Updated: August 1, 2018
Issue: In January 2013, Ralph Martire, executive director of the Center for Tax and Budget Accountability, proposed a multi–year solution to the state’s pension financing problem. The Martire Plan would replace the current “1995-2045” plan to pay down the state’s unfunded pension liability with a new 44–year funding schedule. Essentially, this proposal would “re–finance” state government’s pension “mortgage.”
Martire points out correctly that the biggest and most important part of the public pension problem in Illinois is the unfunded liability facing Teachers’ Retirement System and the four other state pension funds, estimated at $129 billion at the end of fiscal year 2017. The TRS share of this unfunded liability alone is $73.5 billion. Two–thirds or more of the state’s annual pension contribution is devoted to paying down the unfunded liability. The remainder is the cost of pension benefits earned by active teachers in that year.
Discussion: Martire’s proposal would “restructure” 90 percent of the $129 billion unfunded liability, or roughly $116 billion. All but 10 percent of the unfunded liability would be paid off by 2057, through equal annual contributions from state government. In 2013, Martire estimated the payment would be approximately $6.9 billion every year for 44 years.
Currently, state law requires the government to pay off the pension systems’ unfunded liability by 2044 by paying annual contributions. These contributions, however, increase in size annually until 2044. For TRS, the annual state contribution in fiscal year 2018 was $4.09 billion and $4.47 billion in FY 2019. It is scheduled to increase over the next 31 years to as much as $9.31 billion per year.
Legislators say that this continually rising payment under the current law is too expensive and will re-direct money from other state budget priorities.
A TRS Board of Trustees’ resolution of 2012 calls for an actuarially-sound plan to pay off the unfunded liability. This means that:
Normal actuarial practice calls for a 30–year payment plan. State law has required a 50–year plan and this proposal would be a 44–year plan.
Normal actuarial practice calls for pension system to be 100 percent funded — to carry no unfunded liability. Current state law calls for a 90 percent target, which would continue under this plan to refinance the debt.
Along with the annual payment toward the unfunded liability, the state also must pay the annual cost of pensions earned in that year. For TRS alone, that cost was roughly $818 million in 2018 and it will grow to $3.1 billion by 2045.
The state also would have to pay an annual amortized contribution to help pay off the 10 percent unfunded liability that is left over under the Martire plan, further increasing the state’s total pension contribution.