By: Ted Dabrowski and John Klingner
The Illinois Commission on Government Forecasting and Accountability (COGFA) has released its latest state pension report. The numbers confirm what taxpayers already know and what Illinois politicians continue to ignore: Illinois needs massive pension reforms.
COGFA says that the state’s pension debt rose by more than $4 billion despite strong stock markets, a booming national economy and billions more in taxpayer contributions.
The total shortfall for Illinois’ five state-run pension funds – for teachers, state workers, university employees, judges and lawmakers – rose to $133.5 billion in 2018 compared to last year’s $129.1 billion in 2017. The plans’ fiscal year ended June 30, 2018.
The teachers’ fund earned 8.3 percent on its investments and the state employees’ fund earned 7.7 percent, both exceeding their 7 percent return targets. The university employee fund earned 8.3 percent, outpacing its expected return target of 6.75 percent.
Taxpayers also poured more contributions into the pension funds than ever before.
Illinoisans contributed $8 billion dollars to the pension funds in 2018, $6 billion more than what they contributed in 2008.
It just shows how unmanageable Illinois pensions have become. Billions in taxpayers contributions and above expected investment returns didn’t even make a dent in Illinois’ accumulated pension debt. In fact, the situation worsened for taxpayers and pensioners alike over the year. The pension hole is now larger by more than $4 billion.
Collectively, the five pension systems have just 40.2 percent of the funds they need today to be able to meet their obligations in the future, up slightly from 39.8 percent the year before. The university employee fund, SURS, is the best funded of the five pension funds, but its funded ratio fell by nearly 2 percentage points to 42.6 percent.
Most notable is the funding ratio for the state lawmaker pensions. It’s just 15.1 percent funded. Any way you measure it, it’s broke. Only a yearly bailout by taxpayers keeps that plan afloat.
Lawmakers typically blame the current pension crisis on a lack of taxpayer dollars. But the pension funds are crisis today due to over 30 years of uncontrolled benefit growth, not a lack of funds.
What COGFA’s report fails to mention – and what the media has failed to report on – is that total pension benefits owed to state workers grew 1,061 percent between 1987 and 2016, swamping the state’s economy and taxpayers ability to pay for them.
Total benefits promised (the accrued liability) have grown 4.5 times more than personal incomes (238 percent) and six times more than state revenues (176 percent) over the period.
And when you compare accrued liability growth across states, Illinois is also an outlier. Wirepoints performed a 50-state analysis of pension promises and found Illinois had the 4th-fastest growing pension liabilities of all states between 2003 and 2016.
That growth in benefits has made it impossible for the state to escape the pension crisis.
Stellar investment returns and growing taxpayer contributions aren’t enough to fix things so long as politicians refuse to do anything about the growth in pension benefits and the overwhelming pension debt burden.
A period of collapse
Illinois’ pension funds have collapsed – putting both state workers and taxpayers at risk – during one of the longest bull markets in history.
Since the end of the Great Recession, the S&P 500 index has recovered and grown by 200 percent.
During that same time, Illinois’ pension shortfall worsened by 72 percent, or $56 billion. In fiscal year 2009, the unfunded liability was “just” $78 billion. Today, it’s nearly $134 billion.
Some of the growth in debt was due to the pension funds changing their actuarial assumptions, including SURS dropping its assumed rate of return in 2018. Regardless, the systems’ overall downward trend is clear.
And the warning this trend provides is even more stark: if the state’s pension debts continue to worsen during a period of remarkable market returns, imagine how those funds will fare when the next recession inevitably hits.
Illinois needs comprehensive reforms more than ever
What’s important to note is that the reported $133.5 billion in debt is the rosy scenario for Illinois.
The state’s actuaries still calculate the pension shortfalls assuming investment return rates of nearly 7 percent, on average.
When more realistic rates are used – those that can be guaranteed – the shortfall increases to more than $250 billion for the five state funds. That’s what Moody’s calculates is the true shortfall for Illinois.
If Illinois properly paid its debt according to actuarial standards, 50 percent of the state’s budget would be consumed by retirement debts alone. Illinois is the outlier when it comes to that statistic and it’s one of the key reasons why the state is just one notch away from a junk rating.
Illinois’ multi-layered pension crises, including those in Chicago and throughout Illinois, will only be resolved when the state amends its constitution and significantly reduces its unfunded obligations at all levels of government.
Until then, the crises will only get worse.
Read more about Illinois’ state and local public retirement crisis:
- Illinois’ other debt disaster: $73 B in unfunded state retiree health benefits
- Illinois state pensions: Overpromised, not underfunded
- Overpromising has crippled public pensions: A 50-state survey
- Beyond Harvey: Many Illinois municipalities running out of options
- Illinois constitutional pension amendment is long overdue
- $125,000: The pension debt each Chicago household is really on the hook for
Read all of Wirepoints’ major work on pensions here.