CHICAGO — Illinois' unfunded pension obligations rose $11 billion in fiscal 2014, bringing the state's total tab to $111.2 billion while the funded ratio held steady at 39.3%, according to a report from the Civic Federation of Chicago's Institute for Illinois Fiscal Sustainability.

The state will pay $682 million into the system in fiscal 2016 based on the preliminary estimates from the five retirement funds. The figures will be reviewed by the state actuary and final numbers are due to the state by Jan. 15 so the contribution can be incorporated in the state budget that will be unveiled by Governor-elect Bruce Rauner early next year.

The state's actuarially smoothed unfunded obligations rose for the fiscal year ending June 30, 2014 from the $100.5 billion fiscal 2013 figure despite strong investment returns as three funds changed their assumed rate of return on investments, the institute writes in the report.

The figures don't take into account benefit changes adopted by the General Assembly last December because unions are challenging the constitutionality of cuts. Sangamon County Court Judge John Belz this spring temporarily halted the legislation from taking effect.

Belz will hear initial arguments in the case Nov. 20 and could issue a decision this year. The Illinois Supreme Court will have the final say on whether the changes violate the state's pension clause protecting benefits from being impaired or diminished.

The largest of the funds - the Teachers Retirement System - is 40.6% funded and accounts for $61.6 billion of unfunded liabilities, up from $55.7 billion a year earlier. The Employees fund is 33.7% funded and accounts for $26.2 billion of the obligations, up from $22.8 billion a year earlier. The Universities fund is 42.3% funded and accounts for $21.6 billion, up from $20.1 billion. The Judges fund is 31.6% funded and accounts for $1.52 billion of liabilities, slightly down from $1.55 billion while the General Assembly fund is 16% funded with obligations of $272 million, up from $269 million.

The growth in the fiscal 2014 tab followed a hike of $5.9 billion in fiscal 2013, pushing the size of the unfunded liabilities over the $100 billion mark for the first time.

The state's formal figures of assets and liabilities used to establish contributions are smoothed over a five-year basis. The fair market value of the unfunded obligations also deteriorated although strong investment returns helped boost the funded ratio.

Unfunded obligations grew to $104.6 billion from $97.5 billion a year earlier due to the lowering of the assumed rate of return action and the failure of state contribution levels to meet an actuarially required level. The funded ratio rose to 42.9% from 41.1% due to strong returns on asset investments.

State contributions will rise to $7.5 billion in the next fiscal year based on the smoothed fiscal 2014 results, from $6.9 billion this year.

"The steep increase is mainly due to decisions earlier this year by the three largest funds to reduce their assumed investment rates of return," the federation wrote in its report.

This year, the teachers fund lowered its assumed rate to 7.5% from 8% while the employees and universities' funds lowered theirs to 7.25% from 7.75%. The judges and General Assembly funds previously lowered their assumed rate to 7%.

The teachers fund benefitted from a 17.4% return in fiscal 2014 while the universities fund earned 18.2% and the employees' fund earned 17.5%.

"TRS members still face a fiscal day of reckoning in the future unless a dramatic improvement is seen over time in the funded status. TRS is still among the worst-funded major public pension systems in the country. Our funded status should be 100%, not 40%," TRS executive director Dick Ingram said in a statement late last month announcing the fund's results.

The Civic Federation said the state covers about 89% of its contributions from the general fund.

Unions are arguing the pension reforms, said to trim $145 billion off state payments in the coming decades, violate the state constitution's provisions giving contract status to pension benefits and protecting them against impairment or diminishment. The state counters that the legislation provides "consideration" for the negative changes by stabilizing the pension system and reducing employee contributions and that it had few alternatives given its battered finances and credit.

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.