Illinois state pension debt climbs to $144B
Illinois' unfunded statewide public pension liabilities grew another $1.5 billion in the past year. Better investment returns couldn’t keep up with public worker pensions growing faster than projected.
Statewide pension debt has grown to $143.7 billion from $142.2 billion in the past year, according to a new report from the state legislature’s Commission on Government Forecasting and Accountability.
This is the third consecutive year the debt has grown since state leaders put federal pandemic funds into the system in 2021. It is approaching the 2020 record debt of $144.4 billion that those federal funds helped curb.
Investment returns helped, but they were not enough to stop the debt from growing. More state employees retired, more lived longer and they retired at higher-than-expected salaries to keep the debt growing.
The funding ratio, or how much money the state has on hand to pay its obligations for these systems, rose marginally from 44.6% in 2023 to 46.0%. It does not make any substantial change to the position of state pensions or give Illinoisans any real relief. That’s because this less than 2% increase can be attributed to the larger-than-expected investment returns in Illinois and across the country rather than structural change. Future investment returns are not guaranteed, which means the state needs to protect the cost-saving elements of existing reforms such as Tier 2 and work to provide more choice for state pensioners through buyout provisions and defined contribution plans.
Obligations continue to rise past what Illinois taxpayers can afford
Two culprits were primarily responsible for the increase in unfunded liabilities in 2024: changes in assumptions and higher-than-assumed salary increases.
Among the changes made for assumptions were rates of retirement, termination and salary increases. Across all systems, these changes accounted for 64% of the rise. Larger-than-expected salary hikes caused 39% of the increase. These increases were driven primarily by members of the three largest systems – the Teachers’ Retirement System, the State Employees’ Retirement System and the State Universities Retirement System. Across all five systems, salary gains grew the pension debt $1.15 billion dollars.
In their report, the Commission on Government Forecasting and Accountability points toward their concern the payments, while meeting legal standards, are still below what is actuarily necessary for these obligations. While accurate, that analysis only tells part of the story. The problems run deeper.
Illinois makes some of the largest pension contributions of any state to fund its systems. According to Wirepoints research, the annual average growth rate of Illinois pension assets was 5.5% from 2003-2017. That’s the 8th fastest in the country. Additionally, as of 2018, Illinoisians contributed $27 billion more to pensions than required under the original Edgar Ramp – the payment schedule created in 1994 under Gov. Jim Edgar to push required payments farther into the future. That means underfunding is not the issue. Illinoisians have paid more than their fair share. The real issue is the amount of money Illinois taxpayers are responsible for paying into the system has grown nearly 20 times during the past 30 years.
Despite this, the payments continue to fall short of the amounts computed by experts because those amounts are beyond what Illinoisans can afford. It requires an ever-greater share of the state’s budget, climbing toward 20%. This crowds out spending for important services, leading to higher taxes that drive more people out of the state. The benefits promised to Tier 1 employees grow at an unsustainable rate. From 2003-2017, Wirepoints research demonstrated Illinois’ accrued liabilities grew at triple the rate of gross domestic product, while the average across states was half that at 1.5 times. These high rates, when combined with lengthening life expectancies, risk insolvency and endanger pensioners’ future benefits or threaten to drive Illinois’ high taxes even higher.
A source of relief points toward a longer-term solution
Investment returns, a critical variable in pension funding, exceeded expectations in fiscal year 2024, with all of the systems achieving market value returns of at least 8.3%. These higher-than-expected investment returns were seen by pension systems across the nation and boosted Illinois’ systems. Nonetheless, even these solid returns were not enough to overcome the salary increases and changes in assumed lifetime benefits that increased the debt.
Another source of relief was buyout provisions. The state’s “Accelerated Pension Benefit Payment” option started in 2018 for those under the State Employees Retirement System, State Universities Retirement System and the Teachers’ Retirement System. The buyout provisions provide employees with the choice to receive a lump sum of money at the start of their retirement in exchange for a reduced cost of living adjustment on their benefits: 1.5% non-compounding annual increases instead of the 3% compounding rate given to most Tier 1 retirees. A 3% compounding cost of living adjustment leads owed benefits to balloon quickly, and so reducing the rate of increase can have a big impact.
Since the Commission on Government Forecasting and Accountability started reporting the impacts of this policy on the unfunded liabilities, it has consistently offset the growing debt by hundreds of millions each year. The most significant effect was seen in FY 2019 when it offset the new unfunded liability by $405 million. Since its inception, this option has counteracted the growth of pension debt by nearly $1.5 billion in total.
This pattern points to part of a potential solution to Illinois’ pension crisis: a reduction in the rate at which benefits grow each year. States such as Arizona and Rhode Island have been able to change their cost of living adjustments to lower, more sustainable rates and have seen the financial health of their pension systems improve dramatically.
While a system-wide change might not be possible under the current mandates of the Illinois Constitution, giving public-sector workers a choice in their pensions can have a similar effect as we have seen with this optional buyout program so far.
Impact of Tier 2 on the pension crisis
The 2024 pension report concludes with a note from the actuaries on the savings from Tier 2. Illinois’ Tier 2 pension plan, implemented in 2010, has been beneficial in reducing long-term costs. By instituting a more reasonable process for calculating the final average salary, raising the retirement age to match the national age and linking cost-of-living adjustments to inflation rather than fixed, compounding rates, Tier 2 offers competitive public service retirements without unsustainable benefit growth. That helps to protect promised benefits and to protect taxpayers.
Critics of Tier 2 have pointed to concerns about benefit adequacy and compliance with federal rules for retirement benefits that excuse the state and its employees from paying Social Security taxes. While concerns about compliance with these rules merit attention, changes to Tier 2 should be precise and responsible, especially in light of this new actuarial briefing. Any modification to Tier 2 shouldn’t change the retirement age, the cost-of-living adjustment or the process for calculating final average salaries. It should only raise the pensionable wage cap to match the Social Security wage base.
Fixing Illinois’ public pension crisis
By reducing the growth rate of liabilities, buyout provisions and Tier 2 have provided marginal relief to Illinois pensions. To prevent the unfunded liability from growing more in the future, Illinois lawmakers should consider:
- Maintaining Tier 2’s core provisions
While adjustments should be made to ensure compliance with federal requirements, change should be targeted, not an overhaul. Aligning the pensionable wage cap with the Social Security wage base would satisfy federal requirements and maintain the core cost-saving benefits of Tier 2.
- Expanding retirement choice
Illinois should offer all state employees greater flexibility through defined-contribution plans to which SURS employees already have access, and expanded buyout options that motivate more retirees to select a lower annual cost of living adjustment.
- Amending the constitution
Policymakers should pursue a constitutional amendment to allow for pension reform. This will allow Illinois to enact commonsense reforms other states have passed, improving the state's financial position and protecting benefits for pensioners for years to come.