If Illinoisans needed a reminder that the state’s public pension systems are deeply in debt, they got it recently when Moody’s Investor Services released a special report showing the state’s ratio of pension debt to revenues is far and away the worst in the nation.
The Moody’s study shows Illinois pension debt at 250% of its revenues. Only one other state comes remotely close: Connecticut with around 200 percent. The U.S. median is 51.2% and neighboring Wisconsin is at less than 25%, as are New York and Ohio.
Illinois and Connecticut are the only two states with ratios above 180%. California, which once tied with Illinois for the worst credit rating in the nation, is well below 80%.
The report was not a downgrade of Illinois’ credit rating, which remains at A3 from Moody’s – the lowest rating of any state.
The report came as pension reform legislation adopted last year works its way through the courts. The Moody’s study ranks Illinois’ legal framework for altering pension obligations as “very inflexible.” Illinois is one of only seven states that has specific constitutional protection for pension benefits of public employees.
Depending on the outcome of current court challenges, pension reform changes may be interpreted to mean that benefits will remain intact for current employees as it was for the start of their employment. This could mean major changes and decreases in benefits for new or future employees though.
The largest of the state pension systems is the Teacher’s Retirement System (TRS) which covers downstate and suburban teachers and administrators and accounts for around 40% of the Adjusted Net Pension Liability. That number does not include Chicago Public Schools (CPS). That one school district accounts for around five percent of all Illinois adjusted net pension liabilities.
Moody’s also points out that large local governments like the city of Chicago have historically made contributions below the amounts actuaries recommend. The system which funds most downstate and suburban municipal employees, the Illinois Municipal Retirement Fund (IMRF) is considered the best and most stable-funded system because cities are required to make adequate contributions to the IMRF.
However, there are a number of other municipal pension systems, including those covering police and firefighters, which are severely underfunded.
Moody’s suggests that a long history of underfunding has led to the current pension deficit. Although recent state and local pension reforms have aimed for 90 percent or higher funding over time, Moody’s predicts that even with increased contributions the unfunded pension liabilities would not see a decrease for years due largely in part to underfunded contributions in the past.
Moody’s also raised concerns about another trend: the ratio of new employees to retirees. While many people are retiring and utilizing pension benefits, there are not as many coming in. As undefined liabilities continue to grow, the ratio of active employees to pension recipients is declining. This creates a gap in funding where not as many people are contributing to the state pension, because there simply aren’t as many employees.