In his fiscal year 2027 executive budget, Illinois Gov. JB Pritzker proposed a raft of changes to address his state's underfunded pensions. Two of those changes made it through the legislature during the session that just ended.
Illinois is still the only state that doesn't aim to fully fund its pension obligations; it sets a statutory 90% funded target as opposed to the actuarially recommended 100% funded target.
While Pritzker didn't achieve passage of his plan to fully fund the state's pension system by 2048, he did get other pieces of his proposal across the finish line: an extension of the state's pension acceleration or buyout program, and a redirection of surplus revenues to reduce pension debt.
The extension of the buyout program by two years, through fiscal 2028, would cut the state's pension liabilities by up to $1.4 billion, a spokesperson for the governor said by email.
"The pieces of the proposal are constructive for the state's credit, insofar as they continue the forward momentum on addressing liabilities," said Scott Nees, director and lead analyst at S&P Global Ratings.
"But in terms of materially changing the needle… the annual funding shortfall between the statutory contributions and the actuarial recommendations is about $5 billion in the most recent year, so there's a pretty big gap there," he said.
Illinois' general obligation bonds are rated A2 by Moody's Ratings and A-minus by Fitch and S&P, the lowest ratings among U.S. states. The outlooks from all three rating agencies are stable.
"Both measures are credit positive, but they are incremental relative to the scale of the challenge," Chandra Ghosal, vice president of public project and infrastructure finance at Moody's, said by email.
Ghosal said Illinois' unfunded pension liability is the main driver of the state's credit profile, and Moody's puts the unfunded pension liability at around $200 billion on an adjusted basis. That "contributes to a long-term liabilities burden of approximately 340% of own-source revenue and a fixed-cost burden of about 21% of own-source revenue, both among the highest of U.S. states," he said.
Nees said S&P estimates that overall net pension liabilities across the state pension systems now approach $150 billion. "It's a big liability," he said. "Some of the state's actions have chipped away at that, but without really fundamentally altering the picture… It's moving in the right direction, but just not moving there very rapidly."
The pension buyout program requires the state to issue bonds to fund lump-sum payments, so its extension has an upfront cost, Ghosal noted. But because participants accept reduced cost-of-living adjustments, the program reduces liabilities over the long term — by about $3 billion since the program's launch.
The surplus revenue redirection effort automatically siphons excess income tax refund fund balances into the pension funds. Because it's "an ongoing mechanism," it's "more meaningful from a credit perspective," Ghosal said.
Taken together, those two changes "are not, on their own, going to meaningfully move the state's leverage or fixed-cost ratios," he said. "What is significant is that Illinois' unfunded liabilities are no longer steadily rising year over year as they were for many years, and the state has been able to stabilize that trajectory while simultaneously building reserves to their highest level in more than two decades."
Nees also pointed to the state's Tier 2 Safe Harbor dilemma, which remains unresolved, he said.
"To meet federal standards for pension benefits that need to be as generous as those provided by Social Security, we know that there's going to need to be a fix, and whatever fix ends up occurring would probably add billions of dollars to net pension liabilities," he said.
Pritzker had proposed an adjustment to the Tier 2 pensionable earnings cap in
Illinois "pretty ably handled" the budget gap in
Looking ahead, S&P will be watching two things: the ripple effects of international events on the state's economy, and how the state manages some of the more potentially destabilizing effects of H.R. 1, the Trump administration's 2025
"As we get into the legislative session next spring, we're going to be looking for signals as to how the state manages through some of the larger changes that came out of H.R. 1, particularly those impacting Medicaid — a lot of the largest impacts really start being felt in the FY28 budget for the state," he said. "We don't have a big picture view of what the state is going to do in response to some of those changes, and so we're going to be looking for any indication."
Ghosal of Moody's said the rating agency will be looking to see "if the state maintains the fiscal discipline that has driven its recent upgrades." Moody's will be watching for further growth in reserves, "which remain lean relative to most states," he said, and for pension contributions on track with what's needed to stem the growth of unfunded liabilities.
And Moody's will be "watching whether the long-term liability and fixed-cost burdens begin to moderate," he said, noting that the state's below-average economic growth could threaten its ability to manage its high leverage over time.
"We're also monitoring exposure to federal policy changes, including tighter Medicaid eligibility and mandated reductions in healthcare provider taxes, and we continue to watch for the timely release of audited financial statements," Ghosal said.
