Newest report underscores depth of Illinois pension quagmire

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CHICAGO — Illinois’ pension ills worsened last year with another $4 billion added to the tab due mostly to a flawed contribution schedule that will face fresh scrutiny when Gov.-elect J.B. Pritzker takes office next month.

The state government is now saddled with a $133.7 billion of unfunded pension liabilities based on fiscal 2018 figures, a 3.7% increase from fiscal 2017. That’s based on an actuarial calculation that smooths various factors that influence assets and liabilities, such as the assumed rate of return on investments. The market value landed at $133.5 billion.

It's only going to get worse, according to a special pension report the non-partisan General Assembly’s Commission on Government Forecasting and Accountability published Friday, projecting the liabilities will hit $146 billion in 2028 before beginning a slow path to improvement.

Pensions are often named as the primary long-term drag on Illinois’ credit profile and the state has little breathing room, with two of its ratings one notch away from junk.

“The aggregate unfunded liability has been growing significantly over the past decade. One of the main drivers continues to be actuarially insufficient state contributions determined by the current pension funding policy,” according to the report, which provides a historical look at the pension system including past legislation and its impact as well as the fiscal 2018 results and projections going forward. “The primary reason for the increase was, again, actuarially insufficient state contributions.”

Unfavorable demographic factors and the cumulative effect of assumption changes also contributed to the increase.

Actuarial gains from lower-than-expected salary increases, higher-than-expected investment returns and an estimated gain from the teachers’ system due to a fiscal 2019 pension buyout plan helped offset the impact of the negative factors. The results of the buyout plan that was approved earlier this year as part of the budget package won’t be known until the program is completed.

The $38.5 billion general fund relies on about $400 million in contribution savings from the buyouts.

The state’s unfunded tab has swelled by $115 billion to $133.7 billion since 1996 after adoption of the funding schedule.

“Actuarially insufficient state contributions contributed the most to the increase in unfunded liability, accounting for approximately 44.4% of the total increase,” while assumption changes accounted for 28.1% of the total increase.

The Teachers' Retirement System, known as TRS, accounted for the biggest piece of the current unfunded tab at $75.3 billion. The State Employees’ Retirement System, or SERS, followed with $30.4 billion, and then the State Universities Retirement System, known as SURS, with unfunded liabilities of $25.9 billion. The smaller JRS fund for state judges and GARS for the General Assembly complete the system.


The collective funded ratio inched up slightly to 40.1% for fiscal 2018 from 39.9% for fiscal 2017. Based on a market value, the funded ratio moved to 40.2% from 39.8%. While the unfunded liability amount is projected to rise, the funded ratios are estimated to slowly climb in the coming decade.

TRS is 40.7% funded, SERS 36.5%, SURS 42.7%, JRS 37.2%, and GARS 15.3%. All assume a rate of return of 6.75% or 7% and all have steadily lowered their assumed rate of returns in recent years. All met their return targets in the past year.

TRS earned 8.3% while assuming a rate of 7%, down from 8.5% in 2010. SERS earned 7.7% while assuming a 7% return rate, down from 8.5% in 2010. SURS earned 8.3% last year while it assumes a 6.75% rate, down from 8.5% in 2010.

JRS earned 7.4% while GARS earned 6.9%. Both assume a return of 6.75%, compared to 2010, when they were at 8%.

On a market basis, the funded ratio hovered around the 60% level for a few years after the state’s $10 billion pension obligation issue in 2003. It began falling in fiscal 2008 when it dropped to 54.3% and then it tumbled to 38.3% in fiscal 2009 as market losses piled on top of the flawed contribution system. Over the last decade the ratio has hovered from a low of 37.6% to high of 43.3% based on the market value.

The schedule looking forward on an actuarial basis shows slow funded ratio improvement going forward but a 60% funded ratio isn’t achieved until 2036.

The 50-year funding schedule adopted in 1995 requires the state to set contributions at a level percent of payroll in fiscal years 2011 through 2045. The backloaded ramp-up in payments held early contributions at lower levels allowing the unfunded tab to mount. The actual annual contribution veers from the schedule when actuarial changes are made, such as changing the assumed rate of return, because they impact the present value of future obligations.

The state owes $9.2 billion to the system in fiscal 2020, up by 8% from this year. At end of the ramp-up in 2045, the state will owe $19 billion annually.


The Illinois Supreme Court has shot down attempts by the state and Chicago to cut benefits or raise employee contributions, and the state constitution’s protection of existing benefits impairment or diminishment poses a daunting hurdle to reforms.

Talk of shifting the payment burden over to schools or universities for some of the funds or passing a reform model that requires employees to take a cut if they want future pay raises to count toward their pensionable salary have died down since Pritzker’s election in November.

The path Pritzker intends to take remains uncertain. He has called pensions a promise that should be honored and has said he is “looking seriously” at a re-amortization of the state’s current funding schedule that would funnel more payments in the near term to reduce long term costs. Such a plan could include borrowing to cover the upfront payments and may lower the 90% funded target.

A special transition working group on the budget is examining fiscal plans and may make recommendations on how to address the state’s pension mess and rising contributions.

Fitch Ratings recently warned the state to tread cautiously. "A proposal to use pension obligation bond proceeds to finance near-term contribution increases as part of a re-amortization of the state's pension liability, even as the state lowers its already inadequate statutory funding target, would be a credit negative," analyst Eric Kim said in a special report.

Investors and some public policy groups like the Chicago Civic Federation support a constitutional amendment that would clarify benefit protections and allow for future cuts.

“The Illinois General Assembly should vote to place a constitutional amendment on the ballot no later than the 2020 general election that would clarify the pension protection clause and allow reasonable, moderate changes to current employee and retiree benefits necessary to secure the financial sustainability of the state and local governments and the pension systems themselves,” the federation recommends in the budget road map it published in May.

A state constitutional amendment requires legislative supermajorities of 60% in both chambers of the General Assembly to refer it to voters. While Pritzker will enjoy the needed majorities, it would be a bitter pill for many Democratic lawmakers to swallow given labor’s opposition.

Unions have threatened a legal battle against such an amendment. Some legal experts believe such an argument would apply to accrued benefits but there may be an opening to allow the state to change current benefits that are not yet accrued.

Arizona is one of the few states with similar state constitutional language but in 2016 amended its constitution allowing lawmakers to enact reforms to public safety pensions as part of a negotiated agreement that included labor. It has not been challenged. Voters there in November approved an amendment allowing lawmakers to modify pensions for elected officials and correctional officers.

Action is needed, restructuring specialist James Spiotto, a managing director at Chapman Strategic Advisors, warned during a presentation last month on the state’s pension crisis hosted by Truth in Accounting and the Keeley Center for Financial Services.

“Survival of the state or local government is key to long-term survival of pensions,” Spiotto said.

If the government has the inability to pay and reform negotiations have failed or appear impossible, then model guidelines for a constitutional amendment or a legislative public pension funding policy should be considered so that critical services are protected and the tax base preserved, he said. While an amendment would face a challenge it should still be tried, he added.

If negotiations fail and the legal impediments are insurmountable, other options include a prepackaged Chapter 9 for local governments, creation of a special federal bankruptcy court for insolvent state and local government pension funds, and establishment of a special commission to aid in oversight, refinancing and debt adjustment, Spiotto said.

States are not permitted to file municipal bankruptcy and Illinois lacks a bankruptcy statute for its local governments.

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Public pensions State and local finance State budgets J. B. Pritzker State of Illinois Illinois