Illinois State Pension Plans: When is a solution not a solution? by Bob Lyons

When it does not solve the problem. In 1994, the five state pension plans (TRS, SERS, SURS, JRS, GARS) had a total unfunded liability of $15 billion. That was a problem, and the State of Illinois acted. Led by Governor Edgar, the General Assembly voted unanimously to follow a plan to achieve a 90 percent funding for the five state retirement systems by fiscal year 2045. By the time the plan went into effect in 1995, the unfunded liability had grown to $20 billion. After twenty-two years, the unfunded liability was $130 billion.

In 1995, newly retired, I was glad that there was finally a plan to deal with the unfunded liability in the Illinois pensions, but I did not question the details. Well, just last week I heard a state representative, one who taken tough votes in support of retired teachers, say that we should be pleased that the General Assembly had followed the plan in voting to fund the pensions for FY 2019. I think for that reason alone we need to look at what following the plan has meant for the state pension systems:

First, there was a 15-year ramp to gradually increase the state’s contributions, which was designed to make it easier to sell the 50-year plan to the legislators by allowing them to vote to “solve” the problem of funding the pensions while still enabling them to continue to vote for popular projects.

Second, the plan could be amended when needed to allow the legislators to renege on payments when they did not have the money, which they did in fiscal years 2006 and 2007: $2.3 billion was subtracted from the pension payments with the approval of the IEA, the IFT and SEIU in order to spend money on more “popular causes” and to gain the approval of a four-year extension of the ERO. It is certainly possible that the union leaders did not realize that shorting the pension funds by more than $2 billion would add over $6 billion to the unfunded liability. By the time the ramp had come to an end in 2010, the unfunded liability had grown to almost $76 billion.

With the end of the so-called ramp, the legislature realized that with the significant growth of the unfunded liability they needed to be committed to the ever-growing payments.

The real failure of the 50-year plan was it allowed for the unfunded liability to continue to grow, and it was heavily back-loaded. The original funding scheme did not call for the pension payments to grow large enough to begin to reduce the growth of the unfunded liability until 2034, and it called for the total funding in the last five years of the plan to a total of $75 billion.

While it could be argued that any plan was better than no plan, they could have made a better plan. It is equivalent to paying down your credit card. Smaller payments in the beginning mean larger payments in the long run. Any actuary would have told them that the best plan would have called for dividing the amount owed into even payments with a goal of eventually reaching 100% funded. However, this would require larger payments. The sooner a pension fund reaches full funding, the better. Pension funds invest every dollar they can with the hope that their investments will grow and reduce the need for external funding. Illinois pension funds, on the other hand, are currently required to take money out of profitable investments in order to pay annuitants their pensions. “They had to eat their seed corn or starve.”

The last five years has seen the funding grow for the five state pensions funds while at the same time the funded ratio has barely moved. In 2013, the five funds were 39.3% funded; in 2014: 39.3%; in 2015: 40.9%; in 2016: 39.2% and in 2017: 39.9%. In the last five years, each of the pension systems made money and their investments grew, but the unfunded liability climbed. The state’s payments were also less than what was needed and, as already stated, it was $130 billion by the end of FY2017.

The new budget for FY2019 calls for the state to contribute to the TRS pension fund a total of $4.466 billion, a 9.05% increase over this year’s contribution of $4.095 billion. More than 70% of the payment to TRS is to partially pay what they owe because of the underfunding. You can expect to hear state legislators say with some pride that this payment meets the requirement of the 50-year plan, but it must be noted that the payment, as large as it is, still falls far short of moving TRS toward full funding by $2.9 billion.

In 2017, TRS reported that its “investment returned 12.6% net of fees, and the Systems 30 year-return was 8.1%. Total investment income was $5.5 billion.” We will not learn how TRS has done for FY2018, which ends June 30 until late August when the last numbers for real estate and private equity funds are finally reported. We do know that the $49.468 billion that we had at the end of June last year had grown to $51.541 billion at the end of March of this year. While still dependent on how investments do in the last couple of weeks of the fiscal year, it certainly looks like this will be another positive year for TRS, but it will still likely end the year with about 41% funded.

The Teachers’ Retirement System ended 2017 at 40.2% funded; the University Retirement System was at 44.4% funded; the State Employees’ Retirement System was 35.5%; the Judges Retirement System was 35.6%, and the General Assembly Retirement System was 14.9%. Yes, the retirement system for the legislators, which has over 400 annuitants, is just only a market crash away from insolvency, and many of the most recently elected senators and representatives have opted out of the system.

That General Revenue portion of the Illinois state budget for FY2019 calls for spending $38.5 billion and, of that, the total for the five pensions system is $8.5 billion. In addition, the state will pay $1.6 billion in debt service because Governor Quinn borrowed money to pay pensions seven years ago. In almost every state in the nation, three to four percent of their budget for pensions is considered normal. In Illinois, we are paying 22%, or 26% if we add the cost of borrowing. Let’s recall that is still not an adequate payment to stop, or reverse our underfunding from growing.

That is the dilemma that the State of Illinois and the citizens of the state are paying for. It is late, but the only real solution is a variation of the one suggested by Ralph Martire of the Center for Tax and Budget Accountability. He calls for re-amortizing the debt with equal payments with a goal to reach 80% funding and to sell bonds to make the payments. Paying the bonds simply shifts the responsibility to the next generation. I would prefer passing a referendum for a progressive income tax and using the increased tax revenue to try to pay down the unfunded liability directly through equal annual payments. Considering the role the new progressive state income would play in solving what the state owes the pensions, I think we should accept paying state taxes on larger pensions. I do not think it is fair to ask others to pay more unless we are willing to help contribute to a solution that works—Bob Lyons.

Bob Lyons, retired teacher and former annuitant representative on the board of the Illinois Teacher Retirement System (TRS).