Illinois lawmakers plan to short pensions by $5.1B in July

Illinois’ five state-run retirement systems need $16.8 billion in funding for the coming fiscal year, but state lawmakers only plan to pay $11.7 billion. That’s $5.1 billion less than needed for plans already approaching insolvency.

Illinois lawmakers plan to short state pension funds by nearly $5.1 billion compared to what the plans’ own actuaries estimate is needed to truly fund the systems, according to the latest report from the Illinois General Assembly’s Commission on Government Forecasting and Accountability.

Illinois’ pension funding law dictates the state must contribute more than $11.7 billion to the five state-run retirement systems in the upcoming fiscal year 2026 budget. But the plans’ actuaries have determined the five systems need more than $16.8 billion next year – and annually for at least the next 20 years – to fully fund the systems and begin paying down the state’s pension debt.

That’s because Illinois’ pension funding is governed by Public Act 88-0593, signed by then-Gov. Jim Edgar in FY 1996 – but also known as the “1995 pension funding law” and “Edgar Ramp.” It created a new 50-year funding policy with a target of 90% funding of the five statewide pension plans by fiscal year 2045.

The state’s contributions would gradually increase – the “ramp” – from 1996-2011. Afterwards contributions would become a set level of payroll in order to reach 90% funding by 2045.

Illinois is 15 years past the “ramp” but funding is still woefully short of what actuaries determine is needed to truly pay down the state’s pension debt. That debt was $143.7 billion in FY 2024.

For every year the state fails to make a full, actuarially determined contribution, the amount of money needed to pay for pensions in future years is expected to increase.  Since fiscal year 2023 – the first year that COGFA reported actuarially determined contribution amounts – the amount the state needs to pay every year has increased by more than $1.9 billion.

Taxpayers will pay nearly $937 million more in pension contributions in 2026 than was statutorily required in 2023. Still, this increase has not been enough because state lawmakers have neglected to budget the actuarially determined amount, which has increased more than $1.9 billion.

In fiscal year 2023, the actuarially determined amount totaled nearly $14.9 billion. However, because the state failed to contribute that amount, and failed to make a full payment in each year since, that figure has now grown to more than $16.8 billion annually – an increase of more than $1.9 billion in what taxpayers need to pay each year.

The state’s pension shortfall – the difference in what the state is statutorily required to pay and the amount actuaries deem sufficient – has grown, too. In 2023, the difference between statutorily required contributions and the actuarially determined amount was $4.1 billion. In 2026 that gap will reach $5.1 billion.

Because the state continually fails to make a full actuarially determined contribution to the state’s pension systems, Illinois’ state pension debt has grown to near all-time highs at $144 billion.

Illinois’ pension funded ratio now sits at 46% because of high unfunded liabilities. 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.

In other words, the retirements of public sector workers are in serious danger because of the high levels of debt in the state pension systems. So long as state lawmakers continue to refuse to make a full, actuarially determined pension payment, the state’s pension debt is likely to continue to increase.

The additional $5.1 billion that the plans’ actuaries say is needed represents a 43.5% increase in state spending on pension contributions annually. Put in terms of tax collections, 66 cents of every dollar the state collected in personal income taxes last year would need to be sent directly to the pension systems to make a full, actuarially determined contribution.

Illinois’ pension debt is unsustainable for taxpayers and poses a serious threat to the retirement security of the state’s public servants. The state’s current funding schedule is woefully inadequate. It intentionally underfunds the pension systems. There are promises to make up for these underpayments in future years, but it never has happened.

Alternative proposals to “fix” Illinois’ pension funding perpetuate this strategy, failing to contribute the bare minimum the plans actuaries state is needed while asking taxpayers to contribute more to the failing systems.

Fortunately, a constitutional amendment to the state’s pension clause and carefully crafted legislation can balance the concerns of pension members and taxpayers, delivering sustainable retirement incomes for public servants, allowing for the continued provision of vital services and staving off the threat of perpetual tax hikes.

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 and wallets of Illinois’ taxpayers at risk.