Illinois Gov. JB Pritzker has resurrected a 2024 pension proposal that would increase the state's funding ratio goal to 100%, and redirect funding freed up by maturing bonds to pension debt reduction.
The plan would structure the payments at 90% funded by 2045, then add three years to get to 100% funded by 2048, according to the governor's office.
Pritzker is also calling for surplus revenues after the state pays income tax refunds to go toward pension obligations; an extension of the state's employee buyout program; and an adjustment of the Tier 2 pensionable earnings cap to the Social Security Wage Base for employees not covered by Social Security.
The state's bond ratings,
The governor's proposal is "unequivocally credit positive," said Scott Nees, director at S&P Global Ratings, which rates Illinois' general obligation bonds A-minus with a stable outlook.
When the proposal first emerged several years ago, "it didn't go anywhere," Nees said. "So that's one of the things that we're going to be watching going forward: Does this actually get off the ground in the General Assembly this year, given that there is a lot of other stuff the General Assembly is going to be concerned about with this year's budget?"
Karen Krop, senior director at Fitch Ratings, said by email that Illinois faces "elevated and growing" carrying costs. Fitch rates Illinois' GOs A-minus with a stable outlook.
"The governor's proposals could slow the rate of growth while allowing the state to achieve full funding of the pension liabilities, rather than the current 90% target," she said, adding the proposals are "a potential step toward addressing a key structural gap," but require legislative approval and successful implementation.
"We view this positively from a credit perspective," Matthew Butler, vice president of public projects and infrastructure finance at Moody's Ratings, said by email. Moody's rates Illinois' GOs A2 with a stable outlook.
But "it will still take more than 20 years to achieve full funding under the proposal, and the state's cost of funding pensions over this period will be determined not only by future investment performance, but also the contribution decisions of future legislatures and governors," he said.
Fitch's Krop said, "We would also want to see an actuarial analysis, which would be an important part of our analysis of any credit implications."
Under the funding schedule established by lawmakers in 1995, which set the 90% in 2045 goal, the state's contributions are based on a percentage of state payroll — not the actuarially based amount needed to achieve the funding goal.
"The primary driver behind the growth in the combined unfunded liability has been actuarially insufficient state contributions determined under the current pension funding policy," according
"I'm not sure how they arrived at 90%, but targeting 100% is best practice. I think that's admirable, and I hope the governor and the state achieve that goal," said Hank Kim, CEO of the National Conference on Public Employee Retirement Systems, a nonprofit representing public sector retirement systems.
The governor's plan would also permit the use of fixed-length amortization strips from fiscal year 2035 on, which, according to
"The fixed-length amortization is a good idea," said Bryce Hill, director of fiscal and economic analysis for Illinois Policy, a Chicago-based, libertarian-leaning policy nonprofit. How much the state spends on pensions "can swing very widely year-to-year as markets go up and down. Most recently, we saw 2020 markets pull back, and then in 2021 and subsequent years, we saw really big returns. And so we saw a lot of volatility in markets."
The fixed-length amortization strips offer a way to limit that fluctuation while still confronting growth in unfunded liabilities, he said.
The fiscal 2025 funded ratio of the five state public pension funds was 47.4%, according to CGFA's November report.
"In terms of the size of the liabilities, they're among the highest of any pension liabilities of any state, and the numbers are pretty large," Nees said. "I don't think (Illinois) pensions are necessarily positioned to get worse. They're just not positioned to get better very fast."
Illinois
"By the end of the current repayment schedule, annual debt service on the 2003 pension funding bonds exceeds $1 billion," Correa said by email. "The law authorizing those bonds — Public Act 93-2 — included a provision capping the state's annual pension contributions while the bonds remain outstanding, in order to shield the budget from market volatility associated with the 2003 issuance."
Once that cap expires in 2034, he said, Illinois' annual pension contribution will increase by an estimated $815 million, on top of typical year-over-year growth in pension costs.
"Most of the debt service reduction from retiring the 2003 bonds is already effectively committed to the pension systems," he said.
Illinois Policy's Hill praised the 100% funding goal but questioned "reaching that 100% (goal) by extending the current pension funding schedule by an additional three years."
He argued that "what actually happens — or at least was the case in 2024, when the governor originally introduced this idea — is that it actually allowed for the state to lower the pension payments it was making, because… essentially, those payments got back loaded to 2046, 2047 and 2048.
"We're facing a $2 billion deficit," Hill said. "We've heard from insiders that this is one of the more stressful budget processes in recent years, and so this really might be a way for the governor to give himself more breathing room in the short term."
Correa pointed to the governor's
The proposed additional pension contribution level — half of the revenue that was used to pay off the 2003 and 2017 bonds — will save taxpayers $5.1 billion by 2045, according to the presentation.
In a
Correa said the Pritzker administration worked with the General Assembly to create that Tier 2 SSWB reserve fund, and it only covers the approximate first-year costs of adjusting the wage base for Tier 2 members.
"The wage-based minimum of Social Security, if Tier 2 is less than that, as has been reported, obviously that's problematic," Kim said. He compared the situation to a leak in a car tire. The SSWB Fund is like "filling your tire every day instead of trying to patch the leak," he said.
"You could continuously do these sort of ad hoc additions in the budget to make sure you're making adjustments each year," S&P's Nees said. "What the governor's proposal would do is, it would lend some longer-term certainty around how the state is going to address the safe harbor fix for Tier Two."
The adjustment proposed by the governor would maintain safe harbor compliance at the plan level, said Thomas Aaron, vice president of public projects and infrastructure finance at Moody's. "Actuarial estimates conducted in 2023 pointed to about a 2% cumulative increase in the state's pension costs over the next two decades associated with the move," he said by email.
The Illinois Supreme Court
Despite that, Hill suggested that constitutional reform to allow pension benefit adjustments is possible in Illinois, where the state constitution enshrines ironclad public pension benefits.
"When you look at what the plan actuaries say we should be spending… they say we need to be spending almost $5 billion more annually on pensions," he said. "So as that dollar figure creeps up and we are not seeing much improvement in funded ratios, and pension debts remain near all-time highs, I think that's something that becomes more politically feasible, especially if we were to get something like a market downturn that really threatened retirement security."
Nees said constitutional reform would provide more flexibility, but the rating agency factors in feasibility.
"Are you going to see legislators who are going to actually move on that?" he said.
"Would you want to, in some fashion, abridge benefits that you've already promised your employees? I think that places a practical hurdle around potential adjustments to benefits that is very significant," Nees said.
"Public pensions are not a gift; state and local employees have skin in the game," said Kim. "Like private sector 401(k)s, they make contributions into the pension system along with their employer. The difference is that the employees make their contribution every pay period, whereas the state has taken holidays or contributed less than what is required."
Public employees have paid for these benefits directly — according to NCPERS' national survey, around 9% of salary goes into pension payments — and indirectly, in exchange for concessions in other areas, he said.
The state had
