CHICAGO – The picture for Illinois' state employee pensions has become bleaker, with a $12 billion increase in unfunded liabilities and a $1 billion jump in the state's scheduled contributions next year.
The updated data comes from fiscal 2016 draft actuarial reports released by the state's five retirement funds and its preliminary contribution requests for fiscal 2018, which were approved by the system's boards at recent meetings.
The cash-strapped state tentatively will owe $8.8 billion to the state's five funds in fiscal 2018. That's up 12.7% from the $7.8 billion the state is paying in fiscal 2017, which began July 1.
The state's unfunded liabilities, meanwhile, rose to $126.5 billion in fiscal 2016 from $112.9 billion a year earlier and the funded ratio deteriorated to 39.2% from 40.9%.
The funds must submit a preliminary contribution amount by a Nov. 1 state deadline.
"Illinois' contributions to its five pension funds are expected to increase by approximately $994 million in the upcoming fiscal year, putting more financial strain on a state that has been without a complete budget for the past 16 months," the Chicago Civic Federation's Institute for Illinois' Fiscal Sustainability wrote in
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The state actuary reviews the requests and preliminary valuation data and reports back to the funds by Jan. 1. Final certified payment amounts are due back to the state from the funds by January 15 so they can be accounted for in the budget released by the governor in February.
The size of TRS' request "is a direct product of the perpetual underfunding of TRS by state government over the last 76 years," the teachers' fund's executive director, Dick Ingram, said in a press release after his board's vote late last month.
"Illinois is reaping what it sowed. Decades of inadequate contributions for TRS mean that now – when investment returns are not robust – big contributions must be made to secure the retirement promises made to generations of teachers," he said.
Of the $4.56 billion, about $974 million is for the anticipated annual cost of TRS pensions during the year, with the rest going toward the system's $71.4 billion unfunded liability.
"Most of the FY 2018 contribution is a self-inflicted wound. That money could be spent on other priorities today if the state of Illinois had fully met its obligations in the past," Ingram said.
And while going up, TRS' preliminary 2018 contribution still falls $2.31 billion short of what actuaries estimate should be made to keep the fund healthy, TRS said.
If state contributions were based on an Actuarial Determined Contribution formula under new accounting rules instead of the statutory formula used by the state, Illinois would owe $2.8 billion more for four of its five funds, according to the Civic Federation's report.
Under new Governmental Accounting Standards Board reporting rules, the ADC contribution replaces what was previously referred to as the actuarially required contribution.
A big jump in fiscal 2018 contributions was anticipated after TRS lowered its assumed investment rate of return to 7% from 7.5% and SERS lowered of its assumed return to 7% from 7.25%; the systems also made other assumption changes about life expectancy that impact the actuarial valuations.
The changes were recommended by the funds' actuarial consultants and followed the suggestion of the state's actuary.
"It's really the state actuary's recommendations that are driving the fund's actions," said Tim Blair, executive secretary for the State Retirement Systems.
JRS lowered its investment assumption in July to 6.75% from 7% and GARS took similar action in April. The SURS lowered its discount rate to 7.25% from 7.75% in June 2014 and is not currently considering further action.
The assumed rate of return impacts the contributions because it's used to calculate the present value of future pension obligations. Reducing the so-called discount rate increases the present value of future commitments to employees and retirees and results in higher statutorily required state pension contributions.
The Illinois Auditor General's office in December issued a report citing the state's actuary, Cheiron, saying three of the state funds' interest rate assumptions were too high especially given their negative cash flow position.
State pension contributions grew by a more modest $200 million from fiscal 2016 to fiscal 2017. They come primarily from a roughly $33 billion general fund in a state that is grappling with a $5 billion to $6 billion deficit and an unpaid bill backlog that is expected to soon top $10 billion as the state's fiscal 2016 and 2017 budget impasse continues.
Unfunded Burden
The $126.5 billion unfunded pension tab represents the smoothing of market assets over five years and represents the actuarial status. By market value, the unfunded pension obligations rose to $129.8 billion from $111 billion and the funded ratio fell to 37.6% from 41.9%, according to the Civic Federation analysis.
The latest results show unabated growth. From fiscal 2001 through fiscal 2015, the state system's unfunded liabilities increased by $86 billion, according to the Illinois Commission on Government Forecasting and Accountability's last pension report.
"The main factors for this increase in unfunded liabilities were actuarially insufficient employer contributions, changes in actuarial assumptions and lower-than-assumed investment returns over five years, along with other miscellaneous actuarial factors," the nonpartisan commission wrote.
Under the funding schedule established by lawmakers in 1995, the state is required to make contributions as a level percent of payroll in fiscal years 2011 through 2045. The contributions are required to be sufficient, when added to employee contributions, investment income, and other income, to bring the total assets of the systems to 90% of the actuarial liabilities by fiscal year 2045.
The schedule has faced stinging criticism for its backloaded structure. The state settled fraud charges brought by the Securities and Exchange Commission for misleading investors over the health of the pension funds because of flawed schedule.
The state already was considered to have one of the worst funded public pension systems nationally and the latest results underscore the state's need to act on pension reforms.
The Illinois Supreme Court tossed an earlier effort at reform in 2015 because justices ruled that benefit cuts violate the state constitution. Illinois lawmakers have said they hope to take up pension changes along with a budget fix early next year after Tuesday's elections are behind them.
They are expected to exclude retirees, while asking current employees to accept changes that would ease the state's burden in exchange for a new benefit.
Gov. Bruce Rauner has also proposed smoothing over five years any changes in assumed return rates. Some also support putting a constitutional amendment to voters, borrowing to pay down the liability, and re-amortizing the 1995 payment schedule.
Illinois is the lowest-rated state and faces further rating erosion if lawmakers don't make headway on a budget and pension reforms.
The state's pension mess and an anticipation rise in contributions contributed to S&P Global Ratings downgrade of Illinois to BBB from BBB-plus in late September. It retains a negative outlook.
"The downgrade reflects our view of continued weak financial management and increased long-term and short-term pressures tied to declining pension funded levels," said S&P analyst John Sugden.
Fitch Ratings affirmed its BBB-plus rating and left the credit on negative watch. Fitch will resolve the placement in January after lawmakers return for a lame-duck session. Moody's Investors Service rates the state Baa2 with a negative outlook. The state saw spreads to the Municipal Market Data AAA benchmark of 200 basis points on its general obligation bond sale last week.
