Forecast shows Illinois' unfunded pension liability could grow substantially this year

[July 16, 2022]  By Kevin Bessler | The Center Square

(The Center Square) – A public policy research group has a dire outlook for Illinois’ public pension systems.

After huge investment returns in 2021, the Reason Foundation reports several states' pension systems most likely will experience financial losses for this year, including Illinois, as the stock market experiences significant declines. The forecast found that Illinois’ unfunded pension liability could grow from $121 billion in 2021 to $142 billion if the state's major pension plans report -6% investment returns for 2022.

Only five other states, California, New York, Texas, Ohio and Florida, are expected to see their unfunded pension liabilities jump over $20 billion compared to 2021.

With a -6% return, unfunded liabilities would increase by more than $10 billion in an additional nine states – Georgia, Minnesota, New Jersey, North Carolina, Oregon, Pennsylvania, Virginia, Washington and Wisconsin.

Reason Foundation policy analyst Ryan Frost said 2021 was a record-setting year for state pension plans, but it appears Illinois will lose those gains.

“Just a -6% return basically eliminates all the gains they made from last year, and it puts them on the same poor funding track that they were on before last year,” Frost said.

The analysis shows if public pension systems post -6% investment returns for the fiscal year, the nation’s aggregate unfunded liability for state-run pension systems would grow to $1.3 trillion in 2022, up from $783 billion in 2021. The funded ratio of state pensions, the percentage of assets on hand to pay for the retirement benefits already promised to workers, would fall from 85% in 2021 to 75% in 2022.

The most recent audit of Illinois' five pension funds shows a funding ratio on a smoothed basis of 42.4%.

Frost said this year has been difficult for most pension plans, similar to the Great Recession of 2009, but some states rebounded better than others.

“The well-funded plans were able to rebound much faster, they flattened out their funding throughout the 2010’s, where as some of the more poor funded plans like Illinois, they never flattened out and their debt just kept rising, even during the period of the best market performance in our country’s history,” Frost said.

The forecast notes if the returns are even worse, like -12%, Illinois’ unfunded liability could grow to nearly $153 billion.

“During this time of economic volatility, policymakers and stakeholders should recognize that many problems that kept public pension systems significantly underfunded for multiple decades still exist,” the report said.

Out of a $46.5 billion spending plan, Illinois taxpayer will put in nearly $10 billion toward the state's pension funds this fiscal year.

Kevin Bessler reports on statewide issues in Illinois for the Center Square. He has over 30 years of experience in radio news reporting throughout the Midwest.