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S&P warns about 2.2 percent annual pension payment growth

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Illinois

* This is the Edgar Ramp…

Despite some recent positive steps, Illinois has lots more hard and painful work to do if it’s to finally solve pension woes that pose a continuing risk to the state’s financial stability.

That’s the bottom line of a definitely dour report from S&P Ratings warning that, even with stepped-up funding under Gov. J.B. Pritzker, the state still has been contributing billions of dollars a year less than actuaries say is needed to bring Illinois’ government-worker pension funds into long-term fiscal balance.

“We believe pensions have an elevated probability of stressing the state and local governments,” the report says. “Costs will keep rising because contributions are significantly short of meaningful funding progress, plans are poorly funded, and the Illinois Pension Code allows plans to use assumptions and methodologies that defer costs.” […]

However, by casting a spotlight on slow progress, the report could give some momentum to a proposal by the Civic Committee of the Commercial Club of Chicago to impose a temporary income-tax surcharge to pay off billions in old pension debt as part of a deal in which the state also would repeal its estate tax. Illinois Senate President Don Harmon has publicly expressed interest in using the proposal as “a framework” for future action.

* From the report, with the important part highlighted…

Pension costs will keep rising, as Illinois has adhered to policies that defer contributions and weigh down its pension plans’ funded status. Even with efforts to reduce costs, buy out liabilities, and recently, contribute more than what was statutorily required, fixed pension costs related to the five state-sponsored plans (see Overview section) are projected to increase at an annual average rate of more than 2.2% over the next 10 years, according to the Commission of Government Forecasting and Accountability’s Special Pension Briefing, published November 2022.

Pension payments are high, no doubt about it. But the increases are manageable. And 2.2 percent is below inflation.

* On the Tier 2 fix…

Under Tier 2, the capped cost-of-living adjustments could result in benefit payments violating social security’s safe harbor provision if inflation persists at elevated levels. If the safe harbor provision is violated, employers are required to pay Federal Insurance Contribution Act (FICA) taxes, which would allow employees to participate in social security. Changes were made with the downstate firefighters’ consolidation and the state recently passed a bill that raises the pensionable salary cap and benefits for Tier 2 employees in Cook County’s pension system to avoid triggering the safe harbor provision. Segal Consulting recently analyzed the impact of changes to pension cost projections to TRS, SURS, and SERS to maintain an exemption from FICA taxes. In this analysis, Illinois’ 2022 unfunded liability would increase by $285 million, and the state would need to add a further $5.6 billion to its contributions through 2045. Even with the projected changes, the savings from Tier 2 benefits would still be significant. However, we believe an unexpected increase to pension costs will make annual contributions more challenging to fit into budgets.

More challenging, for sure, but not catastrophic.

* This is something to watch out for because retiree healthcare costs are paygo…

We expect cost volatility and increases, as most state OPEB plans are funded on a pay-as-you-go basis and health care cost trends exceed inflation. The Illinois Supreme Court ruled that retiree health care benefits are covered by the pension protection clause and cannot be impaired or diminished.

But this is from the state budget book…

State Employee and Retiree Health Care Savings – negotiated over $1.8 billion in health care cost savings.

✓ Estimated $650 million in collectively bargained cost savings with employees through FY23.
✓ Additional $515 million in savings achieved through negotiations with insurance companies and providers.
✓ $660 million for first five years of savings for retiree health insurance contracts.

posted by Rich Miller
Tuesday, Jun 27, 23 @ 10:42 am

Comments

Tier 2 was as much of a “fix” as the Edgar Ramp.

The big difference was the Edgar Ramp did not deter qualified professionals from electing state employment.

Comment by Flyin'Elvis'-Utah Chapter Tuesday, Jun 27, 23 @ 10:47 am
“impose a temporary income-tax surcharge to pay off billions in old pension debt as part of a deal in which the state also would repeal its estate tax”

Illinois Estate tax only kicks in at $4 million. seems like a compromise that is one-sided - relief to a few super wealthy estates on one side - and the rest of Illinois residents get saddled with a 10-year tax hike.

“One of the suggestions made by the club’s Civic Committee is for the state to implement a “temporary” one-half of a percentage point increase in the personal income tax, from 4.95% to 5.54%, combined with a “temporary” increase of 0.7 of a percentage point hike in the corporate income tax rate, from 9.5% to 10.2%. The increases would last 10 years and be expected to generate $2.9 billion”

Comment by Donnie Elgin Tuesday, Jun 27, 23 @ 11:15 am
Why not cancel our brand new health care for the undocumented and put that 550 million and growing annual expense directly into the tier 2 fix. Did we really need this new poorly thought out program. Can we afford it. I guess S&P has an opinion on that

Comment by Sue Tuesday, Jun 27, 23 @ 11:39 am
How about the income tax surcharge without the repeal of the estate tax. That would shorten the duration and/or the amount of the surcharge.

Better yet, take a little extra time to get to the desired funding level combined with the surcharge and we can fund imigrant health care.

The only variable left is how much surcharge. With FY22 $40 Bn in income tax revenue, a 5% rate would bring in $2 Bn/Yr. $1 Bn can go to pensions, $0.5 Bn to imigrant health and the rest is a cushion for other emergencies. If not needed, put it in pensions.

All that’s left is action. The method is agreeable to all.

Comment by MikeMacD Tuesday, Jun 27, 23 @ 11:59 am
Why does one of the least fiscally sound states have the most generous health care program for immigrants?

If last is prologue the likelihood of a “temporary” income tax hike expiring is unlikely.

Comment by Lucky Pierre Tuesday, Jun 27, 23 @ 12:23 pm
The problem with surcharges is that once we get comfortable with them, they tend to stop being temporary. Who can forget the last time we had a temporary rate increase? If there was some way to guarantee it was temporary and “fix” the pension issue, so we stop digging our same holes, that could get residents to swallow the surcharge. That’s the part I’m not hearing.

Comment by Hump Day Harry Tuesday, Jun 27, 23 @ 12:25 pm
===Why does one of the least fiscally sound states===

Then the last thing that state should do is bailout the billionaire Bears, amirite?

Comment by Oswego Willy Tuesday, Jun 27, 23 @ 12:29 pm
===likelihood of a “temporary” income tax hike expiring is unlikely.===

Didn’t it lapse?

Lemme think…

Comment by Oswego Willy Tuesday, Jun 27, 23 @ 12:30 pm
OW- your right

Comment by Sue Tuesday, Jun 27, 23 @ 12:32 pm
“impose a temporary income-tax surcharge to pay off billions in old pension debt as part of a deal in which the state also would repeal its estate tax”

Seriously…?

There is no such thing as a “TEMPORY” tax in Illinois. The we need more revenue =(Citizen Tax Dollars) to pay for something that’s not really our fault tax bell has started to ring to get the Tax Paying Citizens used to hearing it in the background.

People need to pay attention as the volume on the Revenue=Tax Bell will increase, hoping enough of the Non Government Pensioners will say enough is enough, it’s not our fault either so live within your means as the Governor as recently commented on the current budget issues.

Comment by Sunshine Tuesday, Jun 27, 23 @ 12:51 pm
===There is no such thing as a “TEMPORY” tax in Illinois.===

Some people just have zero memory on purpose.

Comment by Rich Miller Tuesday, Jun 27, 23 @ 12:53 pm
===Who can forget the last time we had a temporary rate increase?===

Not just what Oswego Willy was discussing. In the early 1980s James R. Thompson did a temporary tax hike, and it went away as scheduled.

In the late 1980s Michael J. Madigan pushed through a temporary tax increase (for local governments). In 1990 Jim Edgar ran on keeping the tax, but redirecting it to education. Neil Hartigan ran on letting it lapse. The voters elected Jim Edgar.

So, on the last 3 temporary tax increases, 2 lapsed, and the third was redirected and made permanent with the blessing of the voters. Pretty good track record.

Comment by Anyone Remember Tuesday, Jun 27, 23 @ 12:59 pm
==Tier 2 was as much of a “fix” as the Edgar Ramp.==

I disagree. The Edgar Ramp added billions of dollars to the pension debt. Tier 2 saves billions of dollars. It just takes 30 years to actually achieve any savings….

Comment by Ducky LaMoore Tuesday, Jun 27, 23 @ 1:51 pm
“Why not cancel our brand new health care for the undocumented”
Why not raise taxes on Sue specifically, cut all funding to any schools in her area, all roads, etc.? Can we really fund that expense?

As long as we’re talking about depriving other people that we don’t think deserve the good things in their life. Sheesh.

Comment by Perrid Tuesday, Jun 27, 23 @ 1:59 pm
= Did we really need this new poorly thought out program.=

I don’t know if WE did, but those who will now receive healthcare and with it a slightly easier life do need the program.

Comment by Cool Papa Bell Tuesday, Jun 27, 23 @ 2:33 pm
“Tier 2 saves billions of dollars”

May want to re-read that part about safe harbor.

Comment by Flyin'Elvis'-Utah Chapter Tuesday, Jun 27, 23 @ 2:40 pm
Sue probably actually pays taxes for her services

Comment by Karlyn Tuesday, Jun 27, 23 @ 2:51 pm
“safe harbor.”

While a concern, safe harbor only applies to employees that do not contribute to social security. So there will be additional costs with teacher, police officers, fire fighters. Overall, still saving billions.

Comment by Ducky LaMoore Tuesday, Jun 27, 23 @ 2:54 pm
A couple of things, the article neglects to note that the pension ramp is designed achieve the actuarially required amount of annual contribution in the next few years. Once that happens, and contributions continue under the ramp legislation in excess of that amount, the funding percentages will increase.

Second, the impact of a more normal rate of inflation apparently isn’t being taken into account. Until the last couple of years, we had rates of inflation that were well below historic rates. If more “normal” rates of inflation continue, the underfunding, which is basically a fixed amount, will be paid back with cheaper and cheaper dollars.

To Sue’s comment - the health care expenses for these individuals aren’t going to go away if the legislation providing health care to the undocumented would be repealed. These folks would then have no alternative but to go to hospital emergency rooms for treatment. My understanding is that the hospitals have to accept everyone for treatment, regardless of ability to pay, as a matter of federal law. The hospitals will have to recoup those costs somehow. It will be through higher charges to everyone else. So, one way or another we will pay for the health care of the undocumented. The fix is at the federal level.

Comment by Facts Matter Tuesday, Jun 27, 23 @ 4:01 pm
Why our state would chronically cheat public workers’ pension funds, thus dooming (potentially) them to a deprived life in retirement in order to improve the welfare of non citizens is a stumper. Quite a betrayal for those who’ve served others.

Particularly when those workers paid every cent, dutifully, believing the honor of those who claimed to be paying their part. There are things like, say, priorities. The message sent to young people considering a position in public service professions has not been lost on them. Low priority.

Comment by Anon Tuesday, Jun 27, 23 @ 4:16 pm
Hospitals only have to provide “stabilizing” care.

Medicaid is 100% covered insurance for practically every hospital and doctor in the country, with no restrictions. It is better coverage than anyone working gets.

If I could drop my employer coverage for Medicaid I would do it in a heartbeat. People here illegally also have untraceable income. They have a benefit from remaining non citizens now. Citizens should not get second tier benefits.

Comment by Workin4Less Tuesday, Jun 27, 23 @ 4:23 pm
===If I could drop my employer coverage for Medicaid I would do it in a heartbeat===

And you’d be a complete idiot.

Lots of doctors will not accept Medicaid. It’s the biggest problem with the program. Reimbursement rates are so low that it’s shunned.

So, step into the real world. You’re much better off. But everyone has to complain about something, I suppose.

Comment by Rich Miller Tuesday, Jun 27, 23 @ 4:34 pm
Love the proposal to drop the Estate tax in exchange for a temporary increase in the income tax. Seriously. That’s hilarious. I didn’t do the Math but they are not remotely equivalent. Come on Harmon. Say no to this fig leaf and let the rich continue to pay it.

Comment by Stormsw7706 Tuesday, Jun 27, 23 @ 5:12 pm
“Lots of doctors will not accept Medicaid.”

I have a great doctor that takes Aetna Medicaid. You just need to figure out which doctors take which company. I am not really low income. I am just self-employed with a large family. And my experience in Medicaid has actually been extremely good. And I guess my doctor doesn’t mind. He probably makes his profit in bulk. We schedule several appointments for the same day and time.

Comment by Ducky LaMoore Tuesday, Jun 27, 23 @ 5:13 pm