Illinois’ unfunded pension obligations worsened slightly in fiscal 2015, according to the Civic Federation of Chicago.

CHICAGO – Illinois' unfunded pension obligations worsened slightly to $112.9 billion in the last fiscal year while the funded ratio showed some modest improvement, according to data compiled and analyzed by the Civic Federation of Chicago.

Based on fiscal 2015 results, the five funds that make up the state's retirement system are requesting state contributions of $7.8 billion for fiscal 2017, up by nearly $290 million over their fiscal 2016 budget request, the Civic Federation said.

"The proposed 3.8% increase will add to the state's budgetary pressures in the year that begins on July 1, 2016," the federation warned in a blog post. "However, the increase is considerably below the prior year's increase of $682 million, or 9.9%, which was mainly due to reductions in the assumed investment rates of return by the three largest pension funds."

The state's unfunded obligations grew to $112.9 billion for a funded ratio of 40.9% in fiscal 2015 from $111.2 billion and funded ratio of 39.3% a year earlier. The increase is more modest than the $11 billion added to the unfunded tab from fiscal 2013 to 2014.

The Teachers Retirement System accounts for nearly $63 billion of the unfunded liability tab and is 42% funded, with the state employees fund accounting for $26 billion at a funded ratio of 36.2%, the universities fund accounting for $21.4 billion and 43.3% funded, the judges fund accounting for $1.5 billion and 34.8% funded, and the General Assembly fund accounting for $276 million and 16% funded.

The results represent what's formally reported by the five funds based on the smoothing of earnings over five years. The federation report also reviewed the current market value of the system's assets and liabilities. That assessment shows an increase in unfunded obligations to $111 billion from $105 billion for a funded ratio of 41.9 % in fiscal 2015, compared to $104.6 billion of unfunded liabilities and a funded ratio of 42.9% in fiscal 2014.

Under state law, the funds must submit their proposed contribution amounts for the next fiscal year by November 1 to the state actuary, who reviews them and suggests changes by Jan. 1. Final certified contribution levels are due by Jan. 15 for inclusion in the governor's proposed budget which is typically released in February. More than 85% of total pension contributions come from the state's general operating accounts, with the remainder paid from other state funds.

The proposed fiscal 2017 contribution levels are up from previous projections due to weaker than expected investment returns and revised assumptions related to mortality rates and salary increases at several of the funds, the federation said. The teachers fund saw a return of 3.91% in fiscal 2015 while its assumed rate of return is 7.50%.

"The state's funding plan and subsequently enacted changes defer a large portion of the required state contributions to later years and have been insufficient to prevent growth in the unfunded liability," the federation wrote. The current funding plan took effect in 1996.

To comply with the Governmental Accounting Standards Board Statement No. 67, most of the funds have calculated an actuarially determined contribution designed to reflect more standard actuarial practices. Under a funding policy that would require 100% funding in 20 years, TRS would require a payment of $6.1 billion, about $2 billion more than its formally requested amount of $4 billion, according to the federation's report, which comes from its Institute for Illinois Fiscal Sustainability.

The latest results follow the announcement last month that the state is delaying its November monthly payment to the pension funds, and possibly its December payment. The state comptroller said the delays are needed as the state grapples with a cash flow crisis without a balanced budget in place, although retirees will still receive their annuities.

Illinois' pension strains have contributed heavily to its credit deterioration. Illinois sought to trim its unfunded liabilities and annual contributions with reforms that raised employee contributions and cut benefits, but the Illinois Supreme Court voided the changes as unconstitutional in May. The constitution's pension clause affords benefits sweeping protections against being impaired or diminished and the court's ruling limits the state's options going forward.

Pension reform has taken a backseat amid the ongoing stalemate between Republican Gov. Bruce Rauner and the General Assembly's Democratic majorities over a 2016 budget, which remains in limbo five months into the fiscal year.

Both Fitch Ratings and Moody's Investors Service downgraded Illinois in October, to BBB-plus and Baa1, respectively. Standard & Poor's rates the state A-minus, and has the credit on watch for negative implications.

The state's pension woes are likely to continue to pressure the state's credit.

"Given news of pension funds' widespread investment underperformance in 2015, we anticipate calls for reform efforts will only increase," Gurtin Fixed Income wrote in a special report "Pension Reforms Are No Cure All," distributed Friday. "States with distressed plans are likely to continue to grasp at straws and try their hands in the courts, and we expect that pensions will play a significant role in the credit profiles of Illinois and Chicago, as well as other high-profile outliers like New Jersey, for many years to come."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.