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In just ten years, the Illinois General Assembly pushed the burden of billions in government spending onto Illinois’ future generations. Official estimates put Illinois’ unfunded pension liability at $85.6 billion. But that amount does not take into account the $25.8 billion in pension obligation bond (POB) payments still outstanding, which have a net present value of approximately $17.2 billion1 (see Graphic 1). Adding the present value of the POB debt to the unfunded pension liability puts the total pension burden at $102.8 billion.
The legislature accomplished this sleight of hand by avoiding tough spending decisions and borrowing heavily to pay the state’s statutory pension contributions. The state borrowed $10 billion in fiscal year 2003 under Gov. Rod Blagojevich, but the bad habits didn’t begin and end with his governorship. Under his successor, Gov. Pat Quinn, Illinois borrowed an additional $3.5 billion and $3.7 billion in fiscal years 2010 and 2011, respectively.
The fixed nature of the pension obligation bonds limits the state’s flexibility to manage future costs. Whereas the cost of the future pension liabilities can be reduced through reform, the same is not true for the bond obligations. The past decisions of legislators to kick the can down the road will impose significant costs on Illinois budgets for years to come.
Graphic 2 shows how the pension bond repayments are allocated between the different systems based on their relative size. The largest system, the Teachers’ Retirement System (TRS), represents approximately 59 percent of the state’s total pension obligation. The two next largest systems, the State Universities Retirement System (SURS) and the State Employees’ Retirement System (SERS), account for approximately 20 percent and 19 percent, respectively. The last two systems, the Judges’ Retirement System (JRS) and the General Assembly Retirement System (GARS), have relatively limited enrollment and compose 2 percent and 0.4 percent, respectively, of the total state pension system.
Pension obligation bonds allowed the state government to ignore the need to manage the state’s fiscal issues more responsibly. Instead of accompanying responsible reductions in overall state spending, borrowing for pensions led to the expansion of other programs and the raising of taxes. Borrowing to pay the pension payment simply shifted the state’s current-year obligations from the pension system to long-term bond repayments, spreading the burden of current fiscal irresponsibility onto our children and grandchildren.
Legislators should learn from the mistakes of the past and refrain from pension borrowing in the future. Rather than shirking tough decisions, legislators need to produce sensible, sustainable state budgets every year. The pension crisis facing Illinois is a significant problem that cannot be ignored or deferred any longer. Pension payments will continue to take up larger and larger portions of the budget. Real pension reform is needed now in order for legislators to regain control of the state budget.
Download the full report here.Illinois’ Pension Bonds: The Other $26 Billion Obligation You Shouldn’t Ignore
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