Illinois pension debt is little less worse, but still worst in U.S.

Illinois pension debt is little less worse, but still worst in U.S.

Illinois’ worst-in-the-nation pension debt shrank slightly after investments more than tripled predictions, thanks partly to COVID-19 stimulus. Experts caution 1 year cannot undo decades of overpromising and underfunding.

Illinois reported its worst-in-the-nation public pension debt decreased $14 billion in fiscal year 2021 – the first drop in four years, according to the state legislature’s Commission on Government Forecasting and Accountability.

The analysis of state retirement systems found Illinois’ pension liabilities shrank thanks to annual investment returns ranging from about 23 to 25%, bolstered by months of pandemic-related stimulus. The returns were more than triple state projections of about 7%.

The influx of cash reduced the pension debt from $144 billion projected by the state in 2020 for the five statewide pension systems. Analysts at Moody’s Investors Service said that estimate was way off, projecting the actual shortfall at $317 billion using standard, real-world assumptions about investment returns.

While the outsized returns have some Illinoisans questioning whether the windfall marks a turning point for the long-term fiscal health of state retirement systems, expert analysis – including by the state’s forecasters– reveals an ugly truth.

One year of exceptional returns cannot offset decades of overpromising and underfunding on pension benefits by Illinois’ leaders.

Research from the Reason Foundation analyzing public pension investment returns nationwide suggested a single year of returns – good or bad – is unlikely to have a major long-term effect on a state’s pension funding plan.

Like in Illinois, most state pension systems employ actuarial tactics to spread annual gains and losses over multiple years, stabilizing pension contributions in times of low return but muting the impact of large gains.

Illinois saw similarly improved returns in 2011 with the widespread disbursement of post-recession stimulus. That bump proved to temporarily lower unfunded liabilities but ultimately had no lasting impact on the state’s long-term pension debt.

Researchers also note Illinois’ strong year of pension returns in 2021 – driven by economies reopening, growing vaccine accessibility and declining interest rates – gives no indication that return rates will continue to outperform assumed rates of return in the future.

In fact, financial experts forecast lower yields on investments during the next decade, leading many to predict pension plans will underperform assumed rates of return in the coming years. Researchers warn growing inflation could play a major role in exacerbating these shortfalls.

One tactic Illinois leaders have used to reduce taxpayers’ annual pension contributions is setting a 90%funding ratio for the state’s five retirement systems. This means Springfield lawmakers need only set aside 90% of the pension benefits promised to Illinoisans by 2045.

The COGFA report blamed this money-saving ploy for the historical underfunding of public pensions. It strongly recommended Gov. J.B. Pritzker and state lawmakers adopt actuarial financing practices used in the private sector that target 100% funding for existing benefits.

Another letter from the State Universities Retirement System, State Employees Retirement System and Teachers Retirement System to Pritzker also “strongly recommended raising the target funding ratio to 100%.”

A reply from the governor’s director of the Office of Management and Budget stated fiscal pressure from Illinois’ nation-leading pension debt prevents the state from fully funding payments on that debt.

“Given the current fiscal pressures facing the state, this too is inadvisable to consider until Illinois can eliminate the unpaid bill backlog” and other debts, GOMB Director Alexis Sturm said. “Therefore, at this time, the 90% funding ratio continues to be a reasonable and achievable goal for the State of Illinois pensions systems.”

State leaders also have the option to amend the Illinois Constitution to allow for changes to future, not-yet-earned pension benefits to curb the growth of liabilities. A solution outlined by the Illinois Policy Institute could achieve that goal and save the state $50 billion through 2045 without cutting earned retirement benefits or further overextending taxpayers.

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