By: Ted Dabrowski and John Klingner
Illinois’ annual pension report was released on July 2 by COGFA, the Commission on Governmental Forecasting and Accountability. The story remains the same. It shows that, despite the 2019 bull market, Illinois’ official state pension shortfall grew to a record $137 billion in 2019, up from $134 billion the year before. COGFA now projects that official pension costs will devour more than a quarter of the state’s budget for the next 25 years.
The problem is, Illinois’ pension crisis is far worse than even the official numbers show. The state’s rosy actuarial assumptions make the funds look better-off than they really are.
Under more realistic assumptions, Illinois actually owes $241 billion in debts – the biggest shortfall of any state in the nation, according to Moody’s Investors Service. Illinois would actually need to devote half its budget to retirements to pay off that debt.
Here’s what the official numbers say
State pension debts have grown almost every year since 2000, when the state’s shortfall was just $16 billion. In 2019, those debts grew to a record $137 billion.
Officially, Illinois’ five state-run 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 fund, SURS, is the best funded of the five, at 42.3 percent, but its funded ratio fell by nearly 2 percentage points this year.
Most notable is the funding ratio for the state lawmaker pensions. It’s just 15.9 percent funded, with only enough assets left to make a little more than two years worth of payouts. It’s effectively insolvent by any definition.
The biggest driver of Illinois’ crisis has long been the growth in the total promises made to pensioners and active workers. The state’s accrued liabilities have grown so quickly over the past several decades that they’ve overwhelmed Illinois’ finances. Wirepoints covered that in our report Illinois state pensions: Overpromised, not underfunded.
In 1987, the state owed $18 billion in pension promises, or 1.6 times more than the state’s then-general fund budget of $11 billion. Today, the state’s promises total $229 billion, or 5.7 times the state’s budget of $40 billion.
That growth in pension liabilities has dwarfed the ability of state taxpayers to fund them. Retirement costs have grown to devour more than a quarter of the budget and COGFA estimates they’ll continue to do so for the next 25 years.
No other state in the nation spends as much of their budget on pensions.
What’s most damning about the current system is that the nation’s longest-ever bull market and billions in new taxpayer contributions have done nothing to improve the nation’s worst pension crisis.
By 2019, markets ended up four times higher compared to their Great Recession lows. And taxpayer contributions had more than tripled over the same period. In 2009, the state paid $2.7 billion into the pension funds; last year it poured in more than $9.2 billion.
Despite that, the state’s funded ratio hasn’t improved at all. It’s been stuck at 40 percent since 2009.
That’s really bad news for the funds. If Illinois’ pensions couldn’t manage to improve in good economic times with billions more taxpayer dollars, imagine how badly they’ll be hurt when the recent market downturn is accounted for.
It’s worse than what they say
The state’ official numbers are based on the rosy assumptions of the state’s actuaries, which count on overly optimistic investment returns for the fund going forward. The state assumes returns near 7 percent even though actual market rates are far lower.
The ratings agency Moody’s Investors Service, which used far more realistic assumptions (a 4.14 percent return rate in 2018), calculated Illinois’ shortfall to be $241 billion, more than any other state in the country in both total and per capita terms.
What Moody’s says matters since it rates Illinois’ credit just one notch above junk. One more downgrade and Illinois will be rated junk, which has never happened to any state before.
Illinois’ official low-balling of its crisis also extends to the annual cost of pensions. JP Morgan’s Micheal Cembalest estimates the state would need to devote more than 50 percent of its budget to properly pay for its true retirement costs (including retiree health insurance). Illinois is the nation’s outlier; no other state comes close to that amount of their budget.
Illinois’ pensions are in terrible shape, but it’s the true numbers run by Moody’s and others that show how bankrupt Illinois has become. Major reform, including a reduction in retirement debts, is the only way out.
The negative impact of the COVID-19 crisis makes those changes all the more urgent.
Read more about Illinois’ worst-in-nation pension crisis:
- COVID-19 shutdown drives Illinois’ true retirement costs to 60 percent of budget
- COVID-19 pushes nation’s weakest pension plans closer to the brink: A 50-state survey
- Mismanaged Illinois becomes first state to borrow from new Federal Reserve facility
- US stock markets up 200%, yet Illinois pension hole deepens 75%
- Moody’s new report shows Illinois is nation’s extreme outlier when it comes to pension debts