For those of you tempted to breathe a fiscal sigh of relief now that Illinois finally has a full-year budget, we have a word of advice: Don’t.
You should be gasping instead.
The battle in Springfield to get a budget — after two chaotic years without one — created a revenue and spending plan for the coming year. But it did not solve state’s biggest financial headache, its underfunded pensions. The cumulative shortfalls in the state’s five pension systems are the elephant in the room — and we mean a gigantic elephant in a room too small to hold a muskrat. It’s something Illinois should be dealing sooner, rather than later.
Unfortunately, Gov. Bruce Rauner and the Legislature did not see it that way. The Legislature enacted a budget over Rauner’s vetoes, but fully fixing the pensions remains on both of their long-term to-do lists. When it comes to pensions, Illinois excels at kicking the hard decisions down the road.
After years of pension-payment holidays, early-retirement offers and other financial legerdemain, Illinois’ unfunded pension debt stands at about $130 billion, even though the state in recent years has been meeting its full pension-payment requirements. That’s a huge number for a state whose annual budget stands at about $36 billion. Ten years ago, the cumulative pension debt was only about $41 billion.
The $130 billion number certainly makes Moody’s Investors Service nervous. Moody’s has said it might still downgrade Illinois’ credit rating to junk because of pension debt, even though a budget finally has been passed. A junk rating would drive up borrowing costs and make it harder for Illinois to recover financially. The rating service Standard & Poors, which on Wednesday changed its outlook for Illinois from negative to stable, is more confident.
Illinois’ thorniest pension problem is the so-called pension ramp, a schedule of steadily increasing payments it must make under an agreement that goes back to 1995. The state is straining to pay the currently required amount of about $7 billion a year, but eventually that number will grow to around $16 billion, more than half of the state’s current annual budget. The state doesn’t have that kind of money. We need a fix before we get to that point.
In the last session, the General Assembly and Gov. Bruce Rauner approved three partial pension reforms. They created a Tier 3 pension system that will allow some state workers to participate in hybrid defined contribution/defined benefit plans. They shifted some pension costs from the state to universities, community colleges and school districts. They authorized “pension smoothing,” which phases in changes in actuarial or investment-return assumptions.
But instead of using those changes to boost payments into the pension systems, the state plans to put $1.5 billion less into the systems in the 2018 fiscal year. About $900 million of that cut represents “savings” that really are just changing the way future costs and revenues are estimated.
Moreover, the state has produced no actuarial data supporting its estimated savings, according to the Civic Federation.
By taking this approach, the state is missing a chance to make future pension payments more manageable by putting more money into the system now.
Illinois already has cut pensions for “Tier 2” employees hired after Dec. 31, 2010. But the Illinois Supreme Court in 2015 overruled a pension-reform bill that would have saved money by trimming benefits for other workers.
An alternate way to cut pension costs would be the so-called “consideration” model — offering workers a choice between sticking with their current pensions, but not having future raises count toward their pensions, or taking smaller pensions but including their raises in the calculations. But the Illinois House and Senate this year failed to agree on consideration legislation, putting it on hold for now.
Illinois has just suffered from two years of financial crisis because there has been no budget. Laying the groundwork now for an even bigger future pension crisis involving pensions is troubling. We would all breathe more easily if Illinois put its pension systems on sound footing.