By: Mark Glennon and Ted Dabrowski
On the surface, a new report on Illinois’ state-level pensions is bad enough: The official unfunded liability of the five state pensions grew to $144 billion in 2020 – a record high, and a $7 billion increase in just one year. That’s according to COGFA, the Commission on Government Forecasting and Accountability’s latest special pension report.
The far worse story, however, is between the lines not covered in the new COGFA report.
First, consider the plan we are on and its trajectory. That’s the funding ramp set up by the state and its implications for taxpayers and pensioners, which is shown on page 10 of the report.
That plan, which supposedly would someday return the pensions to stability, would require state taxpayers to double their current yearly contribution to the pensions over the next 25 years. Their contribution already consumes about a quarter of the state budget.
The plan assumes the pensions will earn just under 7% on their assets. That’s far more than any expert assumes and far more than regulated private sector pensions assume. The world today is in an unprecedented low-return economy. Risk-free rates of return are under 2%, and the pensions should actually be invested in risk-free assets since pension benefits are promised as risk-free. If you corrected the pensions’ assumptions about returns on investments the unfunded liabilities would roughly double.
Even with those faults, the plan does not get the pensions to full funding, just 90%. In other words, the plan just assumes away a chunk of the problem.
Second, the new COGFA report entirely ignores future healthcare obligations owed as part of pension benefits to state retirees. They are constitutionally guaranteed in Illinois just like other pension benefits. The state’s official share of the retiree healthcare promises totals $56 billion. And here’s the kicker: They are entirely unfunded. They are on a pay-as-we-go system.
Third, the report only covers the five state-level pensions. But Illinois has some 650 additional local pensions. Most of them, too, are in impossible shape, a problem which is also officially understated. Many of those local pension obligations overlap, particularly in and around Chicago, creating havoc for many households.
Put the above together and you get a mind-blowing total of $420 billion, just 48 percent of which is for the five state-run pension plans. The details are in the chart below.
For a full analysis, see Wirepoints’ “Part 1: Illinois is the Nation’s Extreme Outlier.”
These lines in the COGFA report deserve special attention. “One of the main drivers continues to be actuarially insufficient State contributions…. [I] if all other actuarial assumptions are met, unfunded liabilities will still increase due to the State contributing an amount that is not sufficient to stop the growth in the unfunded liability. Hence, there is a distinction between contributions that are statutorily sufficient and contributions that are considered actuarially sufficient.”
What that means is that, even though pensions consume a quarter of the budget, and even if the phony return assumptions turned out right, the pensions aren’t even treading water. The unfunded liability will continue to grow.
Many state lawmakers brag every year that they made the “full, required contribution” calculated by the actuaries. No, not true. They make only the contribution the actuaries calculated based on the faulty plan – the funding ramp made up by legislators themselves. The actuaries warn each year that it’s bogus.
And it certainly isn’t that taxpayers have been skimping on their share of contributions. The problem, instead, is that total pension benefits owed by the state grew 2.5 times faster than state revenues, year after year, for nearly 30 years. See our Special Report on that, which was cited approvingly in the Wall Street Journal.
For those of you interested, here are further matters of interest from the new COGFA report along with some perspective:
– The state’s official shortfall has reached its new record level after continued growth since the turn of the century, when the pension hole was just $16 billion.
– Officially, Illinois’ five state-run pension systems have just 39 percent of the funds they need today to be able to meet their obligations in the future, down from 40.3 percent the year before.
Most notable is the funding ratio for the state lawmaker pensions. It’s just 17 percent funded, with only enough assets left to make a little more than two years’ worth of payouts. It’s insolvent by any definition.
– The fall in the state’s overall funded ratio and the increase in the shortfall are both partially due to poor investment returns for the pension systems. The systems five plans all have a June 30 fiscal year end.
– Like last year, all five funds failed to meet their annual investment return goals of 6.5 to 7 percent. The Teachers Retirement Fund’s investments performed the worst, barely staying positive with a return of just 0.5 percent. And the State Universities’ Retirement System managed just a 2.6 percent return versus a target of 6.75 percent.
– Using more realistic investment assumptions, for the five state pensions alone, Moody’s recently estimated Illinois’ pension debts at $261 billion for 2020, the biggest pension shortfall in the nation. That’s nearly $67,000 in debt for every household in Illinois.
Unfortunately, Gov. J.B. Pritzker and Mayor Lori Lightfoot continue to reject calls for a pension amendment, with the governor calling structural reform a “fantasy.” Pritzker claims any reforms would ultimately be rejected under challenges from the federal contracts clause.
At Wirepoints, we’ve laid out why reforms would be legal under federal law, why a pension amendment and pension reforms are urgently needed and what those reforms should look like. For a summary, as well as links to all of our analysis and proposals, go to Wirepoints’ Pension Solutions.
Read more about Illinois’ pension crisis:
- Will COVID-19 lead to “pension intercepts” and cuts to core city services across Illinois?
- Solving Illinois’ Pension Problem – Special Report
- COVID-19 pushes nation’s weakest pension plans closer to the brink: A 50-state survey
- Illinois owes $68 billion in health benefits to government retirees. Politicians haven’t set aside a penny to pay for them
- Wirepoints’ Pension Solutions page