Updated: March 1, 2019
Issue: For many decades, the legislative and executive branches of state government have sought a way to increase the funded status of TRS and the state’s four other public pension systems while keeping the annual cost pensions within reason.
Most experts on Illinois government finances note that the biggest and most important part of the public pension problem in Illinois is the unfunded liability carried by the five state pension funds. This liability was estimated at $133.5 billion at the end of fiscal year 2018. The TRS share of this unfunded liability alone was $75.3 billion. Three quarters or more of the state’s annual pension contribution is devoted to paying off this unfunded liability, which is among the largest in the United States.
State law currently sets an auspicious goal for state government in regard to the systems’ funded status. That law requires the state to allocate sufficient revenue annually over the next 25 years to the systems so that they reach a 90 percent level by 2044.
This funding plan, enacted in 1994, was put in place because each of the pension systems’ funded status was below various actuarial standards for being “healthy.” TRS, for instance, had a 55.1 percent funded status in 1994, when the accepted actuarial standard for funding was 70 percent. Since 1994, the situation has deteriorated. The TRS funded status at the end of fiscal year 2018 was 40.7 percent.
The 1994 law established a set 50-year payment schedule for state government in order to help future budget planning. However, the cost of reaching 90 percent was not divided equally across each of the 50 years in the plan. In order to reduce the government’s cost during the first years of the plan, the annual cost for the first 10 years was artificially lowered and those unpaid costs pushed to the end of the 50-year schedule. The first 10 years of payments became known as “the ramp” because it was designed to gradually “ramp up” payments to reach a point in time when the state would start to pay the actual actuarial cost.
But in 2004, which was supposed to be the last year of “the ramp,” the legislative and executive branches did not want to start paying the full actuarial cost, so they borrowed money in order to make the annual state contribution. Since then, it has become a habit for state government to find ways to not pay the annual pension costs mandated by the 1994 law. As a result, the annual actuarial cost of meeting the 2044 deadline continues to get pushed into the future. The expected contributions get bigger and bigger the closer the state gets to 2044.
To complicate this on-going decision to underfund the payment plan, the state’s revenues shrank. Illinois was negatively affected by the 2008-2009 world-wide economic meltdown, which cost the state billions of dollars in lost tax revenue. Policy decisions during this period also created a deep structural deficit that state government continues to grapple with.
Because of these converging problems, in fiscal year 2020, the state’s expected contribution to its pension systems is $9.1 billion, which accounts for 21 percent of the state’s General Funds budget. In most states, the annual contribution is less than 5 percent of revenues. Because of the high cost, many Illinois officials want the pension allocation reduced because the payment is soaking money away from other budget priorities, like education and social services. However, cutting the state’s pension allocation makes it impossible to fulfill the goals of the 1994 state law within 50 years.
One suggested method of meeting these divergent outcomes – reducing government pension costs while bringing the system up to 90 percent funding – is to “re-amortize” or “restructure” the 1994 payment schedule by pushing the deadline beyond 2044 and changing the way the annual contribution is calculated. Essentially, the concept “refinances” state government’s pension “mortgage.”
Two restructuring plans have been proposed formally, one by Gov. JB Pritzker and one by Ralph Martire, executive director of the Center for Tax and Budget Accountability.
Discussion: In January 2013, Martire proposed replacing the current 50-year plan with a new 44–year funding schedule that would begin in the year the new plan is adopted.
Martire’s proposal would “restructure” 90 percent of the unfunded liability. 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.
In his budget plan for fiscal year 2020, Gov. Pritzker proposed a less-ambitious restructuring of the state’s pension debt. Under the Pritzker plan, the 90 percent target remains in place, but the target date for reaching that goal would be extended seven years, to 2052. The calculation of the annual pension contribution would not change, or be equalized over each year. The unpaid pension costs would be pushed further into the future.
However, the governor estimates that a seven-year extension would reduce the state’s annual contribution to its pension systems in FY 2020 by $878 million to $8.2 billion. That total includes a $576 million reduction for TRS.
In order to replace the money lost to the pension systems in this restructuring, Gov. Pritzker has proposed the sale of $2 billion in pension obligation bonds in FY 2020. And beyond FY 2020, the governor has proposed the enactment of a “graduated” income tax in Illinois that would increase overall state revenues. His intention is to dedicate $200 million annually from the graduated tax revenues as an additional payment on top of the payment plan allocation.