* From Moody’s…
“Illinois’ pension buyout plan is credit positive, but reliance on savings poses modest budget risk.” The new Illinois budget allows for an approximately $440 million (or 5.2%) cut in pension contributions in the fiscal year starting July 1, largely by offering benefit buyouts to pension participants. The state’s buyout offer is credit positive because it will generate significant pension liability savings to the extent that employees accept the offer. Illinois’ $201 billion adjusted net pension liability (ANPL) in fiscal 2016 was the highest among all states relative to both revenue and gross domestic product in our most recent survey, and rising contribution requirements challenge the state’s budget. Options to reduce the liabilities through benefit reforms are limited by a constitutional public pension benefit protections clause.
The state’s new legislation aims to navigate around the constitutional constraint by using voluntary buyouts. First, the state will offer certain employees about to retire lump-sum payouts for forgoing guaranteed 3% compounding cost-of-living adjustments on their pensions. Second, the state will offer the vested pension participants who have left their pension-eligible jobs, but have yet to retire, a lump-sum buyout equal to 60% of their lifetime pension benefits on a present-value basis. To preserve pension plan assets, the state would finance the buyouts by issuing as much as $1 billion of bonds. The state also plans to shift certain pension costs to school districts and universities to the extent those entities grant salary increases above a specified level.
Actuaries for the State Employees’ Retirement System of Illinois (SERS), one of the largest of the five plans to which the state contributes, project that the plan will pay out roughly $1.6 billion in benefits to currently inactive, but vested, employees through 2046. The state’s projected saving in the coming fiscal year amounts to $443 million for all five of its major pension plans, but actual savings could fall short of the target if fewer participants than the state expects take the buyouts. The state’s forecast is based on assumed acceptance rates of 25% for retiring members and 22% for the vested but inactive participants. As a result, the state faces a risk that the plan will either increase its underfunding of pension contributions or add to a backlog of unpaid bills.
So, Moody’s doesn’t care that they’re taking out the savings for General Funds spending up front rather than leaving it in the pension systems? This seems kinda odd.
* I posed that question to Moody’s and got this response from Tom Aaron, one of the co-authors of today’s report…
We tend to view pension buyouts as positive because they produce net savings for sponsoring governments. Liability reductions in present value terms, to the extent buyouts are taken up, exceed the cost to the government making the offer.
* Meanwhile, Moody’s also took a look at the education funding reform plan in its second fiscal year…
“Illinois Schools’ second year of significantly higher state aid is credit positive.” The Illinois budget also provides a $350 million boost in school funding. The budget is credit positive for Illinois’ K-12 school districts because it increases funding consistent with last year’s change to the state aid formula. Public Act 100-0465 (PA 100-0465), passed last year, changed Illinois’ funding formula and set targets for significant increases in state funding. The legislation utilizes research-based elements to establish a unique “district adequacy target” for every school district based on student needs. School districts are categorized into four tiers. Tier 1 districts are most below adequacy and benefit most from any boost in state funding.
The fiscal 2018 and 2019 budgets increase formula-based funding by $350 million each year. Of the fiscal 2019 increase, $50 million is allocated to a new property tax relief program. The fiscal 2019 budget also provided another $50 million for early childhood education. Even with the two-year boost in funding, many districts will remain far below adequacy targets. State estimates indicate that it would require billions of dollars in new state funding to bring districts below adequacy to the target. Given Illinois’ financial challenges, it remains highly uncertain whether it can sustain annual funding increases. Illinois also has a history of delaying categorical grant payments to districts, and formula state aid was delayed last year as the legislature rewrote the formula.
Adding $350 million in K-12 spending every single year will be tough, particularly if the national economy hits the skids.