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Liability drops, costs to rise

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Illinois

* A tiny bit of good news…

According to a new report out today by Moody’s Investors Service, the “adjusted net pension liability” in the state’s five retirement systems dropped 9 percent, or $16.5 billion, to “only” $173 billion, in the year ended June 30. Adjusted net pension liability is a form of unfunded liability. Moody’s defines this differently than other ratings agencies, reflecting what it views as overly optimistic assumptions by pension fund managers.

The New York bond rater attributed the 9 percent decline to two factors: The pension funds earned 12.9 percent on their investments, exceeding their assumed 7.9 percent annual return, and interest rates rose, narrowing the spread between what the state expects to earn on pension investments in the future and what Moody’s believes will be earned.

* But, of course, this being Illinois there’s always bad news…

On a three-year average basis, Illinois’ adjusted net pension liability actually rose 7.2 percent, to $165.8 billion, Moody’s said. And Illinois still has a ratio of pension liabilities to revenues of 241 percent, compared with a 50-state median of 45 percent.

As a result, without reform the share of the state’s general (operating) funds that will have to go to pay pension costs will rise from 22 percent in fiscal 2013 to 24 percent in 2014 and potentially 26 percent in 2015, it said.

That 26 percent figure is based on the partial expiration of the tax hike midway through FY 2015.

posted by Rich Miller
Monday, Nov 4, 13 @ 3:37 pm

Comments

Looking forward to the proposals to spend the 16.5 Billion difference over the next year….

Comment by OneMan Monday, Nov 4, 13 @ 3:51 pm
Quinn, Cullerton, and Madigan will call this significant progress and declare the whole pension crisis over!

Comment by Downstater Monday, Nov 4, 13 @ 3:53 pm
The headline is inaccurate. “Costs” are not rising. Actually, with Tier 1 participants being replaced by Tier 2 hires every day, costs are dropping.

You correctly point out in the text, Rich, that the higher share of GRF dedicated to pension contributions in future yeats is the result of the state’s fiscal cliff — the scheduled expiration of current tax rates — not the “cost.” But the header is misleading.

Comment by Reality Check Monday, Nov 4, 13 @ 4:08 pm
Downstater, how would you define “the crisis?”

Comment by wordslinger Monday, Nov 4, 13 @ 4:13 pm
I think the percent of the state’s annual operating costs going to pension liabilities expresses better than anything else the severe fiscal problem Illinois is facing.

I think anyone who looks at those numbers just knows at a gut level that we have an unsustainable problem. It is challenging to downplay the severity of the situation when thought about in this manner.

It also tells you that any real solution will take decades of prudent management and significant reform which makes it very difficult to be optimistic.

On the bright side……it’s only money. Little zeros and ones in a computer data bank somewhere.

Comment by skeptical spectacle Monday, Nov 4, 13 @ 4:21 pm
So happy all employees are not eligible to retire at this time. Thats the basis of the 100 billion debt.

Comment by adrone Monday, Nov 4, 13 @ 4:31 pm
Hey when Moody’s and the other hot shots are calling around does someone want to ask how they rated all that City of Chicago debt that has been in the news?

Our guess is that once the government gets Chase to pay back what they stole on bad bonds that the rating agencies can get their checkbooks and/or prison pinstripes out.

Comment by CircularFiringSquad Monday, Nov 4, 13 @ 4:46 pm
Here is a question I have not been able to verify the answer to. I have heard 2 different answers. When the state shortchanges one of their pension systems, they owe them the money with interest. HOW MUCH interest? I had heard they owed interest equal to what the system would have made with the money that the state owes them. Example, (lets use round number examples), if TRS was shorted a million dollars last year, would the state owe 7.9% assumed interest or the 12.9% actual interest?

Comment by DuPage Monday, Nov 4, 13 @ 5:17 pm
I would foward all those questions to Fahner… after all he made the calls to blow the whistle to lower the ratings or maybe forward to the bond issuer that Fahner has ties to.

Comment by adrone Monday, Nov 4, 13 @ 5:22 pm
DuPage-interest accrues on the unfunded liability at the assumed rate of return on investment for the year in which the “unfunding” occurs. That rate is 7.5 to 8 percent at the present time and varies by pension system. The rate is set by the system’s Board of Trustees.

Comment by Arthur Andersen Monday, Nov 4, 13 @ 6:55 pm
It’s not “pension costs” that have been and will be paid, it’s “pension benefits.”

Comment by aunt_petunia Monday, Nov 4, 13 @ 7:15 pm
DuPage–Arthur Andersen is right as to the calculation, but it’s not real interest like on a bond, it’s “actuarial interest” which is the assumed earnings foregone because the Funds didn’t have those assets to invest.

And the move from 22% to 24% of GRF was the last big year of increase, as of SFY14 the State is finally on its actuarial funding ramp to 2045 and from here on out the number grows with pensionable payroll, and as Tier 2s (capped pay) replace Tier 1s that will probably grow slower than the rest of the budget. Of course, that’s until some assumptions like a 7.9% ROI get blown.

Comment by Harry Monday, Nov 4, 13 @ 8:43 pm
Skeptical, I think we agree that the current situation is unsustainable. Where I believe we disagree is exactly what is unsustainable. I believe that it’s the current flat tax rate that is both unsustainable and unfair. Certainly continued use of the pensions as a piggy bank to cover up that inadequate revenue stream is unsustainable, and you’ll soon find out that telling state employees and pensioners that we’ve unilaterally decided to just not pay what is owed is unconstitutional and illegal. No more kicking the can down the road on tax reform because doing so is…unsustainable.

Comment by PublicServant Monday, Nov 4, 13 @ 8:45 pm
I agree with part of what public servant said about using the pension payment as a piggy bank. When the pension crisis was politicized we went from pension holidays being OK to overeacting the need to fund the actuarially required contribution at 100%. If cooler heads prevail and we fund the liability at a ‘reasonable’ amount, it seems to me that with the new tiers, the underfunding will correct itself over time.

Comment by Soccertease Monday, Nov 4, 13 @ 10:12 pm