‘COVID-19 Was A Dress Rehearsal’ – Illinois Pension Reformers Are Not Giving Up
I admit: since it became clear that even after the pandemic was well underway, during the legislative session that ended May 24, that Illinois was counting on state bailout money rather than making any cuts in its budget, and that neither Gov. Pritzker nor any of those in power had any interest in working to solve Illinois’ worst-in-the-nation pension debt and the crowding-out of needed government spending that its 25%-of-the-budget contributions produce, since it became clear that there was no political will to reform pensions in Illinois, I’ve resigned myself to the high likelihood that Illinois will continue to hobble along while those of us who can, plan for futures elsewhere.
But two organizations are continuing to raise awareness of the serious problems Illinois faces and have produced reports to educate readers.
First, Adam Schuster writing at the Illinois Policy Institute addressed the risk of future market volatility sending the state’s pensions into crisis in “Pension Apocalypse? Covid-19 Exposes Long-Running Fragility of Illinois Public Pensions.” Schuster writes,
“An actuarial stress test of the systems commissioned by the Illinois Policy Institute in fall 2019 shows if state-run pension funds lose 20% of their asset value as a result of a recession – the same loss experienced in 2009 – and the average return on investment matches the roughly 4.6% the funds experienced in the 10 years after the last recession, the state’s major retirement systems will run out of money in fewer than 30 years.”
(Readers who follow the link will see that I am credited for this calculation, which I performed at their request. Separately, I worked out a separate set of calculations for a somewhat different scenario solely for the TRS, for this platform, back in March.)
Now, as it happened, the stock market has recovered, and the Teacher’s Retirement System reported an estimated annual return of 0.52% for the fiscal year that ended this past June. This still sets them back for the year — they’d need to have earned 7% to stay on pace, so anything less than 7% is a loss. And this quick market recovery is likely to have proven to be a mirage, bolstered as it is by tech stocks’ success.
Schuster reminds readers that the failure to reform pensions is not just a matter of bean-counting, but has real costs to Illinoisans.
At the state level,
“Pension costs are already eating away at Illinois government services. Pension costs increased by more than 500% during the past 20 years. Spending on core services, including child protection, state police and college money for poor students, dropped by nearly one-third since 2000. Pension contributions accounted for less than 4% of Illinois’ general funds budget from 1990 through 1997 but have grown to consume more than a quarter of the budget in recent years. That growth crowded out the state’s ability to spend money on programs that provide value to residents.”
And at the local level, “many cities have already been forced to either lay off current workers, raise taxes or both to keep up with the cost of these pension systems.”
After some more unpleasant numbers and a reiteration of the Illinois Policy Institute’s proposal to reform pensions, Schuster concludes:
“COVID-19 was a dress rehearsal for the inevitable collapse of Illinois pensions in the absence of reform. Unfortunately, state elected leaders have no clear plan to prevent or manage this coming crisis. For the sake of all Illinoisans suffering under the broken status quo, it’s time to defuse the pension bomb before it’s too late.”
Second, the team at Wirepoints has been rolling out its special report, “Solving Illinois’ Pension Problem: Why It’s Legal, Why It’s Necessary, and What it Looks Like.” Two parts have been released; the other two will be released over the next two weeks. They document that
- Illinois has the nation’s largest shortfall, greater than California even when measured in the total debt (based on Moody’s Adjusted Net Pension Liability), and the largest on a per-capita basis or the percentage of the state’s GDP, as well. It’s by far the biggest spender in terms of retirement costs as a percent of the state budget as well.
- As a result, its credit rating is one notch above “junk” status according to Moody’s and we pay far more in interest on bonds the state issues, than other states do.
- What’s more, they write, “Illinois’ pensions are overpromised, not underfunded.” Since 1987, accrued liabilities have increased 1,146%. In comparison, the state’s personal income has only increased 267% over that time.
- Calculated another way, Illinois’ pension liabilities have grown at an annualized rate of 7.2% from 2003 – 2017, the 5th highest state. The average rate in this period was 5.2%. Astonishingly, if pensions had grown at 5.3% annually since 1987, rather than 8.5%, the state’s pensions would have been fully funded.
- But instead, benefits are generous and, despite their lack of funding, the legislature continually boosted benefits, including the 3% guaranteed COLA in 1990 and a more generous benefit formula in 1998.
There is an enormous amount of data here, and still more to come as their forthcoming sections are titled “Why Pension Reform is Legal” (release date September 15) and “A Solution for Illinois’ State Retirement Crisis” (release date September 22). They’ve clearly put in a lot of work on this project. And the numbers may be dreary, but in a way, I am at least encouraged that the Illinois Policy Institute and Wirepoints teams consider it worth the effort to continue to make the case for reform.
As always, you’re invited to comment at JaneTheActuary.com!