A graph from the latest Commission report on the government’s forecast and responsibility for the state pension system shows the unfunded liabilities of pension funds over time. (Credit: cgfa.ilga.gov)

Thursday, December 9, 2021

20% investment returns lead to significant reduction in unfunded liabilities

By JERRY NOWICKI
Capitol News Illinois
[email protected]

SPRINGFIELD – The government saw its unfunded pension liability decline in fiscal 2021 for the first time in four years, largely due to investment returns above 20%, according to a new report from the Commission on Government Forecasts and Accountability.

Measured by the present value of pension fund assets, unfunded liabilities – or the amount of debt that public pension funds owe that they cannot afford to pay – have fallen by almost 10%, passing from $ 144 billion to $ 130 billion in fiscal year 2021. in the previous fiscal year. This puts the state’s five pension funds at 46.5% capitalization, up from 39% the previous year.

This is the best funding ratio since 2008 and only the third decrease in unfunded liabilities in the past 15 years, the last occurring in 2017 at 0.5%, the other in 2011 at 2.9%. Otherwise, the unfunded liability increased each year, from $ 42.2 billion in 2007.

But the report also notes that little has changed to alleviate the underlying financial pressures that have tripled unfunded liabilities since the 2007-08 financial crisis, meaning the good financial news was more of an anomaly than it was. a trend.

Yields of 22.9% to 25.2% for fiscal 2021, which ended June 30, far exceeded expected returns of 6.5% to 7%, according to the report.

Good investment news aside, the report was noticeably similar to countless other pension reports in recent years, especially because it once again called on the state to revamp the “Edgar” plan. Ramp ”of 1994 much maligned to repay the pension debt.

It’s the name commonly used for Public Law 88-0593, or the state’s 50-year plan to increase its five pension funds to 90% by 2045.

The real goal of that ramp should be a retirement system funded 100 percent over the next 25 years or preferably sooner, according to a letter attached to the COGFA report from its actuary, Segal Consulting.

The letter also criticized Edgar Ramp for “recharging” pension payments, providing for lower contributions in the early years, leading to the current reality that sees 20 percent of state discretionary spending going to pension payments. every year. He also highlighted other times the pension system has been harmed, including during the tenure of former Governor Rod Blagojevich.

It was only after the target was raised to 100%, the report said, that the state would begin to see sustained reductions in its unfunded pension liabilities.

“(L) the financing plan under (public law) 88-0593 produces employer (state) contributions that are actuarially insufficient, which means that if all other actuarial assumptions are met, the Unfunded liabilities will always increase due to the state’s contribution in an amount that is not sufficient to stop the growth of unfunded liabilities, ”according to the report.

But increasing pension payments is easier said than done, Alexis Sturm, director of the governor’s Office of Management and Budget, said in a letter accompanying the report.

She was not available for a phone call Thursday, but her letter to the COGFA co-chairs said consideration of changes to the current 90 percent target “needs to be carefully considered in the context of the impact. from the state budget “.

The $ 8.6 billion pension payment in FY2021 accounted for 20% of the General State Revenue Fund’s budget of $ 42.9 billion, and pensions are consistently the largest expense state GRF outside of K-12 education. In fiscal year 2022, COGFA estimated the GRF payment at $ 9.4 billion, or more than 21% of the operating budget.

The GRF payment mandated by Edgar Ramp for fiscal 2023 is estimated to be over $ 9.6 billion, or nearly $ 10.8 billion, including other public funds.

But, according to the report, if the state is to contribute at a rate approved by actuaries, it will need to contribute nearly $ 14.9 billion in fiscal 2023, which begins July 1, or 38 percent more. than what is provided via the Edgar Ramp. .

“An increase in the target would result in higher payments, but ultimately lead to a reduction in unfunded liabilities in the systems,” Sturm wrote. “Given the current fiscal pressures facing the state, it is also not advisable to consider this until Illinois can clear the backlog of unpaid bills, loans taken out to pay off the remaining debts of the budget stalemate and recession caused by COVID and address the underlying structural deficit. “

The backlog currently stands at around $ 4.8 billion, according to the website maintained by Illinois Comptroller Susana Mendoza, who said in a public appearance this week that the oldest unpaid voucher had 21 days.

Still, the 90 percent target, Sturm said, is “reasonable and achievable” given the circumstances. Gov. JB Pritzker’s administration fully funded the pension system at Edgar Ramp’s level in each of his first three years, although he briefly considered reducing the payment in his first year before quickly abandon the diet.

In their letter to the director of COGFA, the heads of the “big three” state pension funds – the state university pension system, the state employee pension system and the state pension system. teachers – all also endorsed the goal of 100% funding and shorter ramps to full funding.

Earlier funding, in addition to a targeted funding rate of 100%, would make pension systems more secure and significantly reduce funding costs due to accrued interest on unfunded liabilities, the main driver of contribution requirements. of the state, ”said the executives of the pension systems wrote.

The report also notes that a pension buy-back program initiated in 2018 and extended for three years by the General Assembly under Pritzker created a reduction of $ 213 million in unfunded liability for fiscal 2021.

Capitol News Illinois is a non-profit, non-partisan news service covering state government and distributed to over 400 newspapers statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.