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 Illinois’ pension debt reached an all-time high of $317 billion
as of June 30, 2020, according to credit rating agency Moody’s Investors Service
– more than double the state’s official estimate. The need for a constitutional
amendment to allow for structural pension reforms has never been greater to fix
state finances that are dragging down the state’s economy.
Illinois’ pension crisis has been rated the worst in the nation, measured by
pension debt relative to state gross domestic product, since fiscal year 2014.
Pension debt increased 19% from $261 billion at the end of fiscal year 2019.
Official reporting of pension debt by the state of Illinois puts the debt at
less than half of Moody’s estimate, $144.4 billion at the end of fiscal year
2020. State estimates use much more optimistic, and less realistic, assumptions
about investment returns.
Because the state systemically underestimates its pension debt, it also
underestimates the taxpayer contributions necessary to keep the debt from
growing each year. During the past decade, officially-reported growth in pension
debt outpaced the state’s initial projections by $24 billion. Growth in annual
taxpayer contributions exceeded state estimates by about 15% per year on
average, causing taxpayers to contribute $7.6 billion more than projected during
the decade. Still, that extra money has not slowed a mushrooming pension debt.
The state’s regular upward revisions demonstrate Moody’s method, which is more
in line with private sector standards, is more accurate.
Because employee contributions to the pension funds and benefits paid out are
both fixed by state law, taxpayers must make up for any shortfall caused when
investment returns miss rosy targets. For example, the largest of Illinois’ five
state pension systems, the Teachers’ Retirement System, reported a 0.52% return
on investment in fiscal year 2020, which included the first four months of the
COVID-19 pandemic. That was far short of the TRS’s 7% return target and helped
grow the debt.
In addition to underestimating the debt, the state’s current funding policy
violates best practices for public pension plans by targeting 90% funding rather
than 100%.
Generous pension benefits allow many government workers in the five state
systems to retire in their 50’s with multi-million dollar pensions, after having
contributed only about 4-6% of expected payouts. Combined with the state’s poor
accounting and funding practices, this explains why Illinois spends more of its
tax revenue on pensions than any other state, but still has the largest gap
between current payments and what would be required to pay down the debt without
reforms.
The Illinois Policy Institute previously estimated it would
require a 50% increase in the state’s flat income tax – taking over $1,800 from
a median family’s income – to eliminate the debt without reform.
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On Feb. 24, Illinois House Speaker Emanuel “Chris”
Welch suggested another attempt at amending the state constitution
to implement a progressive income tax, this time earmarked to pay
for pensions. But paying down Illinois pension debt with a
progressive income tax would require rates to be 21% higher on all
taxpayers compared to the rates attached to the “fair tax” voters
rejected in November 2020. This massive $10 billion tax increase
would cost the state economy nearly 127,000 jobs and $21.8 billion
in economic output.
Tax hikes cannot solve Illinois’ pension crisis,
which has never been a problem of underspending. If lawmakers pursue
further tax increases, they will only succeed in driving more
businesses and residents out of state, impeding the state’s ability
to economically recover from the COVID-19 pandemic.
Moody’s Analytics, a sister company to the ratings agency,
underscored this point in a recent analysis for the state.
“Weak demographic trends and deep-rooted fiscal problems such as
mounting pension obligations and a shrinking tax base represent the
biggest hurdles to the longer-term outlook. The forecast anticipates
that the state will grow a step behind the Midwest average and a few
steps behind the nation over the extended forecast horizon. Over the
next five years, employment in Illinois is forecast to increase
6.7%, below the 7.7% increase for the Midwest and 8.8% rise
nationally.”
That translates into about 57,000 fewer jobs than if Illinois kept
up with its Midwest peers, and about 120,000 fewer jobs than were it
to keep pace with the nation.
The only viable solution to Illinois’ pension crisis starts with a
constitutional amendment to allow for reductions in future benefit
growth for current workers and retirees. A constitutional amendment
filed in the General Assembly in 2020 – House Joint Resolution
Constitutional Amendment 38 – would have done just that.
If passed, an amendment mirroring the expired HJRCA 38 would open
the door for reforms such as the Illinois Policy Institute’s “hold
harmless” pension reform plan, which would save the state roughly
$2.4 billion the first year and more than $50 billion through 2045.
The plan would also fully eliminate the state’s pension debt during
that time.
Recent polling from the Paul Simon Public Policy Institute found 51%
of Illinoisans support “an amendment to the Illinois Constitution
that would preserve state retirement benefits already earned by
public employees, but would also allow a reduction in the benefits
earned in the future, whether by current or future employees.”
Pension reform that finally solves Illinois’ worst-in-the-nation
crisis would benefit all Illinoisans by ensuring the state has as
many good-paying jobs as possible for working families.
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