The funding of Illinois’s Teachers’ Retirement System (TRS) has become a major obstacle for future increases in state education spending. Years of overly generous pensions and delayed funding by the Illinois legislature have left the TRS approximately $47 billion short of its obligations.
Historically, the largest item in the state K-12 education budget has been General State Aid (GSA), the program that provides cash assistance to school districts to cover operational costs.
The state will spend $4.6 billion on GSA in 2011. More than any other state education program, GSA targets resources to areas with low property values and high student poverty. The GSA is unlikely to grow, however, as obligations to fund the state’s pension plans dominate Illinois’s general funds.
There are three annual costs associated with TRS:
The annual “normal cost” of new benefits earned by employees during the current year;
The interest on the pension system’s unfunded liabilities from past years; and
The repayments of bonds used in past years to generate cash for the pension systems.
State government makes its required, non-negotiable payments to bondholders. It often does not set aside enough money to cover annual normal costs and interest on unfunded debts – but that doesn’t mean the tab for three items won’t come due. Costs incurred in 2011 will have to be paid at some point.
This year alone, the interest costs on TRS’s unfunded pension liabilities exceed $4 billion. A further $800 million must go toward repaying TRS’s share of the state’s pension obligation bonds. Add that to the “normal cost” needed to cover the cost of new benefits earned by workers during 2011, and the year’s pension costs exceed $5.75 billion. The result? Total Teachers’ Retirement System pension costs have exceeded the amount spent on General State Aid.
Consistent with the failures of the past decades, Illinois will not fully fund this year’s total pension costs. Under the most recent plan the state government will only contribute about $2.2 billion. The remaining $2.8 billion will be left for the future. This is done to free up short term cash to pay for items like GSA, but doesn’t change the fact that the 2011 costs of TRS will come due. And when the state can no longer short the pension fund of its actual costs, it will have to divert money from other sources.
By 2020, total TRS costs will climb to $6.4 billion. As Illinois struggles to meet these and other pension obligations (the other four state pension funds face similar shortfalls and problems), funding for operating funds in education will undoubtedly suffer, unless a reform of the state’s pension funding system is implemented.
See all of the Illinois Policy Institute’s recent research on public employee pensions.