Tuesday, January 28, 2014

"Illinois Still Has Serious Fiscal Problems After December 2013 Pension Law Changes" by Richard Dye, Nancy Hudspeth and David Merriman

Illinois has a chronic, structural fiscal problem so huge that it cannot be eliminated by increases in economic growth alone, increases in taxes alone, or—alas— aggressive pension changes alone.1 In early December 2013 the General Assembly passed, and Governor Quinn quickly signed, a major pension reduction bill. In this brief, we project Illinois’ budget gap with estimates of the fiscal impact of the new pension law. The state still has a large structural imbalance after the pension changes.


In measuring the fiscal condition of the state, we:2
·  Use a broad-based budget measure (700+ special funds in addition to the state’s General Funds) to provide consistency and eliminate confusion from fund accounting changes;
·  Use a long-term perspective that projects budget trends a number of years into the future;
·  Focus on sustainable revenue that ignores new borrowing or decreases in fund account balances when calculating the Budget Gap = Total Revenue – Total Spending.


The General Assembly passed SB 1 in special session on December 3, 2013. Two days later the governor signed the bill, making significant changes in four of the state’s five public employee pension systems.

The intent of the new law is to reduce the state’s fiscal burden of paying for future pension obligations. The savings to the state come mostly from reductions in cost of living adjustments for current and future recipients of state pensions.3


In evaluating the fiscal impact, we assume there are no successful challenges to the new pension law and that there is no delay in implementation of the changes. This assumption may prove not to hold given that the Illinois Constitution states that pension benefits “shall not be diminished or impaired” and that employee unions have already begun to file challenges.4 Also, we rely on initial actuarial estimates of the new law.5


...The budget gap is projected to get worse over the next ten years—from -$1 billion in FY 2014 to -$14 billion in FY 2025... The state’s fiscal problems are so great that much still remains to be done. A look at the structural budget gap... suggests that a gap on the order of $3 billion in 2015, increasing to $13 billion in 2025 still remains. What would it take to close the remaining gap?...


All of the projections... assume current tax law, with temporarily higher tax rates in 2014 declining as scheduled starting in 2015. One policy option is to eliminate the phase-out and make the higher income tax rates permanent... Maintaining higher taxes eliminates roughly half the budget gap compared to the previous figure—reaching only $7 billion in FY 2025... The combined effect of pension law revision and tax increases still leaves a budget gap of $1 billion in FY 2014, which is projected to grow to $5.5 billion by 2025.


Illinois has two huge fiscal problems: a large and growing gap between sustainable revenues and projected spending levels, and a largest-in-the-nation unfunded pension liability.

·  The December 2013 changes to Illinois pension law (should they survive a constitutional challenge) eliminate the unfunded pension liability problem over the next 25 to 30 years...  Unfortunately, the pension law changes do not come close to solving the structural budget gap problem. Savings of just over $1 billion per year barely dent a projected gap of $4 billion to $14 billion over the next ten years.
Even if combined with higher tax rates, pension revisions leave a large projected budget gap... The fundamental take-home message: pension revision does not solve Illinois’ fiscal problems.


1 Dye, Hudspeth and Merriman, October 2013, “Peering Over Illinois’ Fiscal Cliff: New Projections from IGPA’s Fiscal Futures Model,” (http://igpa.uillinois.edu/system/files/ Fiscal-Futures-Projections-Oct-2013.pdf). Also see the one-page summary of that report (http://igpa.uillinois.edu/ system/files/Fiscal-Cliff-Fact-Sheet.pdf).
2 These are explained in more detail in the paper cited in note 1 and other reports on our webpage: http://igpa.uillinois.edu/fiscalfutures.
3 State Employees’ Retirement System of Illinois (SERS), “Senate Bill 1 Public Act 98-0599, Effective June 1, 2014 (https://www.srs.illinois.gov/sers/WNpension_FY14.htm).
4 U of I law professors discuss Constitutional questions: http://www.news-gazette.com/opinion/ guest-commentary/2013-12-08/illinois-pension-reform-constitutional.html ; Employee unions prepare lawsuit: http://www.sj-r.com/article/20131204/NEWS/131209783; Rick Pearson, “Retired teachers file first lawsuit against Illinois pension reform law,” December 28, 2013, http://articles.chicagotribune.com/2013-12-28/news/ chi-retired-teachers-file-first-lawsuit-against-illinois-pension-reform-law-20131227_1_employee-pension-system-illinois-pension-code-teacher-retirement-system.
5SERS: Gabriel Roeder Smith & Company, December 19, 2013, “Illinois SERS – Public Act 98-0599, Baseline 7/1/2013,” (SERS_ PA980599_Contribution_UAL_Summary_Values_12192013.xlsx).
SURS: Gabriel Roeder Smith & Company, December 20, 2013, “Illinois SURS, Senate Bill1/Public Act 98-0599 Analysis with Normal Cost Plus Level Percent of Pay Amortization of Unfunded Liability, Baseline 7/1/2013 (excludes SMP and debt service contributions, includes supplemental payments),” (SURS_ SenateBill1_Study_Summary_20131220_SendValues.xlsx).
TRS: Buck Consultants, November 29, 2013, “Teachers’ Retirement System of the State of Illinois, Actuarial Request on behalf of Legislative Leaders submitted November 1, 2013 with Threshold COLA indexed at Full CPI, Comparison of Contributions and Actuarial Accrued Liability,” (11-30-13 TRS Analysis of Legislative Leaders’ Request - Proposal Dated N.... pdf). These numbers are preliminary, because at this writing TRS has not issued estimates of the final law as enacted. It was possible to revise the projections to include the late provision that the state make additional payments equal to ten percent of the savings from prior law. Results presented at five-year intervals were filled in by interpolation. Unfunded pension liabilities for TRS were missing and assumed to have same proportional change as sum of SERS and SURS.
GARS and JRS: Commission on Governmental Forecasting and Accountability, November 2013, “Special Pension Briefing: State Retirement Systems Overview,” (http://cgfa.ilga.gov/ Upload/1113%20SPECIAL%20PENSION%20BRIEFING.pdf). JRS is not affected by the new law. No actuarial estimates of the impact of the new law on GARS were given, and revision was assumed to have no effect on projected amounts from the above report...

The Fiscal Futures Project began in 2008 out of concern that the state of Illinois lacked sufficient capacity to project its fiscal demands and revenue streams into the future. A longer term perspective is needed due to:

·         The structural deficit: state expenditures have been growing faster than revenue

·         The serious consequences of making policy choices while ignoring the impact on the budget in future years

·         The relentless pressure on future budgets from an aging population and continuing increases in the cost of health care

The Institute of Government and Public Affairs (IGPA) is a public policy research organization based in all three University of Illinois campus cities. IGPA’s mission is to improve public policy and government performance by: producing and distributing cutting-edge research and analysis, engaging the public in dialogue and education, and providing practical assistance in decision making to government and policymakers. The institute’s work not only advances knowledge, but also provides real solutions for the state’s most difficult challenges. IGPA plays an important role in assisting government to better serve the public good. IGPA provides access to top-quality University of Illinois research to improve decision making at every level of government.

For the Complete Report, including detailed substantiation of proof: http://igpa.uillinois.edu/system/files/Pension-Reform-Will-Not-Fix-Deficit.pdf


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