CHICAGO Illinois’ unfunded pension obligations hit the $100 billion mark for the first time, adding to the pressures on lawmakers to fix the state’s pension system.
Another $5.9 billion was added to the state’s tab in fiscal 2013, pushing the total unfunded liabilities on an actuarially smoothed basis up by 6.3% to $100.5 billion from $94.6 billion a year earlier, according to a report from the Chicago Civic Federation’s Institute for Illinois Fiscal Sustainability. The funded ratio of the state’s five funds weakened and is now at 39.3%, compared with 40.4 % a year earlier.
The figures come from a report on the current health of the pension funds and preliminary state contributions expected in fiscal 2015 that was compiled from information provided by the funds and published this week by the federation’s institute.
The latest figures show no abatement of the trend of asset growth failing to keep pace with rising liabilities. The General Assembly is set to return to work Tuesday for the remaining days of their brief annual veto session. It’s unclear whether lawmakers will break a two-year political impasse to vote on a plan that reshapes pension benefits and contributions to stem the rising tide of unfunded obligations.
Various national reports rank Illinois as the weakest state pension system based on fiscal 2012 results. The state’s pension woes have driven recent downgrades. Illinois’ general obligation rating is the lowest among states at the low-single-A level with a negative outlook, resulting in steep interest rate penalties to borrow for capital projects.
“The state is losing ground,” said federation president Laurence Msall. “These numbers are not surprising and reflect what has been known for some time: the state is in a pension crisis and needs to pass reforms that reduce unfunded liabilities and contributions.”
The numbers compiled by the federation’s institute reflect the application of an actuarially based formula that smooths out annual investment returns over five years. State law requires that contributions be based on the smoothed formula and those figures are typically used nationally by analysts and various research groups to compare government funds.
Figures based on a market asset value, which is often cited in local published reports, show a rise in the state’s unfunded liabilities but at a more modest clip due to healthy investment returns. They grew by 0.7%, or $666.2 million, to $97.5 billion from $96.8 billion a year earlier, according to the report.
The strong results helped slightly bolster the funded ratio based on market value to 41.1% from 39% a year earlier. The report noted that even though the funded ratio improved based on a market value, “the systems’ total unfunded liabilities continued to increase because the state’s statutory pension funding plan defers contributions to the future.”
While the numbers offered little good news, they did show some easing in the anticipated growth of state contributions in fiscal 2015.
“The state of Illinois will need to contribute somewhat more to its five retirement systems in fiscal 2015, but the growth will be less than previously projected due mainly to strong investment returns,” the report said.
The state’s five funds use their fiscal 2013 results to deterimine the state contribution level in fiscal 2015 which begins July 1. State contributions are estimated to grow by $103.5 million, or 1.5%, to $6.9 billion in fiscal 2015 from $6.8 billion in fiscal 2014. Total state contributions for the five systems in fiscal 2013 were $5.9 billion. About 89% of the fiscal 2015 total will come from the state’s general fund.
Previous projections had anticipated a $282.4 million increase. The contribution figures must be reviewed by the state actuary before the pension funds can send certified numbers to Gov. Pat Quinn and lawmakers for the next budget.
State contributions are based on a 50-year funding plan that began in fiscal 1995. The plan and various changes later adopted backload the payments to reach a 90% funded ratio by 2045. Actuarial valuations in fiscal 2012 reported that state contributions under the plan would likely climb to $17.6 billion by 2045, the report said.
The funding plan and subsequent changes were cited in the state’s settlement without penalty of a Securities and Exchange Commission charge of fraud this March for shoddy disclosure between 2005 and 2009. The SEC found the state misled investors about the effect of changes after pension holidays in 2005 and other years and the financial risks they posed. The state several years ago expanded and improved its pension disclosure.
The teachers fund accounts for $55.7 billion of the unfunded obligation on a smoothed basis and is 40.6% funded; the state employees fund accounts for $22.8 billion and is 34.2% funded; the universities funds accounts for $20 billion and is 41.5% funded; the judges fund accounts for $1.5 billion and is 28.3% funded; and the General Assembly’s fund makes up $269 million and is 16.2% funded.
A pension reform framework under consideration by a legislative conference committee would trim $138 billion off state payments over the next 30 years. It would cut cost-of-living increases while lowering employee contributions in hopes of withstanding a state constitutional challenge.
"As Governor Quinn has been saying for more than two years now, we cannot keep putting off a solution to the state’s pension problems as the shortfall grows and our bond rating falls, costing Illinois taxpayers an extra $5 million a day,” Quinn’s assistant budget director Abdon Pallasch said in a statement on the latest numbers. “Next week’s veto session marks an ideal moment to solve the problem once and for all with a comprehensive pension reform bill."