Broke Illinois Pension System Leaves Every Resident With $11,000 Of Debt

The Illinois state pension system is in a mess. 

For those unfamiliar, here’s a quick recap: Illinois (rate just one notch above junk) is drowning under a mountain of debt, unpaid bills and underfunded pension liabilities and it’s largest city, Chicago, is suffering from a staggering outbreak of violent crime not seen since gang wars engulfed major cities from LA to New York in the mid-90’s, while rising taxes have prompted a mass exodus with the state lost 1 resident every 4.3 minutes in 2017. 

And if you need a refresher, feel free to peruse some of our coverage on Illinois’ challenges:

• An “Audible Gasp” Was Heard When The Chicago Fed Unveiled Its “Solution” To The Pension Problem

• Illinois Pension Funding Ratio Sinks To 37.6% As Unfunded Liabilities Surge To $130 Billion

• Illinois Unpaid Vendor Backlog Hits A New Record At Over $16 Billion

• Illinois Lost 1 Resident Every 4.3 Minutes In 2017, Dropped To 6th Most Populous State

• The State Of Illinois Is “Past The Point Of No Return”

• “What The Hell Is Going On In Chicago” And Other Highlights From Trump’s Speech To FBI Grads

The state’s horrendous mismanagement has left each man, woman and child of Illinois with nearly $11,000 in debt. 

“Illinois failure to address its pension crisis has resulted in further deterioration of the state and cities’ financial condition, exorbitantly high borrowing costs, and an inability to address other critical needs at the state and local level,” said Laurence Msall, president of Chicago nonprofit – the Civic Federation, which tracks state and municipal finances. “Time is not your friend when your liabilities are compounding and your revenues are not.”

The funding shortfall across Illinois’s five retirement systems climbed to $137 billion by last June, a jump of about $17.8 billion since 2015, after the government for years failed to make adequate contributions.

That pension deficit — more than four times larger that its debt to general-obligation bondholders — is adding hundreds of millions of dollars in costs to Illinois’s budget each year as the government plows more money in to catch up.

Illinois has been contending with the issue for decades. In 1994, Illinois passed a law that was supposed to ensure that the state had enough assets to cover 90 percent of its liabilities by 2045, though it went on to skip annual payments or fail to contribute enough. At the same time, investment returns were hammered by last decade’s stock-market busts. –Bloomberg

“There hasn’t been any progress made,” Dick Ingram, executive director of the Illinois Teachers’ Retirement System, the state’s largest pension. “It’s a case of the numbers have gotten so big that nobody honestly really knows what to do.”

While the state prepares to shell out $8.5 billion to its five retirement systems in 2019, it’s not nearly enough. Despite the 300% funding increase over a decade ago (just $2.8 billion in 2009), underfunded liabilities continue to grow. By 2045, the projected contribution will be $19.6 billion according to a March report described by Bloomberg.

Compounding the problem is 2016 loophole to a 2015 state supreme court ruling which required the state to step up its contribution if the assumed rate of return was lowered. Lawmakers instated so-called “smoothing,” which allowed the state to phase in hundreds of millions of dollars instead of contributing the funds all at once. 

Sinkhole action

The longer Illinois avoids addressing its pension crisis, the closer the state gets to having to impose overly burdensome taxes – as well as credit downgrades, suspension of pension payments, and even bond defaults according to Richard Ciccarone, president of Merrit Research Services. 

Everyone wants to find a “silver bullet,” said Illinois Representative Robert Martwick, chair of the personnel and pensions committee. But he’s exploring any way to save money. He’s held hearings on everything from reducing the debt by selling more than $100 billion of pension-obligation bonds to consolidating downstate police and fire pension funds to save money. The state cannot grow its way out of this problem, Martwick said. –Bloomberg

“We’re in some really, really difficult financial times here,” Martwick said in a phone interview. “We’re still digging a hole for ourselves.”

Rauner supports the so-called “consideration model,” which in part allows state employees to choose lower, delayed cost-of-living adjustments in return for ensuring their future raises count toward pensions. Opponents argue this still violates the ban on lowering benefits. “We need more pressure on the General Assembly,” Rachel Bold, a spokeswoman for Rauner, said in an email.

Lawmakers attempted such a “consideration model” in 2013 – approving cuts to cost-of living adjustments and a higher retirement age for some workers – however the courts unanimously struck down the law, saying it violated the state’s constitutional ban on reducing retirement benefits.

“Crisis is not an excuse to abandon the rule of law,” the May 8, 2015 state supreme court decision reads.

Maybe the judges can make defaults illegal too? 

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