Credit Rating Research Details Illinois Pension System Problems

Published September 11, 2014

The state of Illinois finds itself worst in the nation when it comes to pension liability, according to a new report from Moody’s Investors Service.

The national credit rating agency conducted a study on each state’s pension liability, as calculated as a percentage of state revenue. The Prairie State’s three-year average pension liability, as a percentage of revenue is 258 percent—nearly 60 percent higher than the pension liabilities of the next worst state, Connecticut.

In 2012, Illinois’ one-year pension liabilities were valuated to exceed 300 percent of the state’s annual revenue.

Gordian Knot

Carol Portman, president of the Taxpayers Federation of Illinois told Illinois News Network that the pension shortfall is a real crisis that is not easily solvable.

“The problem is only growing, and the distance between the amount of resources being contributed and those being received is growing. That’s pretty alarming,” Portman said.

The state’s five primary pension accounts are underfunded by about $100 billion, and legislation that would decrease employees’ share of pension contributions while reducing the amount of benefits paid out is currently undergoing judicial review by the Illinois court system.

Another financial expert, Jeffrey Brown, is a professor of finance at the University of Illinois at Urbana-Champaign, believes that the current crisis is the realization of many years of mismanaged retirement programs.

“For decades, the state government has under-invested in the future and allowed the pension programs to accrue debt without a real way to make up the difference,” Brown said. “They’ve kicked the can for quite some time and now they’re realizing that’s not a sustainable way of handling things.”

According to Moody’s study, the total net pension liability for the state’s public retirement systems is just under $200 billion.

Lowered Expectations

The pension system is under-funded and over-paying, Brown added — an unsustainable situation, in his opinion.

Portman agreed with Brown’s assessment, saying that the steps that really need to be taken will be difficult, and won’t make anyone happy.

“It will require a major change in what people expect to receive from the system, as well as what they put into it,” she said. “If everyone hates it, maybe it’s the right solution. A good compromise is one nobody likes.”

However, not the outlook for other states’ pension programs is not as dire as Illinois’ future. Moody’s research shows that the states of Florida, Iowa, Nebraska, New York, Ohio, and Wisconsin have the lowest ratio of pension liabilities to state revenue.

Brady Cremeens ([email protected]) is a reporter for Illinois News Network. Used with permission of the Illinois Policy Institute,