Report: Illinois pension plans on road to ruin
Published: October 24, 2012 - Pensions & Investments
Illinois' state pension plans are heading toward insolvency without any major
pension reform, according to a report by the State Budget Crisis Task Force, led
by former New York Lt. Gov. Richard Ravitch and former Federal Reserve Board
Chairman Paul Volcker.
Pension costs are projected to take up 25% of the state's budget in fiscal
year 2015, up from 8% in 2008 and 20% in 2012. Each of the state's five pension
funds, with an estimated $85 billion in combined unfunded liabilities, is less
than 41% funded. More than 60% of the state's total outstanding debt is due to
pension bonds.
Illinois already has one of the highest debt per capita rates in the country.
It sold $10 billion in pension obligation bonds in fiscal year 2003 and again
had to sell bonds in fiscal 2010 and 2011 to cover legally required
contributions that were still below those actuarially required.
gThe primary cause of the state pension systems' underfunding is that the
state does not impose the same obligation on itself that it imposes on local
governments, and for decades its employer contributions have been below annually
required amounts,h the report states. gIllinois has planned so poorly that it
had to borrow to make its scheduled pension contributions for FY 2010 and 2011,
which were below the (actuarially required contribution) amount.h
Political gridlock among state legislators has prevented any meaningful
pension reform since 2010 when the General Assembly created a second tier of
reduced benefits for employees hired after Jan. 1, 2011. The report acknowledges
this will help with long-term savings, but does nothing to reduce the existing
unfunded liability.
gBecause the state's resources are limited, some type of reduction in pension
benefits appears inevitable, despite the difficulties in making any type of
change,h the report states. gBoth spending cuts and revenue increases probably
will be needed. Pension reform is necessary to salvage the benefits of future
retirees.h
The state constitution currently protects any reduction in employees'
promised benefits.
Compounding matters is that the three largest pension systems — $36 billion
Illinois Teachers' Retirement System, $13 billion Illinois State Universities
Retirement System and $11 billion Illinois State Employees' Retirement System —
use an assumed rate of return of about 8%. Lower discount rates will soon be
required in Illinois under new rules approved by the Governmental Accounting
Standards Board. Under the new rules, the Illinois Teachers' Retirement System
would be 18% funded as of July 2010.
The state's other pension plans are the $63 million General Assembly
Retirement System and $60 million Judges' Retirement System.
The task force was assembled to understand the extent of fiscal problems
faced by the states in the aftermath of the financial crisis. The task force
studied California, Illinois, New York, New Jersey, Virginia and Texas.
Original Story Link: http://www.pionline.com/article/20121024/dailyreg/121029946
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