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Pew: “Illinois is getting closer to stabilizing pension debt”

Wednesday, Sep 15, 2021

* According to the Pew Charitable Trusts, Illinois’ average annual pension contribution growth rate was 12 percent in 2009-19

A Growing Share of States Have Achieved Positive Amortization of Pension Debt

Illinois, Kentucky, New Jersey, and Pennsylvania led this trend in increasing [pension] contributions, with an average growth in scheduled pension payments of 16% each year from 2009 to 2019. These states have been among the worst-funded states for two decades, and their contribution increases are part of long-term plans to address the large legacy pension debt each has accumulated. As a result, Kentucky and Pennsylvania achieved positive amortization in 2019, with Illinois and New Jersey expected to begin reducing pension debt once the outsized investment returns in fiscal 2021 are recognized. In each case, the turnaround was prompted by state policymakers’ acknowledgment that a return to pension plan funding discipline—paying down pension debts in addition to the value of annual benefits as they are earned—is the only path forward in order to avoid pension fund insolvency.

Funding discipline has been central to the improvement in these states, though all four have also changed benefits to help reduce future costs and risks. Illinois began its long path to pension funding in 1995, with a plan to be 90% funded by 2045. This approach was criticized for pushing costs to future generations of taxpayers, as evidenced by the sharp increase in contributions required between 2008 and 2019. However, a quarter of a century later, Illinois is getting closer to stabilizing pension debt, though plan actuaries continue to encourage further strengthening funding policy.

In 2000, Kentucky, New Jersey, and Pennsylvania reported having fully funded pension plans, in contrast to Illinois. But those three states emerged as among the worst-funded due to a combination of shortchanging contributions, offering unfunded benefit increases, and investments that fell short of expectations. All of these weaknesses were in place before 2008. When the 2007-09 recession hit, it further strained underfunded pension systems and forced a reckoning.

In all three states, the initial response to the recession was to gradually increase the level of pension payments that would avoid immediate budget pressures but would give policymakers a plan to meet minimum funding standards. In Kentucky, it became clear that this would take too long. In 2013, further reforms required the state to start making the full payment recommended by plan actuaries and put in place a new plan design to help manage risk. Pennsylvania stuck with the ramp up in pension costs despite the strain it placed on state and school budgets. In 2017, state officials supplemented the initial response with changes to plan design for new hires to make future costs more predictable and lowered investment fees expected to save taxpayers at least $3 billion. New Jersey was the slowest to fulfill its promise to make full pension payments. Before the pandemic, the strategy was to make the full payment in the fiscal 2023 budget, but an improved fiscal situation allowed policymakers to put the full pension payment in the 2022 budget, a year ahead of schedule and the first time this century New Jersey will meet minimum funding standards.

* This is what I told subscribers over a month ago…

Gov. Pritzker traveled to New York recently to meet with the three bond rating agencies. This was his third such briefing, which is highly unusual for an Illinois governor. Deputy Gov. Dan Hynes, who is transitioning out of his job, traveled with Pritzker and Hynes chatted with me for a few minutes yesterday.

Hynes said the ultimate goal of the trip was to push for additional upgrades in the state’s credit ratings. Two of the three firms have raised the state’s rating since the new budget was enacted.

The most news-worthy item to me was about the state’s pension debt. A slide was presented to the agencies showing that by next fiscal year the state will have more employees in the much less costly Tier 2 pension program than in Tier 1. “That’s why the trend is our friend,” Hynes said. “If we just continue to make the same payment, over time, the demographics are going to work in our favor.”

Hynes explained that the “same payment” didn’t mean the dollar amount would level off, but payments would remain at about 25 percent of the state’s budget into the future. While that’s a huge chunk of the budget, “75 percent of a growing revenue pie is still a lot of money to do the things we need to do and want to do,” Hynes said. And planning will be easier. Of course, that assumes no major revenue crashes and no successful legal action on Tier 2.

- Posted by Rich Miller        

  1. - sal-says - Wednesday, Sep 15, 21 @ 10:25 am:

    Long road ahead.

    But HooRah !

  2. - knownothing - Wednesday, Sep 15, 21 @ 10:25 am:

    best of luck to whatever crackpot comes out of the GOP primary

  3. - Oswego Willy - Wednesday, Sep 15, 21 @ 10:27 am:

    Boy, IPI has had a bad 2021

  4. - Socially DIstant Watcher - Wednesday, Sep 15, 21 @ 10:31 am:

    @OW: IPI is playing a long game. Or a long con, depending on your perspective. But do you think a bad year will put them off? Or their funders?

  5. - Lurker - Wednesday, Sep 15, 21 @ 10:31 am:

    You said no successful legal action regarding tier 2. Has there been any legit legal action?

  6. - Sue - Wednesday, Sep 15, 21 @ 10:36 am:

    All good news- and the largest fund TRS under new management FINALLY revised its allocations away from the horrendous hedge fund policies which hammered returns for more then a decade- whoever was responsible for the 14 percent allocation to hedge funds needs to be fired if they are still there. It cost the State many billions in lost returns and opportunity costs

  7. - Morty - Wednesday, Sep 15, 21 @ 10:41 am:

    Cue Mark Glennon writing off another hit piece on Rich.

  8. - Back to the Future - Wednesday, Sep 15, 21 @ 10:41 am:

    Any good news on pension funding is great to hear.
    Maybe we can begin to shift this pension discussion away from who is to blame about this problem to how to solve the problem.
    The short reference to good market returns that will show up in reports next year is important to be aware of and is also good news.

  9. - levivotedforjudy - Wednesday, Sep 15, 21 @ 10:44 am:

    WOW. That is shockingly good news, but it probably ruins the narrative of a lot of people. The beauty is the simplicity of it - the gush of Baby Boomers retiring is helping to fix the problem.

  10. - Norseman - Wednesday, Sep 15, 21 @ 10:45 am:

    Good news. Just keep it up.

  11. - City Zen - Wednesday, Sep 15, 21 @ 10:49 am:

    “assumes…no successful legal action on Tier 2″

    Anticipating a legal action on Tier 2, Mr. Hynes? May want to get ahead of that.

  12. - Rich Miller - Wednesday, Sep 15, 21 @ 10:50 am:

    ===Anticipating a legal action on Tier 2, Mr. Hynes?===

    Did you see any quotes on that? Nope. That was my thought.

  13. - Bothanspied - Wednesday, Sep 15, 21 @ 10:53 am:

    I try to keep up on the pension stuff but I am woefully behind. I know the new tier for new employees eases state contributions down the line and outs less pressure on the budget. Is there a reason, or has it been considered to move state employees to a 401k type system? Would that now fly in this state, like taxing retirement income?

  14. - Flyin' Elvis'-Utah Chapter - Wednesday, Sep 15, 21 @ 10:57 am:

    Someone will need to closely monitor Greg Bishop.

    Maybe take all sharp objects away from him.

  15. - Grandson of Man - Wednesday, Sep 15, 21 @ 11:08 am:

    “Illinois is getting closer to stabilizing pension debt”

    Yes, the right wing has had a bad year in 2021 with this news, state credit upgrades, Democratic Chicago and Cook County gaining population, Biden’s stimulus helping all states, California having a huge budget surplus in a pandemic from taxing the rich higher and the failed recall election, coronavirus exploding in red states, support of Biden’s vaccine mandate, anti-vaxers, union popularity climbing, etc.

    “Let’s be like Texas and Florida.” Yeah, no. That is so over, lol.

  16. - 62468 - Wednesday, Sep 15, 21 @ 11:09 am:

    Would love to see a related piece on the status of Article 3/4 funds across Illinois.

    Are communities making any progress on local pension funds? How many will make 90 percent funding deadline?

    What does IML suggest for accountability for communities who miss funding deadline for fire and police pensions? What about those communities who routinely ignore funding recommendations from actuaries or DOI?

    When might the governor or legislative leaders champion a requirement that communities must pay into their local pension funds just like must do to participate in IMRF?

  17. - Just Me 2 - Wednesday, Sep 15, 21 @ 11:10 am:

    An experienced and wise state official once explained to me the pension problem will eventually solve itself as the pension recipients become statically insignificant which is a polite way of saying they die off, and the next tier recipients take their place.

    However, getting to that point somewhere in the mid 2030s will not be pleasant.

  18. - Candy Dogood - Wednesday, Sep 15, 21 @ 11:14 am:

    === but payments would remain at about 25 percent of the state’s budget into the future. ===

    The state services that grandma and grandpa, and great grandma and grandpa didn’t completely pay for when they received them sure got expensive. Good thing the millennials and gen Z are going to take care of those bills for them.

  19. - Blue Dog - Wednesday, Sep 15, 21 @ 11:15 am:

    These are good things….but I don’t trust politicians from either party to stick to it. But I can hope.

  20. - Jibba - Wednesday, Sep 15, 21 @ 11:16 am:

    ===has it been considered to move state employees to a 401k type system?===

    This topic has been aired here ad nauseam, but I’ll just briefly restate that going to a 401K system triggers the state to join social security, which costs about the same as the pension and cannot be waived or payments missed. No help there…just gotta keep paying the ramp.

  21. - PublicServant - Wednesday, Sep 15, 21 @ 11:18 am:

    Nice to see recognition of the adults paying their bills. Democrats in government try to move the ball forward, in general. While Republicans continue to be the equivalent of streakers whose purpose is to disrupt the game for everyone.

    Problem is governing isn’t a game. Especially in a pandemic.

  22. - City Zen - Wednesday, Sep 15, 21 @ 11:19 am:

    ==Did you see any quotes on that?==

    Sorry, my bad. Would still like to know their thoughts on Tier 2 benefits remaining as-is because every single funding assumption is reliant on that.

  23. - the Edge - Wednesday, Sep 15, 21 @ 11:20 am:

    Tier 2 benefits might not meet the save harbor regs of social security in the future, and there will need to be a fix by either enrolling teachers in social security, or come up with a change of some sorts.

  24. - Oswego Willy - Wednesday, Sep 15, 21 @ 11:20 am:

    ===Or a long con===

    Marks are always going to believe the ridiculous.

    It’s now about IPI’s honesty and integrity continually being peppered as phony… but, the checks cash all the same.

  25. - Grandson of Man - Wednesday, Sep 15, 21 @ 11:24 am:

    Maybe someone can shed light on its constitutionality, but if JB and Democrats win in 2022, maybe they can hike the state income tax and exempt incomes under a certain amount—a de facto tax on the rich, so we can have more money to pay pension debt.

    We had a plan to help pay pension debt, but it failed and so many of its opponents are currently giving more of their money to Springfield politicians, to use their own argument. Those who supported the plan and could suffer budget cuts because it failed have reason to harden against cuts.

  26. - DuPage - Wednesday, Sep 15, 21 @ 11:30 am:

    Pay the pension funds first, in full and on time. Then pay the other bills, especially ones that have federal matching funds attached.

  27. - Rich Miller - Wednesday, Sep 15, 21 @ 11:31 am:

    ===Pay the pension funds first===

    That’s been done for a while now. Did you not read the above story?

  28. - Nick - Wednesday, Sep 15, 21 @ 11:43 am:

    Hmm so does this mean starting this year or next our “unfunded-liabilities” should actually start falling?


  29. - Original Rambler - Wednesday, Sep 15, 21 @ 11:54 am:

    The other Tier 2 problem is that there is no real incentive for these employees to remain on the job. Once they gain experience and become marketable (and wise up to the deficiencies in their retirement plan), you may see them leave State employment earlier than they would if something closer to Tier 1 was in place. Brain drain is not pretty.

    But this is certainly good news that I did not see coming. I think Pat Quinn needs to take a bow.

  30. - Contrarian - Wednesday, Sep 15, 21 @ 12:08 pm:

    I’m often critical of JR for obvious reasons…however, the pension bond plan Hynes is floating isn’t necessarily a bad idea. All depends on what you do with the “savings”…if you blow it at Vegas (like Blago did with his pension bond scheme), it’s a terrible idea. On the other hand if you use it to pay down debts, stabilize cash flow, and are, generally, prudent in its’ use, it can make a lot of sense. The problem Spfld has shown it is incapable of acting prudently over the long haul - even if you get - get a couple years back to back of fiscal hawkishness - it never lasts.

  31. - Rich Miller - Wednesday, Sep 15, 21 @ 12:11 pm:

    ===even if you get - get a couple years back to back of fiscal hawkishness - it never lasts===

    You need to update yourself. Required pension payments have not been skipped since the beginning of the Quinn administration.

  32. - Oswego Willy - Wednesday, Sep 15, 21 @ 12:13 pm:

    Who is this JR you speak?

    Did you read Pew?

  33. - MisterJayEm - Wednesday, Sep 15, 21 @ 12:23 pm:

    Doing the right thing gets good results?

    Whodda thunk it?

    – MrJM

  34. - Nick - Wednesday, Sep 15, 21 @ 12:25 pm:

    I feel like psychologically it’d actually be pretty big for our pension debt to actually fall for once.

    Not that I expect the tribune to print that in their headline.

  35. - City Zen - Wednesday, Sep 15, 21 @ 12:44 pm:

    ==maybe they can hike the state income tax and exempt incomes under a certain amount==

    They can do that anytime. It’s called the personal exemption. Or they can create tax credits that only apply to lower incomes, like the child tax credit that magically disappeared when the Fair Tax failed.

    The state has been playing with pseudo-graduated rates for years. If you make over $250K, you can’t claim the property tax credit or exemption allowances. There’s nothing preventing the state from expanding on any of this.

  36. - A - Wednesday, Sep 15, 21 @ 12:52 pm:

    Great news! Addressing this problem needed to happen along with time. Nothing happens overnight

  37. - yinn - Wednesday, Sep 15, 21 @ 12:58 pm:

    ==Are communities making any progress on local pension funds?==

    DeKalb is. Release of latest comprehensive annual financial report in June shows the city is within striking distance of eliminating unfunded liability for IMRF. Fire and police pensions still have a scary amount of unfunded liability and take up 25% of our operating budget. But a combination of adjusting the return on investment assumption down to 7% in 2017, plus a couple good years of returns, has slowed growth of unfunded fire and actually reduced unfunded police a little. This is especially good news for the fire pension, which has seen a reduction in unfunded liability only once since 1999.

    Latest bit of good news is DeKalb has just been awarded a 3-year federal SAFER grant of $2.7 million for fire operations. This will allow for some cost-shifting elsewhere in the budget, hopefully including a couple additional whacks at the liabilities.

  38. - walker - Wednesday, Sep 15, 21 @ 1:27 pm:

    I recall someone estimating conservatively that Tier 2 would turn us around in approx 23 years, when we were working on it in 2010. I sure wish I could recall who that was.
    My response was that no one would trust any politician for that kind of time period.

  39. - yinn - Wednesday, Sep 15, 21 @ 1:33 pm:

    ==When might the governor or legislative leaders champion a requirement that communities must pay into their local pension funds just like must do to participate in IMRF?==

    One of the reasons we’re not as far behind with IMRF as police/fire is that IMRF sets the return on investment assumption. In my community, at least, the problem is not that we haven’t made the annual required contributions, it’s that the assumptions used to calculate the ARCs — especially the return on investment assumptions — have been faulty so the unfunded liabilities have grown despite making the full ARC payments. A state rule about when to change ROI assumption in police/fire pension funds might help by eliminating the temptation to run with a higher ROI in order to keep ARCs low.

  40. - frustrated GOP - Wednesday, Sep 15, 21 @ 1:42 pm:

    I’m still waiting for the news stories on how the drop in life expectancy is going to reduce billions in pension liability. because that too is a big part of the next chapter. That said, don’t know howe we get past the legal challenge to paying the same rate for less benefit will fly.

  41. - JS Mill - Wednesday, Sep 15, 21 @ 1:50 pm:

    =by next fiscal year the state will have more employees in the much less costly Tier 2 pension program than in Tier 1. “That’s why the trend is our friend,” Hynes said. “If we just continue to make the same payment, over time, the demographics are going to work in our favor.”=

    In fact, the states required annual payments are down over $500 million because of Tier 2. And that has made it possible to increase equity.

    Tier 2 will have to be adjusted due to safe harbor issues. This has been known since at least 2012.

    But the right will not change their narrative or even acknowledge the good news. Their positions have never been truth/fact base and their is no indication that will ever change.

    The news is positive and it is clear the governors leadership is improving the financial position of Illinois.

    @Mister JayEm is spot on- Whodda thunk it?

  42. - Scooter - Wednesday, Sep 15, 21 @ 2:06 pm:

    OriginalRambler @ 11:54:

    “The other Tier 2 problem is that there is no real incentive for these employees to remain on the job. Once they gain experience and become marketable (and wise up to the deficiencies in their retirement plan), you may see them leave State employment earlier than they would if something closer to Tier 1 was in place. Brain drain is not pretty.”

    Yeah, I can’t speak for other retirement systems’ membership, but this has been occurring in SERS for some time, and the Pandemic has only accelerated the Tier 2 turnover. Isn’t helping that with some bargaining units, salary brackets seem to be based on Springfield costs-of-living yet a greater portion of the workforce is in the northeastern part of the state, where COL is higher.

    I’m no expert on the pension funding process and the investments which grow the fund, but I am curious how the funding levels will be affected by an increasing number of Tier 2 employees putting into the system for a few years, then pulling out their contributions when they leave the state workforce.

  43. - A Jack - Wednesday, Sep 15, 21 @ 2:13 pm:

    Yes, demographics are on our side. The baby boomers which make up most of Tier One, will be reaching Tier One retirement age shortly. The next biggest chunk of Tier One were born before 1970 and will hit Tier One retirement age in the next nine years. I only know the numbers for one of the big three, but I suspect the other systems are similar.

  44. - Six Degrees of Separation - Wednesday, Sep 15, 21 @ 2:17 pm:

    Walker 1:27

    According to the Crain’s article,
    1. The pension ramp projected annual funding goes up every year until 2045, from 6.9B in 2015 to $16.3B in 2045
    2. However, it has already leveled off as a percentage of GRF spending and will remain at 24-25% until 2045
    3. We should be somewhere around 45% funded in 2021 according to the chart projected in 2015. The good year in the market may have us doing better than that.

  45. - Back to the Future - Wednesday, Sep 15, 21 @ 2:33 pm:

    Agree with yinn that many communities did tax at the rate suggested by the actuaries that the local Finance Directors selected and the assumptions were consistently higher than the IDOI assumptions resulting in lower tax rates.
    Never the less, the downstate police funds, for example, have been funded at a higher rate as a group than all the other state funds except for IRMF.
    The recent investment assumption by the Pritzker Consolidated Police Pension Fund is significantly lower using the investment model they are suggesting so it is safe to assume that taxes for Downstate community’s for pension will increase substantially. Not exactly what was promised, but if you can’t make the funding level improve by a better investment model then you end up taxing more.

  46. - Been There - Wednesday, Sep 15, 21 @ 5:20 pm:

    ====But the right will not change their narrative or even acknowledge the good news.====
    But then again I haven’t heard them calling for bankruptcy. Which I believe they said that was the only way out of the mess even though we couldn’t anyway.

    Also, I would love to hear RNUG’s thoughts on this. He has been great over the years in deciphering the facts.

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