(The Center Square) – Despite the state making supplemental contributions, a credit rating agency says Illinois’ “poorly funded” pensions will continue to stress state and local government budgets as the state sees “weak demographic trends” and “shrinking population.”
S&P Global Ratings published their “Pension Spotlight: Illinois” report Monday. In announcing the report, the agency said it “expects 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.”
The report says the burden on state spending comes regardless of efforts to reduce costs, buy out liabilities and contribute more than what was statutorily required. The fiscal year budget that begins July 1 contributes a total of $10 billion to pensions, or around 1 out of every 5 dollars of taxes the state brings in.
“[F]ixed pension costs related to the five state-sponsored plans … are projected to increase at an annual average rate of more than 2.2% over the next 10 years,” the report said. “With the additional payments from the pension stabilization fund, the state will have contributed an additional $700 million to the five state-sponsored plans. However, contributions are still short of an amount we consider indicates funding progress.”
The Illinois Auditor General pegs Illinois’ unfunded pension liability at around $140 billion. All five state funds combined are 42.4% funded.
“All of the five state-sponsored plans are poorly funded, and contributions need to increase before meaningful funding progress is made,” the S&P report said.
Illinois law requires a pension funding ramp for the decades ahead.
“Contributions target only a 90% funded ratio, which is not actuarially recommended and results in underfunding,” the S&P report said.
More than a decade ago, the state created a second tier pension with fewer benefits.
“The enactment of a new benefit tier in 2010 is generating significant cost savings today but recent efforts have been made to increase these benefits in an attempt to avoid violating social security’s safe harbor provision,” said S&P Global Ratings credit analyst Joseph Vodziak.
Another driving cost for retired state employees is taxpayer subsidized health care.
“Because of Illinois’ aging demographics, shrinking population, and lack of money set aside for [other post employment benefits], OPEB costs in the state will escalate,” the report said. “Retiree health care benefits are constitutionally protected in the state but remain unfunded. We expect costs will escalate, in part due to medical inflation.”
Local pension woes were also reviewed by the ratings agency, which noted in 2020 that police and firefighter plans were around 56% funded.
“We expect cities, towns, and villages with poorly funded single-employer pension plans, elevated property taxes, and weak demographic trends will face budgetary pressure from rising pension obligations,” the report said. “The consolidation of the single-employer downstate and suburban public safety plans into a multiple-employer agent plan will provide some administrative cost savings but for many plans, the shift to an asset mix that justifies a discount rate greater than 7% may mean more volatility and potentially higher costs.”
The ratings agency notes the local police and fire funds being consolidated faces a legal challenge in the Illinois Supreme Court.
While the report does not include a rating action, S&P said “pensions have a high likelihood of stressing state and local government budgets despite the state making supplemental contributions.”
