Illinois’ unfunded pension tab dropped in fiscal 2021 for the first time since 2017 and its funded health improved, propelled by investment returns that topped 20%.
The state’s unfunded liabilities on an actuarial basis for fiscal 2021 dropped to $139.9 billion for a funded ratio of 42.4% compared to $141 billion — a peak for the collective tab — and a funded ratio of 40.4%
The market value saw even better improvement as one-year results are felt more acutely in the reporting. The unfunded tab fell to $130 billion for a funded ratio of 46.5% from $144.4 billion and a funded ratio of 39%. Asset smoothing began in fiscal 2009.
“A significant drop in unfunded liability was recorded in FY 2021, largely thanks to exceptionally strong investment performances by all the five systems,” the legislature’s Commission on Government Forecasting and Accountability said in its
annual briefing
report. The five systems had experienced poorer investment performance in fiscal 2020 “due to the national and global economic turmoil associated with the COVID-19 pandemic.”
The latest results for fiscal 2021 show a reversal of fortunes after three years of growth in the tab dating back to fiscal 2018. Since 2007 when the tab stood at $42.2 billion, it’s steadily risen in all but two years, first in 2011 and then again in fiscal 2017. In 2018 it began rising again, growing to $133.5 billion from $129.1, then $137.2 billion in 2019 and $144.2 billion in 2020 before falling last year to $130 billion.
“The primary driver behind the growth in the combined unfunded liability has been actuarially insufficient state contributions determined by the current pension funding policy,” the report said. “As the actuaries for the state retirement systems have noted in their respective annual actuarial valuation reports, the funding plan … produces employer contributions that are actuarially insufficient.”
Under state rules, the five funds must submit their contribution requests for the next fiscal year by Nov. 1 based on the actuarial reports for the previous fiscal year that closed June 30. COGFA compiles those reports and annually releases its “November Special Pension Briefing” in early December. The state actuary issues its own report certifying the state contributions early in the New Year.
The state actuary’s report typically recommends a change in the 90% funding target and higher contributions but state leaders have paid little heed to the suggestions.
Under the funding schedule, 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 funds aren’t projected to reach 50% until 2025 and don’t hit 70% until 2040.
The report offers the views of actuaries, the funds, and the state on the 90% target that is subject to periodic review.
“We strongly believe that the 90% funding ratio goal, along with the actuarial methods used to determine the statutory funding contributions for the Illinois pension plans, is not an appropriate goal,” COGFA’s actuary Segal Consulting writes.
Segal recommends a 100% target under a narrower timeline limited to 20 to 25 years. A letter from several of the funds also calls for moving to the 100% target.
Gov. J.B. Pritzker’s administration shows little sign of accommodating the persistent requests.
Budget Director Alexis Sturm writes that lowering the targeted goal would trim annual state contributions but raise unfunded liabilities and “impact Illinois’ credit worthiness” while an increase would lead to lower unfunded liabilities but raise contribution levels.
“Given the current fiscal pressures facing the state, this too is inadvisable to consider until Illinois can eliminate the unpaid bill backlog, borrowings undertaken to pay off debt remaining from the budget impasse and COVID-driven recession and address the underlying structural deficit,” Sturm said of raising the 90% target. “The 90% funding ratio continues to be a reasonable and achievable goal for the state of Illinois pension systems.”
Early in his tenure, Pritzker
Market participants worried the amortization change could drive a downgrade in the state’s ratings that were then one notch away from junk. Pritzker dropped the amortization and bonding plans after April 2019 income tax collections surged.
Pensions weigh heavily on the state’s credit profile that otherwise has benefited this year from the infusion of federal aid and skyrocketing tax collections.
S&P Global Ratings raised the state’s rating by one notch to BBB in June and more recently revised the outlook to positive from stable. Moody’s Investors Service raised it one notch to Baa2 with a stable outlook in June. Fitch Ratings raised the outlook on its BBB-minus rating to positive from negative in June.
"While pension-related fixed costs are likely to persist, if funding of the actuarially determined pension obligations does not continue to improve and the state's forecast budgetary out-year gaps do not meaningfully narrow, we could revise the outlook to stable," S&P said.
On an actuarial basis, the state’s largest system — the Teachers' Retirement System, or TRS — accounted for $79.9 billion of the $139.9 billion tab. The State Employees’ Retirement System, or SERS, had unfunded liabilities of $30.5 billion. The State Universities Retirement System, or SURS, accounted for $27.5 billion, followed by the Judges Retirement System, or JRS, with $1.69 billion and the General Assembly Retirement System with $302 million.
TRS is 42.5% funded, SERS is 41.1% funded, SURS is 43.8% funded, JRS is 42% funded, GARS is 19.3% funded.
TRS saw a return rate of 25.2%, SERS returned 24.9%, SURS 23.8%, JRS 24.9% and GARS 22.9%.
Swings in investment returns often have the most influence on annual changes but other factors also have driven erosion including the funds moves in recent years to lower their assumed rate of returns.
TRS lowered its rate twice over the last few years to 7% from 8.5%. SERS moved it three times lowering it incrementally to 6.75% from 7.75%. SURS has moved three times lowering it to 6.50% from 7.75%. JARS and GARS have lowered their rates two times moving it to 6.5% from 7.0%.
The report also provides the most up-to-date view yet of the effects — $1 billion in fiscal 2021 — of two pension buyout programs launched in 2018 under former Gov. Bruce Rauner and extended in 2019 by Pritzker with legislative approval for three years until June 30, 2024 that cover the three largest funds.
TRS accounted for $576.4 million, SERS $404.7 million, and SURS $24.8 million, of the $1 billion.
The state last week
The latest actuarial reports allow for the initial calculations of what the state owes the funds in fiscal year 2023. Pritzker will unveil his budget proposal early next year and approval typically comes before the start of the new fiscal year July 1.
The state owes about $230 million more next year, bringing its full payment to all five funds to $10.78 billion from $10.6 billion this year. That is $4.1 billion short of an actuarially determined contribution.
