By: Ted Dabrowski and John Klingner
Many pension funds across Illinois were running out of cash even before the Coronavirus reared its ugly head. Some funds were even on the brink of becoming pay-as-you-go plans, where pensioners are forced to rely directly on employer operating budgets, and not pension fund assets, to get their retirement checks.
The proof is in the collapsing asset-to-payout ratios of most Illinois pensions. That ratio – which is one of the statistics Moody’s Investors Service uses to measure pension health – compares a fund’s total assets to how much it pays out in benefits each year. In other words, it measures how many years a pension plan can make benefit payouts before it runs out of money, assuming no new contributions or investment income.
Illinois’ worst-off funds only had two to five year’s worth of payouts left in 2018. They were among the most insolvent in the country. The COVID-19 market meltdown will have only shrunk their assets further.
Take, for example, the Chicago firefighter fund. In 2018, its total assets were $1.1 billion and its pension payout for that year was $330 million. That means it had about 3 years’ worth of payouts on hand – an asset-to-payout ratio of 3.4. There are just a handful of funds in the nation with lower ratios than that.
By comparison, the plan’s assets amounted to nearly 10 years’ worth of payouts in 2000.
Chicago’s firefighter plan is now dangerously close to becoming a pay-as-you-go pension plan. That would make firefighters dependent on the city – which is already junk rated and effectively bankrupt – for their retirement checks.
It’s not just the firefighters’ fund that’s in trouble. It’s the same thing for Chicago police. Their funds’ ratio was just 4.1 in 2018. Chicago municipal had a ratio of 4.7 years. With the markets and bond yields down significantly, Chicago’s funds are now in a precarious position.
The state’s funds are only slightly better off. Illinois’ biggest fund, the state Teachers’ Retirement Fund, had a ratio of just 8.2 in 2018. At the turn of the century, it had 17 years’ worth of payouts.
The State Employees Retirement System had a ratio of only 7 years.
Worst of all is the Illinois lawmakers’ fund, which had just 2.5 years worth of payouts.
Of Illinois’ major state and local funds, only the Illinois Municipal Retirement Fund (IMRF) is healthy. Its asset-to-payout ratio was almost at 19 before the crisis. But its ratio is high only because Illinois law forces cities to fund IMRF prior to funding all other core government services, including public safety.
To understand how dire Illinois’ situation really is, look at its pensions compared to the healthiest funds in the nation.
In 2018, the nation’s healthy funds had assets equivalent to about 20 times their benefit payouts. South Dakota’s state plan had a ratio of 22.6, while Tennessee’s was at 18.9. Same goes for Wisconsin, at 18.4.
In contrast, Illinois’ five state plans collectively had just 7.8 years worth of payouts.
The situation is equally bad for many suburban and downstate public safety funds, too.
No choice left but reforms
Don’t mistake the coronavirus as the cause of Illinois’ pension collapse. Long before COVID-19, Illinois had a near-junk rating and the nation’s worst shortfalls, the result of decades of overpromising.
If the market meltdown persists for much longer, expect the city of Chicago’s rating to fall further and for the state’s to end up in junk. The consequences of both would be huge. But so far, Gov. J.B. Pritzker and Mayor Lori Lightfoot continue to reject an amendment to Illinois’ pension protection clause.
But soon, they may be forced to choose between either chaos or reforms. Barring state bankruptcy, pension reform is the only way to cut Illinois’ strangling debts and to keep pension fund asset-to-payout ratios from plunging straight to zero.
Read more about Illinois’ pension crisis and the impact the Coronavirus is having:
- Coronavirus impact may push Illinois state pension debt to over $300 billion
- Pension bailouts are not the answer for Chicago and Illinois — even during a pandemic
- Don’t Let States Rob COVID-19 Funds to Bail Out Pensions – RealClear Politics
- Stock market meltdown, collapsing bond rates will wreak havoc on Illinois’ weakest pension plans