Pensions set to consume 29% of Illinois’ budget amid $7 billion debt increase

New official reporting from the state of Illinois shows both rising debt and rising costs in state retirement systems, with essential government services again facing cuts.

Illinois Gov. J.B Pritzker in February will tell state lawmakers how he plans to balance the state budget for the coming fiscal year, but he will start with nearly 30% of the state’s revenues already dedicated to public pension debt.

If Illinois continues to pursue across-the-board tax hikes and cuts to essential government services, it risks further harming its economy and losing residents. The governor’s administration has threatened both wide-ranging cuts and tax increases.

Pritzker has consistently opposed a constitutional amendment to fix the pension crisis, but that is precisely what Illinois needs.

Pension debt increased $7.1 billion to $144.4 billion in fiscal year 2020, according to the Commission on Government Forecasting and Accountability, or COGFA, the fiscal analysis unit for the General Assembly. The total cost of that debt burden to taxpayers in fiscal year 2022 will be nearly $11.6 billion, including:

• $9.4 billion in direct contributions from general revenue sources
• $1.1 billion in “other state funds”
• $797.9 million in debt service costs on previously issued pension obligation bonds
• $264.8 million towards the Chicago Teachers’ Pension Fund, or CTPF

Pensions will consume 28.5% of the budget. That is based on $38.5 billion in expected general revenue for fiscal year 2022, adding in that $1.1 billion from “other state funds” – which would go to critical programs were it not being used for pension debt.

COGFA and the governor’s budget officials typically include only the $9.4 billion in direct costs under the “pensions” category in official budget documents. Payments on pension-related bonds are categorized as “debt service” while payments to the CTPF are included under “education.” “Other state funds” are essentially ignored in the budget and include employer contributions for state worker salaries that are not funded through general revenues and proceeds from the sale of unclaimed property transferred to the pension fund for higher education workers.

This convoluted accounting system conceals the true cost of pensions from taxpayers and misleads the public about where their tax dollars flow.

Worse, unrealistic accounting assumptions used in state estimates of retirement debt hide the depth of the crisis.

Pension debt across the five state retirement systems equaled $230 billion at the end of fiscal year 2019, according to credit rating agency Moody’s Investors Service. That was equal to nearly 26% of gross domestic product, giving Illinois the worst pension debt-to-GDP ratio among all 50 states for the fourth consecutive year.

Moody’s projects state pension debt will rise to an all-time high of $261 billion by the end of fiscal year 2020 when audited financial statements are finalized. That $115 billion difference compared to the state’s estimate stems from Moody’s method for calculating unfunded pension liabilities, which is more in line with private sector standards. State estimates use inflated assumptions about rates of return on pension fund assets invested to earn interest. That makes future pension obligations and costs look smaller than they truly will be.

During the past decade, growth in pension debt outpaced the state’s initial projections by $24 billion. Growth in annual taxpayer contributions exceeded state estimates by about 15% per year on average, causing taxpayers to contribute $7.6 billion more than projected during the decade.

Blame rests with the state’s faulty methods for calculating and funding pension debt, which violate best practices established by pension actuaries. But it is wrong to conclude Illinois’ pension crisis is fundamentally caused by “underfunding” retirement benefits.

COGFA writes in its recent report that since 1996, “actuarially insufficient State contributions contributed the most to the increase in unfunded liability, accounting for approximately 45.9% of the total increase.” Without proper context, this statement is just as misleading as the way Illinois reports pension costs in the budget and accounts for future pension liabilities.

Illinois’ state and local governments already spend the most in the nation on pensions as a percentage of their revenues, about double the national average, but still it is not enough to keep the debt from growing under currently promised benefit levels. Despite its highest-in-the-nation pension spending, Illinois also has the largest gap between what it currently pays and what would be required to fully fund the retirement systems without reform.

Michael Cembalest, chair of market and investment strategy at J.P. Morgan Asset and Wealth Management, found in a 2019 report that Illinois would need to double its spending on retirement benefits to 51% of the state budget to eliminate the debt without reform. Or, a 50% increase in the state income tax – taking over $1,800 from a median family’s income – would be needed to eliminate the debt.

Simply put, Illinois cannot solve the pension crisis by throwing more money at it. Pension reform is the only responsible answer.

Illinois politicians long played reckless funding games, but this is a symptom of current benefit levels and the pension system design placing too large a financial burden on taxpayers. They also leave the average career worker paying just 4-6% of the cost of their lifetime benefits. While promised benefits should be properly funded, that can only be achieved if required taxpayer contributions are set at an affordable and sustainable level.

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 constitutional amendment filed in the General Assembly in 2020 – House Joint Resolution Constitutional Amendment 38 – would do just that.

If passed, HJRCA 38 would open the door for reforms such as the Illinois Policy Institute’s “hold harmless” pension reform plan, which would save the state roughly $2.4 billion the first year and more than $50 billion through 2045. The plan would also fully eliminate the state’s pension debt during that time.

Recent polling from the Paul Simon Public Policy Institute found 51% of Illinoisans support “an amendment to the Illinois Constitution that would preserve state retirement benefits already earned by public employees, but would also allow a reduction in the benefits earned in the future, whether by current or future employees.”

Illinois politicians on Nov. 3 were eager to ask voters for a constitutional amendment so they could hike taxes. Voters’ rejection of Pritzker’s “fair tax” proposal should be read as a demand for a new strategy to control spending.

It is past time to let Illinoisans vote on an amendment to fix the pension crisis that is at the root of many of the state’s fiscal and economic challenges.