Moody’s has published new research (attached) noting the State of Illinois (rated Baa3/negative outlook) will set another record for the 50 states when its adjusted net pension liability (ANPL) exceeds $300 billion in financial reporting this year, reflecting the June 30, 2020, funding position of its five pension plans. With historically low interest rates, this increase in liability will closely track other states, but the higher ANPL connected with the state’s June 2021 financial reporting underscores Illinois’ growing pension challenges. Even with the substantial increase in long-term liabilities, however, the near-term funding and cash-flow positions of the state’s pension systems will remain relatively unchanged.
“The new liability is based on the aggregate ANPL of Illinois’ five pension systems, which reached $317 billion as of June 30 last year, a 19% jump from the prior year that was driven largely by falling interest rates,” said Ted Hampton, Vice President at Moody’s. “The FTSE Pension Liability Index, a high-grade corporate bond index Moody’s uses to value state and local government pension liabilities, fell to 2.70% as of June 30, 2020, from 3.51% the prior year.” (In comparison, the aggregate net pension liabilities reported under Governmental Accounting Standards Board (GASB) rules by the state’s five pension systems grew to $154 billion from $145 billion as of June 30, 2020, reflecting a weighted average discount rate of 6.74%. The results will appear in the state’s audited financial statements covering the period ending June 30, 2021.)
With a state GDP decline estimated at 2.5% in 2020, Illinois’ ANPL amounts to roughly 37% of economic output, up from a range of 28% to 32% over the previous four years. As illustrated in our most recent survey, Illinois’ pension liabilities are the highest among the 50 states, and the state’s liabilities and fixed costs for pensions, debt service and retiree healthcare (or OPEB) are at or near the top by almost any measure. Illinois also allocates about 30% of its budget to retirement benefits and debt service, a “fixed-cost” ratio more than three times the median for states.