S&P: Illinois’ ‘poorly funded’ pensions to continue stress on state,
local governments
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[June 27, 2023]
By Greg Bishop | The Center Square
(The Center Square) – Despite the state making supplemental
contributions, a credit rating agency says Illinois’ “poorly funded”
pensions will continue to stress state and local government budgets as
the state sees "weak demographic trends" and "shrinking population."
S&P Global Ratings published their “Pension Spotlight: Illinois” report
Monday. In announcing the report, the agency said it “expects costs will
keep rising because contributions are significantly short of meaningful
funding progress, plans are poorly funded, and the Illinois Pension Code
allows plans to use assumptions and methodologies that defer costs.”
The report says the burden on state spending comes regardless of efforts
to reduce costs, buy out liabilities and contribute more than what was
statutorily required. The fiscal year budget that begins July 1
contributes a total of $10 billion to pensions, or around 1 out of every
5 dollars of taxes the state brings in.
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“[F]ixed pension costs related to the five state-sponsored plans … are
projected to increase at an annual average rate of more than 2.2% over
the next 10 years,” the report said. “With the additional payments from
the pension stabilization fund, the state will have contributed an
additional $700 million to the five state-sponsored plans. However,
contributions are still short of an amount we consider indicates funding
progress.”
The Illinois Auditor General pegs Illinois’ unfunded pension liability
at around $140 billion. All five state funds combined are 42.4% funded.
“All of the five state-sponsored plans are poorly funded, and
contributions need to increase before meaningful funding progress is
made,” the S&P report said.
Illinois law requires a pension funding ramp for the decades ahead.
“Contributions target only a 90% funded ratio, which is not actuarially
recommended and results in underfunding,” the S&P report said.
More than a decade ago, the state created a second tier pension with
fewer benefits.
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The Illinois State Capitol May 2023
Greg Bishop / The Center Square
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"The enactment of a new benefit tier in 2010 is generating significant
cost savings today but recent efforts have been made to increase these
benefits in an attempt to avoid violating social security's safe harbor
provision," said S&P Global Ratings credit analyst Joseph Vodziak.
Another driving cost for retired state employees is taxpayer subsidized
health care.
“Because of Illinois' aging demographics, shrinking population, and lack
of money set aside for [other post employment benefits], OPEB costs in
the state will escalate,” the report said. “Retiree health care benefits
are constitutionally protected in the state but remain unfunded. We
expect costs will escalate, in part due to medical inflation.”
Local pension woes were also reviewed by the ratings agency, which noted
in 2020 that police and firefighter plans were around 56% funded.
“We expect cities, towns, and villages with poorly funded
single-employer pension plans, elevated property taxes, and weak
demographic trends will face budgetary pressure from rising pension
obligations,” the report said. “The consolidation of the single-employer
downstate and suburban public safety plans into a multiple-employer
agent plan will provide some administrative cost savings but for many
plans, the shift to an asset mix that justifies a discount rate greater
than 7% may mean more volatility and potentially higher costs.”
The ratings agency notes the local police and fire funds being
consolidated faces a legal challenge in the Illinois Supreme Court.
While the report does not include a rating action, S&P said “pensions
have a high likelihood of stressing state and local government budgets
despite the state making supplemental contributions.”
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