State Pensions

One idea that has been proposed by a number of observers to repay some of Illinois’ pension debt is an “asset transfer.” Under this proposal, the state (or the City of Chicago, which is also facing a large pension debt problem) would make a contribution to the pension systems in the form of a publicly owned property, such as a tollway or lottery, rather than in the form of cash.

Proponents point to a number of advantages from such a move. First, the value of the asset would be added to the pension systems’ balance sheets, immediately reducing the systems’ debt, or “unfunded liability.” Second, as in the case of a tollway or lottery, the asset might produce its own revenue stream, which would provide an ongoing source of funding for the pension systems into the future. Finally, because annual state contributions to the pension systems are driven largely by the need to repay pension debt, if the asset transfer significantly reduced the amount of that debt, it could also reduce the state’s annual contribution, freeing up revenue for other current services.

This Analysis briefly looks at two recent examples of large pension asset transfers in New Jersey and Queensland, Australia, representing two paradigms: A revenue-generating asset that creates a dedicated funding stream, versus a one-time windfall from privatization.

The Analysis then poses six important questions for any asset transfer in Illinios:

1. What assets can be transferred, and what restrictions woudl the state face in transferring them?

2. Will the asset include a revenue stream currently used for other purposes? If so, how will the state replace that revenue?

3. Will the transfer be an implicit promise to privatize the asset?

4. How will the asset transfer affect the state's overall pension contribution levels?

5. How would an asset transfer affect management of the asset itself?

6. How will the asset transfer affect the pension funds' anticipated investment returns, and how will that affect the size of current liabilities and the state's required contributions?

You can download this Analysis as a PDF below, or read it at the Budget Blog here.

The changes made to Illinois public pension systems in Public Act (PA) 100-0023 (introduced as Senate Bill 42), the Budget Implementation Act, or BIMP, passed on July 6, 2017, and include two primary elements. First, the BIMP creates a new Tier 3 level of benefits for public sector workers. Second, the BIMP permits the state to smooth out the fiscal impact of the actuarial reduction in the assumed rate of return generated by the state’s five pension systems.

While proponents of the changes suggest they will give the state immediate and long-term fiscal relief from growing pension costs, this analysis of the changes indicates that the hoped for fiscal relief may not materialize.

Tier 3 is a new hybrid defined benefit-defined contribution plan that all Tier 2 and new employees will be able to opt into. The FY2018 budget is predicated on Tier 3 saving $500 million for the state; however, analysis by the State University Retirement System suggests that this number will be lower, and will continue to be slight for the foreseeable future. Moreover, much of the savings result from cost-shifting to local units of government.

The five-year assumption smoothing will result in savings in FY2018 for the state. However, it essentially amounts to additional borrowing against pension liabilities, and therefore will increase long-term costs. The Teachers Retirement System estimates that for each dollar of up-front savings, there will be three dollars of long-term costs.

PowerPoint presented by Ralph Martire at the Senate Revenue Hearing.

An analysis of the five Illinois retirement systems finds that the state's worst-in-the-nation unfunded pension liability has grown by more than $7 billion in just the last two years.

This Report address the most common misconceptions the underfunding of Illinois' pension systems, and reviews the relative strengths and weaknesses of defined benefit versus defined contribution systems from the perspective of both the public sector and taxpayers.

A Fact Sheet on the source of Illinois' unfunded pension liabilities.

A two-page summary of the  Commission on Government Forecasting and Accountability's 2007 report on the Illinois' state pension systems.

The three primary sources of contributions which finance Illinois state retirement systems are employee contributions, employer (the state) contributions and investment returns. According to the most recent state comparison of unfunded pension liabilities by Wilshire Research Associates, at $40.7 billion, Illinois has the worst unfunded pension liability in the nation. Moreover, when compared to Illinois FY06 total general revenue fund of $28.65 billion, Illinois $40.7 billion dollar unfunded liability represents 142% of FY2006 total general fund. This Report explains the source of Illinois immense unfunded liability, and how it relates to the state's budget and overall fiscal position.

Pension funding and the state's FY2008 General Fund budget.

Among the most discussed – but least accurately portrayed – spending pressures that contribute to the state’s fiscal problems, is Illinois’ unfunded pension liability owed to the state’s five public employee retirement systems: the State Employee Retirement System (‘SERS’ – currently 46.1% funded), the Downstate Teachers’ Retirement Systems (‘TRS’ – currently 56% funded), the State Universities Retirement System (‘SURS’ – currently 58.5%), the Judges Retirement System (‘JRS’ – currently 42%) and the General Assembly Retirement System (‘GARS’ – currently 32% funded). Maybe the problem gets misrepresented so frequently due to its enormous scale, an unfunded liability that exceeds $54.4 billion, the worst of any state in the nation. Or, perhaps the current legislation covering repayment of the liability, frequently called the ‘Pension Ramp’, which backloads costs and creates escalating fiscal pressure over the long term, causes people to misconstrue the issue. Whatever the reason, almost the entire discussion of what caused the state’s unfunded liability to develop in the first place, as well as how best to address the problem in the long run, is woefully off point, dominated by myth and rhetoric, and contrary to the data. This Fact Sheet dispels some of the more common, and egregious, myths involving Illinois’ unfunded pension liability.