by Ted Dabrowski and John Klingner
Moody’s Investors Service reported that Illinois’ true unfunded pension liability in fiscal year 2011 was nearly 65% higher than the state’s official estimate.
In its report titled “Adjusted Pension Liability Medians for U.S. States,” Moody’s calculated the unfunded liabilities for Illinois’ three largest state-run pension plans at $133 billion, compared to the state’s official calculation of $81.3 billion.
Illinois’ pension funds use overly optimistic assumptions in calculating their unfunded liability, including an expected 8% yearly average investment return. The new Moody’s methodology uses more realistic market rates based on high-quality corporate bonds. The rate Moody’s used for fiscal year 2011 was 5.67%, resulting in a $52 billion increase in the state’s unfunded liability.
Moody’s has yet to publish their report on fiscal year 2012 liabilities. However, the market rates they’ll use to calculate the unfunded liability have already been determined. As of June 30, 2012, that rate was equal to 4.13%. That means Illinois’ official $97 billion underfunding is set to approach $200 billion under the new Moody’s methodology.
The Illinois Policy Institute estimates that Illinois’ unfunded liability — using the lower market rates —exceeds $200 billion.
It’s laughable, then, that as the Illinois’ pension crisis balloons, Springfield is trying to find a middle ground between House Speaker Michael Madigan’s and Senate President John Cullerton’s bills. Neither addresses the true size of the problem, nor offers a solution to end the pension crisis.
Madigan’s plan only reduces the unfunded liability to 2011 levels, at which point the state was already in a full-blown crisis. Even more, Madigan’s plan doubles down on the state’s failed defined benefit program by implementing a pension funding guarantee that would ensure more tax increases for Illinoisans.
Cullerton’s plan reduces the unfunded liability by even less than Madigan’s proposal.
The reality is, a $200 billion problem requires a real and sustainable solution.
That means moving away from defined benefit plans and embracing 401(k)-style plans going forward.