There is a growing disparity between the pension benefits owed to eligible state employees and the funds set aside by the state to fulfill these future pension payments, which is referred to as the Illinois pension problem. State pension funds have only $85B available to pay out to Illinois pensioners, despite the state’s $214B obligation to pay out pensions. In terms of unfunded pension liabilities, Illinois ranks only behind New Jersey. A threefold increase in the funding gap has resulted from Illinois state budget payments falling short of increases in pension liabilities for 12 of the last 15 years.
Five public sector pension funds make up Illinois’ pension obligations. Included in the plans, as well as their relative financing levels, are:
How much do Illinois pensions owe?
- This is the only sort of pension included in the $83 billion figure: the $82.9 billion in state pensions.
The first comprehensive study on Illinois’ overall retirement debt has been released. In total, Illinois’ state and municipal governments owe more than $203 billion in pension and retiree health insurance liabilities. Every Illinois household has a retirement debt of more than $41,000.
Is Illinois pension underfunded?
Credit rating firm Moody’s Investors Service estimates Illinois’ pension debt at $317 billion as of June 30, 2020, more than double the state’s official forecast. Since public finances are hurting the economy, the demand for a constitutional change allowing for structural pension reform has never been greater.
According to state gross domestic product, Illinois has the worst pension debt-to-GDP ratio of any US state since fiscal year 2014. At the conclusion of fiscal year 2019, pension debt has grown by 19 percent, from $261 billion.
By the time fiscal year 2020 ends, Illinois will have accumulated less than half of the $144.4 billion in pension debt estimated by Moody’s. The assumptions about investment returns that are used in state forecasts are far more rosy and less realistic.
As a result of the state’s systematic underestimation of its pension obligation, taxpayer contributions are likewise underestimated in order to prevent the debt from expanding year after year. During the past decade, the state’s initial predictions for pension debt growth were overestimated by $24 billion. Taxpayer contributions exceeded state expectations by an average of 15% each year over the decade, resulting in an additional $7.6 billion in payments from taxpayers. A growing pension debt has not been deterred by this additional funding. It is clear that Moody’s system, which is more in accordance with private sector standards, is more accurate, as the state has made repeated upward revisions.
Taxpayers are on the hook for any shortfalls in investment returns when they are set by state legislation, as are employee payments to pension funds and benefits paid out. It is worth noting that the Teachers Retirement System of Illinois recorded a 0.52 percent return on investment during the first four months of the COVID-19 program in fiscal year 2020. To put it another way, the TRS’s 7 percent return goal was missed and the debt grew as a result.
While the state’s present funding scheme does not meet best practices for public pension plans, it underestimates the state’s debt.
Many government employees in the five state systems can retire in their 50s with multi-million dollar pensions because to generous pension benefits, even though they have only contributed 4-6 percent of the expected payout. Due to faulty accounting standards as well as inadequate funding practices, Illinois is spending more tax income on pensions than any other state but still has the widest disparity between current payments and what is required to pay down the debt without improvements.
In the past, the Illinois Policy Institute calculated that a 50% increase in the state’s flat income tax would be needed to remove the debt without reform.
Another proposal to modify the state constitution for a progressive income tax was proposed by Illinois House Speaker Emanuel “Chris” Welch on February 24. The “fair tax” that Illinois voters rejected in November 2020 would have increased rates on all taxpayers by 21% in order to pay down the state’s pension deficit through a progressive income tax. As a result of this hefty tax increase, the state’s economy will lose approximately 127,000 jobs and $21.8 billion in GDP.
Illinois’ pension dilemma, which has never been a result of underspending, cannot be resolved through tax increases. Lawmakers who increase taxes will only cause more businesses and residents to leave the state, which will hinder the state’s economic recovery from the COVID-19 pandemic.
In a recent research for the state, Moody’s Analytics, a sibling business to the ratings agency, emphasized this issue.
The largest obstacles to the long-term prognosis are weak demographic trends and deep-rooted budgetary concerns, such as growing pension commitments and a dwindling tax base. Over the long term, the prediction predicts that the state’s growth will be a step behind the Midwest average and a few steps behind the country. Over the next five years, employment in Illinois is expected to climb by 6.7 percent, which is lower than the 7.7 percent increase for the Midwest and 8.8 percent increase nationally.”
That means that Illinois would lose 57,000 jobs if it were to stay pace with its Midwestern rivals and 120,000 jobs if it were to keep pace with the rest of the country.
Illinois’ pension crisis can only be solved by amending the state constitution to allow future benefit growth for current employees and retirees to be reduced. In 2020, a House Joint Resolution Constitutional Amendment 38 was introduced in the General Assembly that would have done just that.
Illinois Policy Institute’s “hold harmless” pension reform plan will save the state $2.4 billion in the first year and more than $50 billion through 2045 if an amendment replicating HJRCA 38 is implemented. Additionally, the plan would reduce the state’s pension debt during this time period.
According to a poll conducted by the Paul Simon Public Policy Institute, 51% of Illinoisans support “an amendment to the Illinois Constitution that would preserve state retirement benefits already earned by public employees, but would also allow a reduction in the benefits earned in the future, whether by current or future employees.”
It would be in everyone’s best interest if Illinois’ worst-in-the-nation pension situation was ultimately solved by reforming the state’s pension system.
Are Illinois state pensions safe?
Moving to defined-contribution retirement plans for government workers is essential to solving the state’s astronomical pension problems. It has long been a policy of the Institute to provide 401(k)-style retirement programs to all federal employees. A 401(k)-style scheme, modeled on the self-managed plans for state-university professors, was suggested by the General Assembly in 2013 to replace the current pension system for all government workers, and 18,000 employees are currently registered in it.
Although the Illinois Supreme Court ruled down Senate Bill 1 in May, it was supposed to provide some relief to the state’s budgetary woes. If the court rules in favor of existing workers, there will be no meaningful modification of current workers’ pensions because of the Illinois Constitution’s pension-protection clause.
In light of the Supreme Court’s decision on SB1, the debate over how to solve Illinois’ pension crisis has come to a halt. Until the Illinois Constitution is changed to allow for structural improvements to government-worker pension plans, or until the state’s government-worker unions agree to pension changes at the bargaining table, real reforms will not be possible. However, this does not imply that the state is without recourse while it awaits the outcome of the lawsuit.
What Illinois legislators can do immediately to deal with the state’s rising pension shortfall:
- Put an end to politician pensions. Illinois lawmakers could set an example by converting their own pensions to self-managed plans like 401(k)s, since there are no labor unions to oppose such reforms.
- Provide new employees with a 401(k) plan. Regardless of the outcome of the Illinois Supreme Court’s SB1 decision, new government employees in Illinois will continue to enjoy their current retirement benefits. Following in the footsteps of states across the country, Illinois legislators should establish self-managed plans for all new state and local employees.
- Offer current employees the opportunity to participate in a 401(k) plan. Government employees shouldn’t be tied to bankrupt retirement programs managed by politicians they have no control over.
- Make all instructors pay for their own retirement plans. When it comes to their own pensions, most Illinois public school teachers fail to pay the minimum 9.4 percent of their salaries. As an alternative, several school districts foot the bill for the required salary payments for their instructors.
- Put an end to the state overseeing pensions for local school districts. Teachers’ pensions should be paid for by the school districts that employ them, not by the taxpayers. Local school districts should pay for teachers’ annual benefits rather than the state in the future.
- Limit the rise in pensionable wages. Limit the rise in pensionable wages. Benefits for government employees’ pensions are increasing at a rate that is far outpacing the ability of taxpayers to cover them. The General Assembly’s only option is to limit pay growth and other elements that drive up pensionable incomes, because structural change of pension benefits for present government employees is not an option.
- Bankruptcy should be allowed for municipalities. A lack of ability to change pensions for current workers means that local governments should be given more influence over their operations. Having the opportunity to file for bankruptcy is part of the deal. If a city or town is in financial trouble and cannot renegotiate its debts or negotiate new contracts, declaring bankruptcy may be the last recourse.
How much debt does the state of Illinois have?
Illinois’ state debt totaled $63.3 billion in the fiscal year 2020. About 73.2 billion US dollars is estimated to be spent in the fiscal year of 2026.
How much is Chicago pension debt?
It is estimated that Chicago owes $32.9 billion to its four employee pension plans, which include police officers and firefighters, municipal workers and laborers. According to the data, this is a rise of about 3.5% from last year.
City pension debt climbed 5.6% in the year between 2019 and 2020, which is down from the previous year’s growth of 5.8%.
CFO Jennie Huang Bennett claimed that the company’s expansion was expected to continue “Because the city is now obligated to contribute to its pension funds based on actuarial predictions, “fully anticipated” is the most accurate term. The city’s structural deficit has grown as a result of this new rule, which takes effect in 2020.
The goal of this law is to ensure that the city’s pensions are fully financed by 2045, so that employees may get their benefits when they retire.
According to Chicago’s Annual Comprehensive Financial Report for 2020, the city’s pension funds are still considerably underfunded despite the statute taking effect. A modest decrease in funding for the Municipal Employees Retirement Fund occurred between 2019 and 2020, while the other three funds had a slight increase in money.
Workers’ fund has highest amount of funding, at 44%. Firefighters’ fund has lowest level of funding, at 19%, according to the study
In order to keep pace with planned increases in salaries and perks for employees, the city’s pension funds were boosted by a 10% increase in investments, Huang Bennett stated.
Lori Lightfoot warned investors at a city-hosted conference in May that pension debt is “the largest concern” facing Chicago’s finances and vowed to “demand a reckoning” in Springfield.
There have been no clear ideas from Lightfoot on how to reform Illinois’s pension system since then, and he hasn’t even referenced the city’s pension problem.
Earlier this year, Mayor Emanuel Lightfoot criticized the city’s pension payments for their annual cost-of-living hikes “Unions slammed it as “unsustainable” and a firestorm of criticism ensued.
According to the city’s expenditure plan, the city would pay its four pension funds $1.8 billion in 2021, which is approximately $91 million higher than in 2020.
According to city budget predictions, Chicago will be required to pay $2.25 billion toward these funds by 2022. In August, new forecasts are scheduled to be published.
From mid-March to early June, many businesses were forced to close their doors again due to another surge in COVID-19 cases that peaked in mid-November. The annual financial report for the city of Chicago documents the massive budget crater caused by the COVID-19 pandemic, which shut down the city’s economy completely. Until mid-June, restrictions on the transmission of the virus were in place because to a third, less severe surge.
According to city statistics, Chicago’s unemployment rate peaked at 18%. According to the study, the city’s general fund, which is used to pay for most public services, collected $405.5 million less than planned. According to the report, the pandemic left a $886 million hole in the city’s budget.
In 2020, the epidemic struck havoc at both Chicago airports, resulting in a complete shutdown of travel. Midway International Airport saw a 17.5 percent reduction in revenue, while O’Hare International Airport saw a 28.5 percent drop.
As a result of $1.4 billion in federal subsidies, Huang Bennett said the city completed the year with $197 million cash on hand, $12 million above forecast.
Additional debt repayments of $211 million will be completed by 2020, Huang Bennett stated.
What percentage of Illinois budget is pensions?
To begin with, over 30% of the state’s income are already earmarked for public pension debt, which Illinois Gov. J.B. Pritzker will explain to lawmakers in February.
As long as Illinois continues to raise taxes across the board and cut down on key government services, its economy will continue to decline and inhabitants will go. Taxes and spending cuts have been threatened by the governor’s administration.
Illinois needs a constitutional amendment to address the state’s pension crisis, but Pritzker has continuously rejected it.
By the end of fiscal year 2020, the state’s pension debt had grown by $7.1 billion to $144.44 billion, according to the Commission on Government Forecasting and Accountability (COGFA). In fiscal year 2022, that debt burden will cost taxpayers about $11.6 billion, which includes:
- debt service costs on pension obligation bonds previously issued totaled $797.9 million.
28.5 percent of the budget will be devoted to pensions. For fiscal year 2022, it’s based on $38.5 billion in predicted general revenue, plus an additional $1.1 billion in “other state funds” – cash that would have gone to critical programs if they weren’t utilized for pension debt.
In formal budget documents, COGFA and the governor’s budget officers normally only list the $9.4 billion in direct costs under the “pensions” category. Pension-related bond payments are classified as “debt service,” while CTPF payments are classified as “education.” Employer contributions for salaries that are not financed by general revenues and income from the sale of unclaimed property that are transferred to the pension fund for higher education workers are virtually ignored in the budget.
Taxpayers are misled about the true cost of pensions by this muddled financial reporting structure, which keeps them in the dark about what they’re paying for.
Worse, the state’s retirement debt estimates are based on false accounting assumptions that obscure the true extent of the problem.
According to the financial rating agency Moody’s Investors Service, the total debt of the five state retirement systems at the end of fiscal year 2019 was $230 billion. As a result, Illinois had the worst state pension debt-to-GDP ratio among all 50 states for the fourth year in a row.
By the conclusion of fiscal year 2020, when audited financial records are finalized, Moody’s expects state pension debt to reach an all-time high of $261 billion. Moody’s technique for calculating unfunded pension liabilities, which is more in line with private sector standards, accounts for the $115 billion discrepancy between the state’s estimate and Moody’s. According to state estimates, pension fund assets are invested to produce income at inflated rates. Future pension responsibilities and expenditures appear smaller than they really are.
During the past decade, the state’s initial predictions for pension debt growth were overestimated by $24 billion. Taxpayers contributed $7.6 billion more than expected over the course of the decade, a 15 percent annual growth rate above official forecasts.
According to actuaries, the state is to blame because it uses shoddy methods to calculate and fund pension obligations, which are contrary to the best standards in the industry. Even though “underfunding” retirement benefits has been blamed as the primary reason of Illinois’ current pension issue, this is incorrect.
There has been a “actuarially insufficient State contributions” since 1996, contributing for approximately 45.9 percent of unfunded obligation, according to COGFA’s recent report. By not providing context for this assertion, it is like Illinois’ budget reporting and accounting of pension liabilities, which are both false.
There are many reasons why the state and municipal governments of Illinois are already spending more on pensions than any other in the country, but it is still not enough to keep the debt from ballooning at current benefit levels. Although Illinois has the greatest pension spending in the country, it also has the widest disparity between what it presently spends and the amount needed to adequately finance the retirement systems without reform.
In a 2019 analysis by J.P. Morgan Asset and Wealth Management, Michael Cembalest, the chair of market and investment strategy, concluded that Illinois would need to quadruple its spending on retirement benefits to 51 percent of the state budget in order to remove the debt. Alternatively, a 50% increase in the state’s income tax would be required to remove the debt, which would take $1,800 from the average family’s income.
Just throwing more money at the problem is not going to solve it, plain and simple. The only sensible solution is pension reform.
However, this is a consequence of the current benefit levels and the pension system design placing an excessive financial load on taxpayers in Illinois, which has been going on for decades. The average career worker pays only 4-6 percent of their lifetime benefits, according to these plans. In order for promised benefits to be fully funded, taxpayers must contribute at a level that is affordable and sustainable for the government.
Starting with a constitutional amendment that allows for future benefit growth decreases for both current workers and retirees, the only realistic answer to Illinois’ pension issue In 2020, the General Assembly will vote on a constitutional amendment that will accomplish this goal.
Illinois Policy Institute’s “hold harmless” pension reform plan, which would save the state $2.4 billion in the first year and more than $50 billion through 2045, might be implemented if HJRCA 38 becomes law. During this time, the state’s pension debt would be completely paid off.
A constitutional amendment to raise taxes was the goal of Illinois politicians on Nov. 3. To understand why the “fair tax” idea was rejected by voters, it is necessary to look at what they are saying.
It is long past time for Illinois residents to vote on an amendment to address the state’s fiscal and economic woes by amending the pension system.
What is the state of Illinois unfunded pension liability?
There were total unfunded liabilities of $317 billion as of June 30, 2020, a 19 percent rise from the previous year, according to the report. As a result, pension fund profits across the country have been reduced by historically low interest rates.
How much debt does the city of Chicago have?
According to Truth in Accounting’s July 2021 analysis, Chicago’s overall financial health decreased during the epidemic despite federal aid.
The fiscal year 2020 report indicated that each Chicago taxpayer would have to write a check for $43,700 to cover all of the city’s expenses. From the previous fiscal year, that liability increased by $2,600 per taxpayer.
Because of federal help, the city’s grants and contributions increased from $497 million to $1.17 billion in the 2020 fiscal year, a financial watchdog audit revealed.
Pension and healthcare costs ate away the gains. More than $1.15 billion was added to the pension fund’s debt. Health care debt for retirees increased from $829 million to over $2 billion.
Truth in Accounting cited a court judgment that mandated the city to extend some retiree health care benefits indefinitely as the reason for the large increase in those health care responsibilities. Prior to this, they were scheduled to end in 2022.
After a Truth In Accounting assessment in January 2021 classified Chicago second-to-last in financial health among the 75 most populous cities in the United States, this analysis was conducted. Only New York City came out on top.
As a city, Chicago must do more to cease being ranked as one of the worst in the country for crime and poverty “Starting with pension reforms, sinkhole cities” will require massive financial adjustments.
The city’s overwhelming tax burden and $470 million in CARES Act money hardly scratched the surface of its liabilities in July’s report. Chicago’s total assets were $9.9 billion, but the city’s total debt was $48.5 billion.
All city personnel, including firefighters and police officers, would have to be laid off for eight years in order to keep up with pension payments, according to the analysis.
However, there is a sensible answer to this problem. Chicago’s pension crisis could be solved by amending the Illinois Constitution to allow for increases in the cost of future, unearned payouts.
The financial impact of the COVID-19 pandemic was felt by many of the largest American cities. Chicago’s actual problem was its long-standing difficulties with pensions and retiree health care commitments, which the report noted “Since the beginning of time, the city has been underfunded.
This catastrophe in Chicago’s pension system has gotten so bad that it dwarfs the total pension debt of 44 states across the country. During Mayor Lori Lightfoot’s first term, compulsory pension contributions will increase by $1 billion.
Chicago, as well as other Illinois communities and the state itself, would benefit from limiting future pension expenses by tying them to inflation rather than 3% yearly compounding increases. However, the Illinois Supreme Court ruled in 2015 that the constitution prohibits such amendments, making this change impossible without an amendment. In 2013, the state legislature moved to reform the pension system.
After leaving office, Rahm Emanuel, the former mayor of Chicago, approved this proposal. However, Lightfoot’s public pronouncements denouncing Chicago’s pension situation have not supported an amendment that would enable for improvements to be implemented..
If Lightfoot wants to save Chicago, he or she needs to make it plain that pension reform is the only solution.
Do Illinois state employees get a pension?
State employees are eligible for retirement benefits through SERS. An individual can count on a defined benefit (DB) pension from the system to provide a modest but reliable monthly income for the rest of their lives after retirement. state and local retirees in the State of Illinois spend money.
When did the Illinois pension crisis start?
In 1971, the State enacted a constitutional guarantee of government-sponsored pensions in response to a pension crisis over forty years ago. It’s since then that the Illinois Supreme Court has heard three different cases addressing the funding of public sector employee pensions by employers.
About Pension System Funding
There are a number of statutory pension schemes in which the state is required to contribute each year. These include the State Employees Retirement System (SERS), State Universities Retirement System (SURS), the Judges’ Retirement System (JRS), and the General Assembly’s Retirement System (TRS). Contributions to SERS originate from state agency payrolls as well as payment requests made directly to SERS. GARS, JRS, SURS, and TRS all receive direct vouchers for contributions. Although the Chicago Teachers’ Pension Fund (CTPF) is primarily supported by citizens of the city of Chicago, the state does contribute to the fund.
