Updated: Dec. 13, 2019
Issue: As part of his $40 billion state government budget for fiscal year 2020, Gov. JB Pritzker implemented a multi-faceted proposal to address the financial issues facing TRS and Illinois’ four other state public pension systems.
Discussion: Here is a summary of Gov. JB Pritzker’s pension program as enacted by the General Assembly in June 2019. The fiscal year runs from July 1, 2019 to June 30, 2020.
The State Pension Contribution in FY 2020
Gov. Pritzker and legislators agreed on a $4.8 billion contribution to TRS as part of the $40 billion state budget. The contribution is an increase over the governor’s original funding level for TRS of $4.2 billion, which he proposed in January 2019. Because of the state’s ongoing financial problems, the governor at first wanted to redirect roughly $576 million away from TRS to other priorities.
However, state tax receipts for April 2019 came in $1.5 billion ahead of estimates, so Gov. Pritzker changed his mind and decided to use that windfall to boost the TRS contribution back up to $4.8 billion.
The $4.8 billion funding level meets the state funding level required by state law for the year, but nonetheless falls $3 billion short of “full funding” for the System as determined by TRS actuaries. Since 1939, state government has never once appropriated a “full funding” amount for TRS. This record of inadequate funding is the main reason TRS carries a $79 billion unfunded liability, one of the largest long-term pension debts in the country.
Restructuring the Current 50-Year Pension Debt Repayment Schedule
Gov. Pritzker postponed plans to “restructure” the state’s existing public pension debt repayment law during fiscal year 2020 because of the April “windfall” in tax receipts.
The original $576 million reduction in the state contribution for TRS during FY 2020 would have resulted from a restructuring of the pension debt repayment schedule. The restructuring would have extended the annual payment schedule by seven years.
Here’s the background: Under a 1994 state law, state government must allocate enough money each year to TRS and the other pension systems to gradually raise all the systems’ funded status to 90 percent in 2045. To do this, the current payment schedule requires a state contribution in FY 2020 of $9.1 billion for all the state’s systems. That equals 22 percent of the state’s general fund revenues.
In the governor’s original proposal, the 90 percent target would have remained in place, but the target date for reaching that goal would be extended from 2046 to 2052.
Pension Obligation Bonds
In the spring of 2020, state government is scheduled to borrow $2 billion and use the proceeds to supplement the FY 2020 annual contribution to TRS and the other pension systems. If the $2 billion is split proportionately based on each system’s pension debt, between $1 billion and $1.2 billion could be available to TRS.
Extended “Buyout” Programs for Members
The two “accelerated pension payment” programs enacted in 2018 – commonly known as the “buyout” options – would be available to members until 2024. Originally, the buyout options were set to expire at the end of FY 2021.
One program is only for retiring Tier 1 members. TRS asks every Tier 1 member when he/she fills out retirement paperwork whether he/she wants to participate. Members who choose to accept the program:
- Give up the current 3 percent compounded annual raise in their pension benefits.
- Accept an annual 1.5 percent not-compounded annual raise in their pensions.
- Receive a lump-sum “accelerated pension benefit payment” that equals 70 percent of the monetary difference between the estimated current lifetime value of the 3 percent annual raise and the estimated current lifetime value of the 1.5 percent annual raise.
The second program is for all inactive members eligible for a benefit.
Members accepting this buyout give up any future claim to a TRS benefit. The buyout amount will equal 60 percent of the present value of the member’s anticipated pension benefits.
The buyout programs are funded solely by as much as $1 billion in state government borrowing. State officials sold $300 million in April 2019 to fund the first buyouts. The first accelerated payments to retiring Tier 1 members were made in May.
State Government Asset “Transfers”
A task force was created to look into the potential for “transferring” the value and/or revenue-generating potential of state-owned property and other assets to TRS and the other state pension systems.
Adding these assets and potential revenue streams to the assets already controlled by the pension systems would boost the funded status of TRS and the other pension systems. The current TRS funded status is 40 percent, which is one of the lowest among the country’s largest public pension systems.
“Asset transfer” is a concept that is gaining traction in New Jersey, Florida and in Alton, Illinois. Alton is selling its wastewater treatment plan to a private company for $53.8 million. The proceeds from the sale will be added to the existing assets of the city’s underfunded municipal pension plans.
Local Government Pension System Consolidation
A second task force was formed to study the consolidation of local government pension funds throughout Illinois into a statewide system. The task force recommended the consolidation of the investment functions of the 649 separate police and firefighter pension systems operated by local governments. Under the plan, the local pension systems would continue to administer benefits. The proposal’s goal is to increase investment earnings and reduce administrative costs.
Increased Annual State Pension Contributions
The governor said in the future he wants to add $200 million in state revenue each year “on top of” the annual contribution amounts certified by the state pension systems. If this program were in place for TRS in FY 2020, the $4.813 billion contribution certified by the trustees would become $5.013 billion.
However, funding for this annual increase in the contribution is dependent on the future passage of an amendment to the Illinois Constitution that would allow a “graduated rate” state income tax that consists of different rates based on a person’s income. The current state income tax is a “flat” tax because all taxpayers pay the same rate.
In practical terms, the earliest this $200 million annual increase could take effect is in fiscal year 2022 because of the constitutional and legal steps necessary to enact a “graduated rate” tax.
A constitutional amendment allowing a graduated-rate tax will be on the statewide ballot for the November 2020 election. The General Assembly already has approved legislation to implement a graduated-rate tax should the constitutional amendment be successful.