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More Money Needed For Pensions

Illinois residents should be ready to pay an additional $886 million in general funds in the next fiscal year (which starts July 1st) towards pensions for state employees, teachers, staff at state universities, judges, and legislators. That’s the total change from this fiscal year (FY17) after the state pension systems[1] set their contribution amounts and the State Auditor (a firm hired by the Auditor General) reviewed them. The state contributions to the pension systems will total $8.9 billion in FY18 with approximately $7.9 billion coming out of the general revenue funds.

The state operates under a 1995 law requiring the pension systems to have assets at 90% of their projected liabilities in FY45. Currently, the state’s pension systems collectively only have assets for 37.6% of their liabilities.

When the state adopted the 1995 law, it back-loaded the payments with contributions dramatically increasing in FY12. The systems also adopted lower projected rates of returns on existing pension system assets in recent years. The result of the reduced rates is an increase in the unfunded liabilities of the systems and therefore a need to increase the required contribution amounts. Other revised demographic changes, such as mortality rates, have impacted the projected liability and estimated contribution amounts.

 

Historical Change in Investment Rate Assumptions
System Prior to FY 10 FY10 FY12 FY14 FY16
TRS 8.50% 8.50% 8.00% 7.50% 7.00%
SERS 8.50% 7.75% 7.75% 7.25% 7.00%
SURS 8.50% 7.75% 7.75% 7.25% 7.25%
JRS 8.00% 7.00% 7.00% 7.00% 6.75%
GARS 8.00% 7.00% 7.00% 7.00% 6.75%
Note: The years associated with investment rate assumption changes reflect the actuarial valuation year and not the fiscal year in which the State contribution was calculated using the new rate.
Source:  Commission on Government Forecasting and Accountability

 

The total unfunded liability for the pension systems (to get to the required FY45 level) stands at just under $130 million dollars. To put the FY18 general revenue funds contribution amount of $7.9 billion into perspective, the total General Revenue Funds operating budget in FY15 (the last time there was a complete state budget) totaled just over $31 billion. So, the contribution represents more than 25% of the last complete state budget. The state could change the existing law and stretch out the time frame for meeting 90% of system liabilities. However, that likely would mean setting aside even more money for pension system contributions.

The increased pension payments only add more pressure to the state’s finances which are already stressed by the failure of lawmakers to pass a complete state budget and expenditures that exceed incoming revenue by billions of dollars (resulting in the state currently having a backlog of bills totaling more than $11 billion). The result has been cuts to vital human services and higher education institutions with more cuts likely absent any further action.

The only viable solution is for the state to bring in new revenue. Without new revenue, the state is looking at deeper and deeper cuts that will undermine Illinois’s economy and quality of life.

[1] Teachers’ Retirement System, State University Retirement System, State Employees Retirement System, General Assembly Retirement System, and Judicial Retirement System

Nothing to See Here: Lawmakers Banked on (likely) Unconstitutional Pension Cuts, Averted Eyes to Coming Revenue Disaster

By passing a 2013 pension law that cut benefits for public workers and then refusing to act this spring to maintain current revenue levels, lawmakers put all the state’s eggs in a fragile basket. Now, after a Sangamon County Circuit Court judge ruled Friday that the 2013 law violates the State Constitution, the “savings” that lawmakers had banked on appear likely to vanish.

Though the State Supreme Court will almost certainly have the final word, most observers expect that the Court will affirm the Circuit Court’s ruling. If that happens, the counted-on $1.1 billion reduction in pension contributions for fiscal year 2016 will evaporate, along with lawmakers’ flimsy excuse not to maintain current income tax rates.

Pension 'Savings' LIkely to Disappear

Even if the banked-on $1.1 billion in savings were found constitutional, Illinois would still face a budget shortfall of about $3.6 billion in FY 2016 due to the roughly $5.4 billion loss of income tax revenue, according to Fiscal Policy Center estimates. If the law is struck down and the “savings” disappear, the budget hole would be about $4.7 billion.

The cuts needed to close the $3.6 billion hole are about 25 percent to most state programs. For a $4.7 billion hole, lawmakers would have to cut most programs by one-third to balance the budget.

There is simply no conceivable way that Illinois can meet its obligations and fund priorities like public schools, public safety, and most other services Illinoisans rely on every day if lawmakers allow state revenue to plunge as scheduled on New Year’s Day.

Cuts of that magnitude would devastate critical services such as afterschool programs and K-12 education, and would cut huge holes in our safety net, such as efforts to prevent struggling families from becoming homeless.

As highlighted in the FPC’s new series “A Stronger Illinois,” such cuts would imperil Illinois’ future, undermining the very foundations of our state’s prosperity. Rather than put Illinoisans through more disruptive and counterproductive cuts, lawmakers should take the responsible path and provide the resources our state needs. That means maintaining current levels of revenue into the New Year and beyond.

For more on the inevitable deep cuts if revenue collapses, read the Fiscal Policy Center’s detailed estimates.

S&P Lowers Illinois’ Outlook to ‘Negative’

A major credit rating agency’s decision to give Illinois’ financial health a “negative” appraisal affirms that the state’s current path simply isn’t sustainable.

In what is likely to be the first in a wave of negative judgments by credit rating agencies, Standard & Poor’s (S&P) yesterday lowered its outlook for Illinois’ rating to “negative.” That means our lowest-in-the-nation credit rating could be downgraded again in the next two years (though, possibly much sooner) – driving up the state’s routine borrowing costs — unless lawmakers get Illinois’ financial house in order.

There’s little hope of that unless lawmakers reverse the course they’re on to allow current income tax rates to expire at the end of the year. Otherwise, they will be forced to make enormous cuts — likely 30 percent or more — to large swaths of the state budget. Such cuts would further undermine the building blocks of a strong economy: high-quality public schools, safe communities, and efficient transportation. 

S&P said the state budget for fiscal year 2015, which began July 1, is “not structurally sound and will contribute to growing deficits and payables…”

The agency also made clear that after “improved alignment of revenues and expenditures for fiscal years 2013 and 2014 with some steady reduction in” unpaid bills,” it expects this progress “to reverse in fiscal 2015…”

Of course, what enabled this progress was the 2011 increase in income tax rates.

And what is now reversing this progress? The failure of the General Assembly (so far) to prevent a devastating revenue collapse that will occur when current income tax rates expire at the end of December, resulting in over $2 billion less revenue than if the rates are maintained. In the following fiscal year, revenue will be about $6 billion below where it would be with current rates.

S&P’s “negative” outlook also reflects the increasing likelihood that the State Supreme Court will strike down the pension law enacted last year. While the state hadn’t banked on any budget savings from the law in fiscal year 2015, it has anticipated saving over $1 billion a year starting in fiscal year 2016. Should this savings disappear, the consequences of failing to maintain current income tax rates will be even more severe.

Maintaining Revenue Even More Important After Pension Change

This week, the Illinois Teachers’ Retirement System (TRS) lowered its assumed annual rate of return on investments from 8 percent to 7.5 percent. While such a change may sound small, it will substantially increase Illinois’ required annual contributions to the system, regardless of whether the pension law passed by the General Assembly last year is ultimately upheld in the courts.

While TRS indicated that its long-term annual return on investments has been above 9 percent, such robust returns are widely expected to be difficult to reproduce in the future. Even the 8 percent assumed return, which was put in place in 2012, is now believed to be unlikely due to increasing volatility in the world economy. 

TRS spokesperson David Urbanek told Crain’s Chicago Business that, had 7.5 percent been used to calculate the state’s contribution for fiscal year 2015, which begins next week, the contribution would have been $500 million higher, or $3.9 billion. Increases to future contributions of this magnitude would significantly blunt the expected budgetary savings from the new pension law (assuming it survives ongoing court challenges).

Savings due to the new law in fiscal year 2016 are expected to be $1.182 billion, so a required increase of $500 million to the state’s contribution would cut the expected savings nearly in half. If the new pension law is struck down, the anticipated savings would evaporate, and the state would still have to fund the higher contribution due to lower assumed rate of return.

The lowering of the assumed rate of return, while seemingly justified, only adds to the state’s significant financial challenges. If lawmakers ever thought that pension savings would negate the need to maintain stable revenue by extending current income tax rates, the fact that any pension saving has likely just shrunk significantly should make them reconsider. 

 

Posted to Blog, Pensions, Revenue

Don’t call it a comeback…yet

When the Governor delivered his state of the state address last week and said “Illinois is making a comeback,” many critics raised objections.

Downgrading-our-future-blog-post

Over the past few decades, Illinois has not been the model of fiscal or ethical stability for the nation. And that means there’s a lot of clean up to do to get this state back on the right track.

Here’s the thing: even though we’re not there yet, there is a light at the end of this tunnel.

“Ok Emily,” you might be thinking, “take off your rose-colored glasses.”

But seriously.

Illinois is showing signs of an economic recovery. According to a Philadelphia Federal Reserve Bank forecast, economic growth in Illinois is expected to accelerate to 2.35% in the first half of this year– the fastest of the nation’s five most populous states. And the “Flash Index” (a measure of future economic growth developed at the University of Illinois) indicates the state’s economy ended 2013 on a strong note, which “engendered considerable optimism for 2014.”

In addition, while some argue that lawmakers haven’t worked to cut the budget, the reality is that lawmakers made program cuts to education and human services to the tune of about $1.8 billion since FY 2009. Illinois has also made progress by paying off our bills, reducing the backlog by more than $3 billion, and lawmakers restructured the state-funded pension systems to save about $1 billion a year.

But here’s where things get decidedly less rosy.

The looming revenue collapse — the one that will take place automatically at midnight on January 1, 2015 — will reverse any progress we’ve made, and will plunge Illinois deeper into its hole.

That level of revenue instability is not only bad for kids, families and communities; it’s bad for investor confidence. In FY 2015 alone, we’ll have a budget shortfall of almost $2 billion. You can double that for FY2016.

And where investor confidence plunges, so do credit ratings.

So while there are signs that Illinois is, indeed, in the midst of a comeback, we need to understand that it extends only as far as willingness to maintain stable and sustainable revenue for children, families and communities.

The reality is that unless lawmakers are willing to maintain funding for schools, roads and bridges, public safety and other essential services, we can kiss our comeback goodbye.

Don’t call it a full comeback yet. But with a commitment from lawmakers to maintain fiscal stability, we can get there.

A version of this post also appeared in the Huffington Post.