Unrealistic assumptions and missed investment returns have meant Illinois taxpayers paid $13.7 billion more for public pensions than state leaders projected five years earlier. Unless the estimates improve, taxpayers will pay an extra $21.3 billion during the next decade.
Illinois does a particularly poor job of figuring out how much money is needed to pay its public pensions: The past decade has seen the projections miss by 16%, which meant taxpayers needed to give $13.7 billion more than was estimated.
Retired public service workers gathered Monday to urge lawmakers to put more money into state pension funds.
The pension situation in Illinois is often referred to as a crisis because as of June 2021, the unfunded pension liabilities were almost $140 billion, according to a Commission on Government Forecasting and Accountability report.
That is money the state has promised to retirees who say they need it to live.
There’s a proposal in this year’s budget to put half a billion dollars toward pension debt on top of the required payments from the state.
Decisions made more than 30 years ago drive challenges. The seeds of the City’s pension problems were sown more than three decades ago when the City promised unsustainable benefit increases to members of the retirement system without funding the associated annual Actuarily Determined Contribution (ADC).2
The severity of the situation makes Providence an outlier. The City of Providence’s Employee Retirement System (ERS) is among the lowest funded pension plans in the nation. Since 1991, the City’s unfunded pension liability increased by more than $1 billion. In addition to the pension liabilities, and over and above the pension shortfall, the City’s retiree health benefits are underfunded by approximately $1.1 billion.3 The unfunded liability of the ERS drives costs to City that outpace revenue growth, limiting investments in other priorities. As of June 30, 2020, the ERS was only 22.2 percent funded.4 Total pension liabilities equated to $8,518 per resident – of which $6,629 is not funded.5 In the last twenty years, the City’s unfunded liability per capita increased by $4,000 per resident.
Pension systems said earnings on investments accounted for 68% of overall pension revenues in their most recent fiscal year. Employer contributions made up 23% of revenues, and employee contributions totaled 8%.
The Covid-19 pandemic accelerated efforts by public pension systems to expand their communications capabilities. In all, 78% offered live web conferences to members during 2021, up from 54% a year earlier.
Pension funds that participated in the survey in 2020 and 2021 reported that their funded levels rose to 72.3%, from 71.7%. Overall, pension funds reported a funded level of 74.7% for 2021. While funded levels are not as important to pensions’ sustainability as steady contributions are, the trend is positive.
The inflation assumption for the funds’ most recent fiscal year remained steady at 2.7%. These assumptions were in place in the midst of an acceleration in the rate of inflation, which reached 7% at the end of 2021, from 1.4% a year earlier, as reported by the Bureau of Labor Statistics.
Two Connecticut governors have tried — and failed — to shift some of the massive cost of teacher pensions onto municipalities, arguing it’s inherently unfair for the state to foot the entire bill. Education equity advocates hope to resurrect that debate this year — with a big twist. Rather than trying to bolster the state’s coffers, the Connecticut chapter of Education Reform Now (ERN) wants the state to bill the wealthiest school districts and use at least some of those resources to help the poorest communities.
Connecticut’s second-largest education-related expenditure — about 7% of the General Fund or $1.44 billion this fiscal year — is the required annual contribution to the teachers’ pension fund. That hefty pension contribution consumes resources that normally would be spent on school operations or other core programs in the state budget. For most states, this pension expense is much less. According to ERN, Connecticut is one of only seven states that spare towns from contributing toward teacher pension costs.
The spike in Milwaukee’s annual pension contribution will be one of the top challenges facing the next mayor — and he or she won’t have much time in office before big decisions must be made.
Next year, current estimates predict the city’s annual pension contribution will increase from about $71 million to about $130 million, according to the city budget office. It is expected to remain elevated for years to come.
The projected increase is driven by factors including a drop in the anticipated future earnings on the city’s pension fund, from 8.24% to 7.5%.
For example, Pritzker wants to set aside $500 million to pre-pay pensions. To do that, he would take $300 million out of the unexpected extra revenue this year, and $200 millino will come out of the 2023 General Fund budget.
In Illinois politics, pension underfunding is like the weather. Everyone complains, but no one does anything about it. Why? It’s hard to do, and laboring to fix pensions doesn’t resonate with voters. There is little political bang for the buck. That’s why state pensions have been underfunded year after year for a century.
There is value in prepaying pension debt beyond what is required by the so-called ramp, as Pritzker proposes. Because of double compounding — less money must be borrowed to be repaid with interest and investments on the added money yield more returns — $500 million spent now will save the state $1.8 billion later.
Citing an improved economic outlook in the COVID-19 pandemic, Gov. J.B. Pritzker’s latest budget proposal will devote an extra $500 million to Illinois’ nearly insolvent pension funds, pump $200 million into a “rainy day” fund and tamp down the state’s unpaid bill backlog — all while providing $1 billion in tax cuts, freezes and rebates, administration officials said Wednesday.
Pritzker was scheduled to outline the ambitious $45.4 billion election-year spending plan during his “State of the State” speech at noon in Springfield, in a downsized event held at the Old State Capitol Building due to a massive winter storm sweeping the state.
In a media preview ahead of the speech, the governor’s top advisers claimed the new spending plan keeps the state on track to end in the black for back-to-back years for the first time in 25 years.
Yet an analysis by the CT Mirror shows that more than six out of every 10 federal relief dollars built into the new state budget that began July 1 effectively will wind up in public-sector pension accounts.
And while Gov. Ned Lamont and others insist the new state budget — and the billions Congress sent to Connecticut via the American Rescue Plan Act — will be used to heal the state’s wounds, others question whether the administration’s priorities are askew. Pension debt deserves to be addressed after being ignored for decades, they say, but that shouldn’t come at the expense of the state’s response to a once-in-a-century health and economic crisis.
Analysts project the newly adopted $46.4 billion, two-year state budget will close in July 2023 with $2.3 billion left over — an amount that exceeds the $1.8 billion in federal coronavirus relief built into the budget. Because the state’s rainy day fund already is filled to the legal maximum, those dollars must go into either the pension fund for state employees or the retirement system for teachers.
And that’s in addition to the nearly $6 billion in required pension deposits Connecticut already plans to make as part of the two-year budget. That’s a supplemental payment of more than 35%.
Newcomers to the state of Illinois may find it odd to see the word “bipartisan” show up anywhere in reference to Illinois, but they forget that the state’s history includes jailed governors from both political parties.
Nothing especially persuasive emerges from these studies, except for one: “Polarization and Policy: The Politics of Public-Sector Pensions,” by Sarah Anzia and Terry Moe, published in 2017 at Legislative Studies Quarterly.
Their main argument: before the Great Recession, in those states with un/underfunded pensions, both parties were the cause of the underfunding. Simply put, the public at large simply had no interest in pension funding, but was very much interested in a high level of government services and a low level of taxation. There was therefore no incentive for politicians of either side to fund pensions.
And a review of the history of Illinois’ pension funding is a case study in how this pre-Great Recession bipartisan pension funding indifference played out. The whole history was outlined in great detail in a 2014 report by Eric Madiar, who at the time served as Chief Legal Counsel to Illinois Senate President John J. Cullerton; while the objective of much of his document is to argue a political point, his history lesson is extremely helpful, and starts with a 1917 report by the Illinois Pension Laws Commission lamenting that pension plans were not being funded and calling for the legislature to begin to fund pensions when benefits are earned. Throughout the 40s, 50s, and 60s, dire reports were issued by similar commissions, to no avail, with the result that the Illinois constitution of 1970 essentially treated the pension protection clause as an alternative to funding pensions.
So there you have it: a century-long legacy of unfunded pensions in Illinois.