* 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.