Illinois Pension Debt Deepens

Published February 1, 2007

A year after allegations of a huge extortion and kickback scheme against Illinois’ government pension system grabbed headlines across the state, the state’s pension system has slipped deeper into financial trouble, according to a prominent state senator and an independent civic group.

The Civic Committee of the Commercial Club of Chicago issued a report in December showing Illinois’ five major pension plans for teachers and other state and local government workers have a combined unfunded liability of $45.7 billion, largest in the nation.

That figure does not include $10 billion borrowed in 2003 to shore up the system’s finances. Including that debt, which must be repaid at an annual interest rate of 5.05 percent, puts Illinois’ unfunded pension liability at $55 billion.

‘Horrendous’ Situation

“Facing Facts: A Report of The Civic Committee’s Task Force on Illinois State Finance” notes, “The $45.7 billion unfunded obligation–putting to one side for the moment the pension bonds–gives Illinois one of the lowest funding ratios for its state pension plans of any state in the country, and represents an obligation of approximately $3,800 per person for the 12 million residents of the State.”

“The situation is horrendous,” said state Sen. Bill Brady (R-Bloomington), who unsuccessfully ran for the Republican nomination for governor for the November 2006 election and who served on the Governor’s Pension Commission in 2004. Brady praised the Civic Committee report, saying, “I read the report and couldn’t find anything to take issue with.”

$2.3 Billion Diversion

Despite the pension system’s huge unfunded liability, Illinois over the past two years has diverted $2.3 billion of scheduled pension fund payments to other budget items.

Lawmakers diverted the pension payments even though state budget officials have been warning of the system’s dismal financial situation.

The state’s FY 2007 budget document notes, “The unfunded pension liability of the state’s five state retirement systems is our state government’s single greatest financial challenge. In fact, Illinois State Government’s unfunded pension debt has been significantly greater than all of the state’s bonded debt combined for several years.”

Fiscal Irresponsibility

David John, a retirement benefits expert and senior research fellow at The Heritage Foundation, said Illinois lawmakers could not have been more fiscally irresponsible.

“Everything you read and hear about state and local pensions warns against [diverting scheduled pension payments] for other spending,” John said. “That is about as irresponsible as you can get.

“The other incredibly irresponsible thing lawmakers do is issue bonds, which Illinois did,” John continued. “In many cases they can sell the bonds, assuming they have a decent bond rating, but once they do that they not only have to repay the borrowed money and the interest on the bonds, they also need an investment return that is higher than the principal and interest payments. They can get suckered into investment strategies that are exceedingly high risk.”

John said Illinois lawmakers can take small consolation in knowing that, as a percentage of assets to liabilities, West Virginia has an even worse funding ratio than Illinois. Still, in dollar terms, Illinois has dug by far the deepest pension hole in the nation.

“The problem is how to deal with it,” John said. “If you’re trying to get out of a hole, the first thing you need to do is stop digging it deeper. Right now [government officials] can do things like control above-average pay raises and stop granting lots of overtime in the last years of employment,” practices that give people much bigger benefits when they retire.

Move to 401(k)

“In the long run,” John said, “a change to a defined-contribution plan [such as a 401(k)] would help, but the problem with that is you cannot take an individual who is in a defined-benefit plan and put that person into a defined-contribution plan.”

Only new hires could be placed into a defined-contribution system, and that is precisely what Brady said he hopes to do. He promises to introduce legislation this year to begin offering new government workers a defined-contribution benefit instead of a traditional pension.

Brady introduced similar legislation last year. The Civic Committee report also suggests moving to a defined-contribution system for new hires.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.