How Bad is Illinois' Pension and Retiree Health Care Funding Problem?

It's pretty bad. I wanted to use this post to call attention to the state's retirement funding albatross, as well as the funding obligations that are essentially an anchor strapped to Illinois' cities, villages, and towns. The common denominator, of course, is the Illinois taxpayer.

First, let's look at the state's funding problem courtesy of a report prepared by J.P. Morgan that was published last June. The purpose of the report was to evaluate the ability of states to finance the pension and health insurance obligations owed to government employees. I lifted a couple of charts from the report that tell the essential story.

Let's start with a look at where Illinois' ranks among the states with respect to the funded ratio of its pension systems:

Illinois has the worst-funded pension system among the states. But that's not a surprise. We knew that. This next chart is the real eye-opener. Keep in mind that it combines both pension and retiree health care costs to derive the percentage of state revenues required to properly service debt:

The blue bars represent what the states are presently paying, expressed as a percentage of total state revenue, to fund their annual pension obligations. The orange bars depict what they should actually be paying based on what J.P. Morgan identifies as sound actuarial practices (referenced in the graph). Based upon this analysis, Illinois would need to allocate about 40% of total revenue collections per year to properly fund pension and retiree health care costs. 

This type of financial commitment would necessitate a huge tax increase on Illinois residents, exceedingly painful budget cuts, or a combination of both options. That's why it's so imperative to meaningfully reduce the long-term funding obligations presented by Illinois defined benefit pension plans.  

Public employee unions oppose these reductions and, so far, a circuit court judge has sided with their arguments against the reductions within SB 1.  A lawsuit has recently been filed to negate reforms enacted to address the rising costs confronting Chicago's Municipal Employees' Annuity and Benefit Fund. The Illinois State Supreme Court has already ruled that requiring state retirees to pay premiums toward their health insurance benefits is unconstitutional. 

The courts seem to be affirming that the Illinois Constitution essentially establishes a financial fantasy land for public employees.

The mantra of public employee unions is that the present benefits were promised and shouldn't be reduced. This, of course, is code for "just increase taxes on Illinoisans." Is it realistic to think that Illinois will tax its way out of these financial problems? No way.  Revenue enhancements might be part of a solution, but so will spending cuts and, hopefully, sensible pension reforms. 

And we ought not forget that Illinois cities, villages, and towns are facing a pension crisis of their own. The Illinois Policy Institute (IPI) published an analysis that used ten metrics to evaluate the financial condition of municipal pension plans. Each city was provided a cumulative score along with a risk designation. Here are the "top 20" cities per the IPI analysis:

The IPI analysis includes a rank for other Illinois cites as well. Probably the most significant finding in the study is that only three cities were considered to be in "critical" condition in 2003. This number grew to seventeen by 2012. Illinois cities are continuing to slide into the pension funding danger zone. 

Illinois has significant legacy costs that must be addressed. Governor-elect Rauner knows this and wants to move aggressively to restore Illinois' finances and place the state on a sound financial footing. The biggest hurdle that could upend a long-term solution is politics. The Illinois General Assembly will either rise to the occasion,  or content itself with simply managing Illinois' decline.