Illinois may borrow $1B for pension buyouts

Illinois lawmakers might borrow $1 billion to extend pension buyout programs until 2026. Experts warn the efforts have been a disappointment and will do little to ease Illinois’ worst-in-the-nation pension crisis.

Illinois lawmakers are considering new legislation that would extend two pension buyout programs for state employees an additional two years and borrow $1 billion in bonds to help cover the costs.

House Bill 4292 would amend the General Obligation Bond Act and authorize an additional $1 billion in State Pension Obligation Acceleration Bonds. Lawmakers propose the proceeds from the bond’s sale could then be used to buy out future benefits promised to pension recipients with a large one-time payment.

Proponents of the policy to extend the buyout option until 2026 claim the move will save the state hundreds of millions in future pension payments. But history has shown the maneuver fell short of projections in the past, in 2019 generating just 3% of what the state estimated it would save.

Nearly four years into effect, $1 billion in reduced liability has been attributed to the program by the legislature’s Commission on Government Forecasting and Accountability. These saving amount to less than 1% of the state’s total pension debt, by optimistic estimates. Proponents originally projected $400 milllion in annual savings, meaning the program should be approaching $1.6 billion in savings.

As Illinois continues to try and borrow its way out of the nation’s worst pension crisis – estimated at $144 billion by state retirement systems and more than $317 billion by credit agencies – the urgent need for constitutional pension reform becomes ever more apparent.

Illinois established the Accelerated Pension Benefit Payment Program in June 2018 as an alternative means to save money for the state and its underfunded pension systems by offering early benefit buyouts to pension recipients.

The early buyout program offered Tier 1 and Tier 2 participants in the state’s Teachers’ Retirement System, State Employees Retirement System and State Universities Retirement System a lump sum equal to 60% of the present value of their accrued benefits. The pensioner would then be permanently removed from the system.

A second offer only available to Tier 1 recipients who still work for the state would give pensioners a lump sum upon leaving the workforce in return for halving the automatic annual 3% increase in their benefits after they retire. That sum is 70% of what the retiree would have received in full benefits if they had not taken the lower rate.

The program options were initially set to expire in 2021 to incentivize pension recipients to accept a buyout in the short term. Gov. J.B. Pritzker extended that horizon to 2024 in his first budget. Pritzker publicly claimed the programs’ extension could save the state $25 billion – a statement later determined to be “mostly false” by Politifact.

HB 4292 would see that expiration date moved back again to 2026, despite the fact most pension recipients considering the buyout, representing the largest savings potential, would have likely accepted the deal already.

Some experts have also expressed concerns the pension buyout program targets Illinoisans who can least afford it, appealing to retirees with unexpected medical expenses or those without the financial literacy to understand they are accepting a cut in their lifetime benefits.

Bill sponsor state Rep. Bob Morgan heightened these concerns, encouraging retirees to take advantage of the program for fast cash rather than planning for their long-term financial futures.

“This allows retirees to pay for their medical bills, to pay for their mortgage, to pay for other expenses,” Morgan said. “It’s not accepting the idea that 20, 30, 40 years down the road their pension is going to cover the costs they need.”

Whether state retirement systems will be solvent to fully funded those promised pension benefits in 40 years also remains in question.

While the state’s official projections show all five state funds will reach 90% funding by 2045, this assumes the funds make at least 6.5% returns on investment for the next two decades. The state has regularly underperformed on these optimistic investment projections in the past, even when the economy was growing, leaving Illinois taxpayers to make up the difference.

From 2010 to 2019, taxpayers were forced to pay $7.6 billion more into the retirement system than the state sources estimated they would. On average, taxpayer contributions to annual pension obligations were 15% above state estimates during this past period.

But despite being asked to pay more each year and more than expected, taxpayers still could not keep up with growing pension debt.

A pre-pandemic actuarial stress test of the retirement systems commissioned by the Illinois Policy Institute in 2019 showed this underfunding left pension funds highly vulnerable to insolvency in the case of a serious economic downturn.

Had state-run pension funds averaged roughly the same returns seen in the 10 years after the Great Recession and lost 20% of their asset value during the COVID-19 pandemic – the same loss experienced in 2009 – the state’s major retirement systems would have run out of money in less than 30 years.

While Illinois avoided this dire outcome with the assistance of billions of dollars in federal stimulus bolstering the state economy, it none the less demonstrated how fragile the current system is and the need for reform.

The only viable solution to Illinois’ pension crisis starts with a constitutional amendment to allow for reductions in future benefit growth for current workers and retirees.

A “hold harmless” pension reform plan developed by the Illinois Policy Institute for the state’s systems can save roughly $2.4 billion for the state budget the first year and more than $50 billion through 2045. The plan would also totally eliminate the state’s pension debt during that time, rather than the 90% reduction state leaders hope for.

And it accomplishes all of that while preserving every dollar of pension benefits promised to public workers for work already performed.