Illinois' state pension plans are heading toward insolvency without any major pension reform, according to a report by the State Budget Crisis Task Force, led by former New York Lt. Gov. Richard Ravitch and former Federal Reserve Board Chairman Paul Volcker.
Pension costs are projected to take up 25% of the state's budget in fiscal year 2015, up from 8% in 2008 and 20% in 2012. Each of the state's five pension funds, with an estimated $85 billion in combined unfunded liabilities, is less than 41% funded. More than 60% of the state's total outstanding debt is due to pension bonds.
Illinois already has one of the highest debt per capita rates in the country. It sold $10 billion in pension obligation bonds in fiscal year 2003 and again had to sell bonds in fiscal 2010 and 2011 to cover legally required contributions that were still below those actuarially required.
“The primary cause of the state pension systems' underfunding is that the state does not impose the same obligation on itself that it imposes on local governments, and for decades its employer contributions have been below annually required amounts,” the report states. “Illinois has planned so poorly that it had to borrow to make its scheduled pension contributions for FY 2010 and 2011, which were below the (actuarially required contribution) amount.”
Political gridlock among state legislators has prevented any meaningful pension reform since 2010 when the General Assembly created a second tier of reduced benefits for employees hired after Jan. 1, 2011. The report acknowledges this will help with long-term savings, but does nothing to reduce the existing unfunded liability.
“Because the state's resources are limited, some type of reduction in pension benefits appears inevitable, despite the difficulties in making any type of change,” the report states. “Both spending cuts and revenue increases probably will be needed. Pension reform is necessary to salvage the benefits of future retirees.”
The state constitution currently protects any reduction in employees' promised benefits.
Compounding matters is that the three largest pension systems — $36 billion Illinois Teachers' Retirement System, $13 billion Illinois State Universities Retirement System and $11 billion Illinois State Employees' Retirement System — use an assumed rate of return of about 8%. Lower discount rates will soon be required in Illinois under new rules approved by the Governmental Accounting Standards Board. Under the new rules, the Illinois Teachers' Retirement System would be 18% funded as of July 2010.
The state's other pension plans are the $63 million General Assembly Retirement System and $60 million Judges' Retirement System.
The task force was assembled to understand the extent of fiscal problems faced by the states in the aftermath of the financial crisis. The task force studied California, Illinois, New York, New Jersey, Virginia and Texas.