Report: Illinois, Chicago public pension crises worst in U.S.

Illinois state and local pension debt now tallies $218 billion with both debt to GDP and funding ratios the worst in the nation, according to a new Equable Institute report.

By multiple measures, Illinois’ statewide public pensions are in the worst shape in the nation, a new report shows.

The same is true for Chicago-area public pensions.

Yet political leaders either don’t get it or fail to admit it.

Gov. J.B. Pritzker and others are touting Illinois’ financial improvements, but a new report by Equable Institute shows just how little improvement has been made on Illinois’ biggest financial problem – pension debt. The report examined state and local pension debt across all major state and municipal pension plans, with the analysis confirming Illinois’ pension crisis is the worst in the nation.

Illinois ended the 2023 fiscal year with an estimated $429 billion in pension liabilities but only $218 billion worth of assets, leaving the state with $211 billion in unfunded state and local pension liabilities. The pension systems’ collective funding ratio of 50.8% was the lowest in the nation. Experts warn pensions with funding ratios below 60% are deeply troubled and plans with funding ratios below 40% are likely to be past the point of no return.

The report also looked at other metrics to add context to the pension debt issue for states. It shows Illinois’ unfunded liabilities as a percentage of its gross domestic product – a proxy for a state’ ability to pay – stand at 21%, by far the worst figure in the nation. It was nearly five percentage points higher than the second-worst figure of 16.2% in Kentucky. Forty-two states had unfunded liabilities as a percentage of GDP lower than 10%.

Not only are Illinois’ pension systems most likely to default, the state has the lowest capacity to pay the debt compared to other states.

The bad news in the report didn’t stop there. Of the 167 statewide pension systems whose market returns for 2022 were analyzed, three of Illinois’ five state-run retirement systems were among the 10 worst-funded systems in the nation. Last year’s pension report showed two Illinois systems in the bottom 10 nationally, the State Employees Retirement System and Teachers Retirement System. This year, the Judges Retirement System joined them among the worst-funded systems in the nation.

Bad turns to worse for local pension systems in Illinois. Of the 58 major municipal pension systems analyzed, eight of the 10 worst-funded systems were in Chicago or Cook County, including the five bottom systems.

The pension systems for Chicago’s laborers, police, municipal employees, and firefighters are all below the 40% threshold experts have cited as likely doomed to insolvency.

Massive pension debt and poor funding ratios have coincided with pension systems taking on riskier alternative investments. Illinois’ pension systems had over $65 billion – the sixth-most in the nation in nominal terms – invested in alternative asset classes such as private equity, real estate, hedge funds and commodities at the end of fiscal year 2022. These alternative investments represented one-third of all assets held by Illinois’ pension systems. While they can offer greater diversification, they also carry a greater degree of risk and returns can vary widely.

This could be especially troubling given Illinois is the only state to mandate environmental, social and governance considerations – known as ESG – to be factored into public investment decisions. ESG investments have not only been shown to yield lower returns than traditional investments, but companies in ESG portfolios have also had worse compliance records for both labor and environmental rules. Critics of ESG investing have cited concerns over the politicization of investment decisions and alleged the concept violates the fiduciary duty of investment managers.

The latest report from the Equable Institute highlights the need for Illinois’ pension systems to make prudent financial decisions. That includes not only making wise investment choices, but also considering reforms to the pension system that would help combat unfunded liabilities and improve funding ratios in the long term. The state’s current funding plan shorts statewide pension systems by more than $4 billion annually, but underfunding is responsible for less than half of the growth in state pension debt since 1996.

Illinois cannot escape its pension problem by worsening its high-tax and uncompetitive business climate. Unfortunately, Pritzker and lawmakers have aggravated those trends. Illinois’ business tax climate continues to lag behind regional neighbors and most other states. The tax climate has led to an exodus of businesses, jobs and wealth from the state. It has also forced residents to leave in record numbers. Data shows Illinoisans of every age and income bracket are fleeing the state, taking with them $11 billion in income each year.

Despite recent credit rating upgrades, even ratings agencies remain wary of Illinois’ massive pension debt and leaders’ failure to fix it. S&P Global Ratings recently warned the state isn’t doing enough to address its pension liabilities.

“We believe pensions have an elevated probability of stressing the state and local governments,” the report says. “Costs will keep rising because contributions are significantly short of meaningful funding progress, plans are poorly funded, and the Illinois Pension Code allows plans to use assumptions and methodologies that defer costs.”

Only structural pension reforms enabled through a constitutional amendment can truly turn state finances around. A “hold harmless” pension reform plan such as one originally developed by the Illinois Policy Institute – based loosely on bipartisan 2013 reforms – could help to eliminate the state’s unfunded pension liability and achieve retirement security for pensioners.

Previous analysis showed changes such as capping pensionable salary, replacing 3% compounding raises with true cost-of-living increases and adjustments to realign benefits with historical inflation rates would have saved the state $2.4 billion in the first year alone, and more than $50 billion by 2045. It would also fully fund the plans, as opposed to the state’s goal of 90% funding, to truly safeguard retirees’ benefits.

Without reform, Illinois’ unfunded liabilities will continue to grow and the state’s pension systems will become even leaner, putting the retirements of Illinois’ public servants at risk.