COGFA, Illinois’ official number-crunching group, is out with its state pension reports for both FY 2022 and 2023 and its analysis shows that while record-high inflation has reduced the stress of pension costs on the budget in the short-term, those retirement debts continue to be a major threat to the state’s fiscal and economic stability.
Inflation has ballooned Illinois’ state budget to over $50 billion in recent years, and that’s helped drop pension costs as a percentage of the budget to “just” 20 percent in 2023, compared to 25 percent in pandemic-2019. That’s largely the result of the federal government’s trillions in covid spending, including the near-$200 billion sent to Illinois (see appendix).
But even with the “help” of inflation – which simultaneously crushed the finances of households across the state – Illinois’ pension debts continue to grow and funded ratios remain dangerously low.
Inflation is also a double-edged sword. Budget pressure has been partially deflated for now, but pension costs will rise as politicians continue to meet government workers’ demands for bigger pay hikes and more benefits. In fact, that’s already happening.
Here are a few key takeaways from the COGFA reports:
1. Illinois pension debts hit $142 billion – 2nd highest shortfall ever. This is the 2nd year in a row the state’s shortfalls have grown since 2021’s once-in-a-generation stock market rally helped shrink unfunded liabilities to $130 billion.
2022’s subsequent dismal investment returns pushed debts back up to $140 billion. And now 2023’s lackluster returns have helped increase shortfalls yet again.
That $142 billion is just one part of the total $207 billion Illinoisans are burdened with in official state and local pension debts. That’s $40,000 per household, which we wrote about recently.
2. Illinois’ pension funds continue to have less than half of what funds they need. Illinoisans are on the hook for $142 billion in unfunded state pension debts. That shortfall exists because the five pension funds should have $257 billion in their investment accounts today to ensure they can pay out their future pension obligations. Yet they have only $114 billion in the bank, hence the shortfall. That leaves the state’s overall unfunded ratio at 44.6 percent, the worst in the country.
It’s important to point out that the billions in windfall tax revenues as a result of the covid bailouts did little to get Illinois out of its pension hole. The funded ratio only improved by 4.3 percentage points, up from 40.3 percent in 2019. Those federal funds have now largely dried up.
3. Illinois politicians are set to short pensions even more than last year. Last year, COGFA began publishing the difference between what the state should be paying into the pension funds (Actuarially Determined Contribution) and what the state is actually contributing – something we’d wanted them to do for years.
The state’s statutory requirements for pensions (decided on by lawmakers) require a payment in FY 2025 of $11.3 billion, but the pensions’ actuaries calculate Illinois should be paying $16.1 billion.
That’s a funding shortfall of $4.8 billion, even bigger than last year’s $4.4 billion gap.
Add in the annual underpayment of retiree health insurance costs – in the past it’s been $1 to $3 billion – and the state’s total underpayment of retirement costs is more than $5 billion, or about 10 percent of Illinois’ general fund budget. Keep that in mind when Illinois lawmakers claim yet again they’ve passed a balanced budget.
4. Salary hikes boosted unfunded liabilities by more than $1 billion. As mentioned above, inflation cuts both ways regarding Illinois’ pension crisis. Yes, the state’s debt is inflated away, but costs will also grow as government unions demand pay hikes to catch up with all that inflation.
2023 was a record year for the impact of salaries on the pension funds, as contracts got renegotiated and workers got pay hikes far larger than actuary estimates. Oversized raises were responsible for over $1 billion of the state’s $2.6 billion increase in the unfunded liability. That’s the single largest negative impact raises have had on pension debts since at least 1996.
Expect big raises to continue as more teacher and other government contracts are renegotiated in the next couple of years.
Worst is still worst
Count on many Illinois officials to point to the latest pension data and say things are better. In the state’s FY 2019 report, pension costs were projected to remain at 27 percent of the budget through 2045. Now, costs are projected to fall to 17 percent over time. That’s not a drop to ignore.
But there are three things to keep in mind:
- Illinois politicians have done nothing in the last decade to reduce the burden on taxpayers or improve retirement security for pensioners. Any improvement has come strictly from the windfall tax revenues as a result of covid aid.
- At 20 percent, Illinois will still contribute more of its budget to pensions than any other state. Illinois will remain uncompetitive for decades.
- The state’s pension projections are based on rosy assumptions that may never be met. That means debts – and costs – are likely to grow in the future.
- Some of the savings from Tier 2 are already being unwound and there’s increasing pressure to boost benefits for Tier 2 workers. Any real increase could boost pension debts significantly.