SPRINGFIELD — Illinois residents are on the hook for $203 billion in public-sector retiree debt, about a third of the state’s gross domestic product last year, according to a new report.

By Andrew Thomason

SPRINGFIELD — Illinois residents are on the hook for $203 billion in public-sector retiree debt, about a third of the state’s gross domestic product last year, according to a new report.

“Politicians keep talking about the state pension problem,” said Ted Dabrowski, vice president of policy for the Illinois Policy Institute, a libertarian think tank, said. “Really our problems are much, much larger than that.”

Illinois’ public pension system owes current and future retirees $83 billion more than it has in assets, but that is less than half the problem, according to the institute’s report released Wednesday. Public sector retiree health care and pension systems also are facing:

  • $15.5 billion in state pension obligation bonds;
  • $54 billion in unfunded state retiree health-care liability;
  • $38.2 billion in unfunded local government pension liability;
  • $10.7 billion in unfunded local government retiree health-care liability;
  • $1.9 billion in local government pension and benefit bonds.

A plan to curb the rising cost of the state’s public pension system by decreasing cost-of-living adjustments faltered this spring, but Gov. Pat Quinn and lawmakers are continuing to try and hammer some solution out.

The public pension systems for municipal retirees are doing slightly better than the state’s pension system. While the state has an unfunded liability of about 55 percent, or $83 billion, local governments, including Chicago and all tangential pension funds, have a combined unfunded pension liability of 44 percent, or $38 billion, according to the report.

Beyond the fragile state of public pensions, the state is on the hook for $54 billion in retiree health care. Unlike pensions, there isn’t a dedicated pot of cash and investments to cover future expenses. Instead the state pays these costs, which were approaching $1 billion annually, out of the general revenue fund.

Faced with such a staggering number, legislators passed a measure this spring that eliminates completely subsidized health care for state retirees and could save the state as much as $300 million annually.

Local governments have $10.7 billion in unfunded retiree health-care liability, according to the report.

“It hasn’t been nearly as well documented as the underfunding of pensions,” Dabrowski said. “These liabilities are growing.”

The institute is calling for retiree health care to be phased out, but Robert Rich, director of the Institute of Government and Public Affairs at the University of Illinois, said eliminating a benefit people have planned on isn’t fair.

Rich suggested creating funds to handle retiree health care cost as an option.

Dabrowski said cutting the $203 billion is going to be a difficult task because there isn’t one entity responsible for all public retiree benefits.

“You have this mix of who’s really accountable, who’s really in control of this stuff … In some cases it’s the state, in some cases it’s the locals,” Dabrowski said.

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1 Comment

  1. Will retired teachers get paid their pensions?

    Today's Wall Street Journal article mentions that the Executive Director of the Teachers Retirement System(TRS) has been discussing that "under one scenario, the pension fund could run out of money by 2030."

    The Executive Director, Dick Ingram, has been in charge of TRS for 1 1/2 years and during this time he has been in a state of denial regarding the significance of the challenges facing this important retirement fund.

    The good news is that he and others are finally starting to wake up to the realities confronting the Teachers Retirement System, other State of Illinois Pension Funds, Cook County Pension Fund, Illinois Municipal Retirement Fund, and locally managed Police and Fire Pension Funds.

    It is imperative that our state and other government bodies, provide appropriate, well funded pensions for public employees. Full transparency and disclosure which has been woefully lacking, and full recognition and funding of pensions needs to be provided to establish a fiscally sustainable framework throughout our state.

    Specific to TRS, the WSJ article mentions that it is likely that the fund lowers its very aggressive 8.5% return assumption. As the chart shows, only 4 out of 126 state and local pension funds in the U.S. are assuming an 8.5% return. Bill Gross today published commentary stating that even generating compounded 7.0% returns is unlikely and in fact stated that "7% returns-guaranteed or not – are so comical." (last sentence of "Debt crisis can't be cured with more debt paragraph)

    The TRS fund under current assumptions is only 46% funded. However, the TRS board of trustees is conducting a normal review of assumptions which typically occurs every 5 years – the updated assumptions may be released at the August board meeting. But given the very negative news, this could be postponed until after November elections.

    How bad is the news going to be and what are the implications? Currently the stated unfunded liability is $44 Billion. At 7.75% return assumption this number goes above $50 Billion, and when a new accounting rule is implemented in the near future, the unfunded liability could go into the $60-80 + Billion range. New accounting changes recently adopted will require poorly funded pension plans like TRS and other State of Illinois pensions to use more conservative accounting.

    The silver lining in this painful issue is that transparency and disclosure about the TRUE MAGNITUDE of the "Pension Debt" will be provided and the TRUE EXPENSE of providing the defined benefit pensions will be provided to the public. As normalized financial returns declined, the expense of providing the defined benefit pension has skyrocketed, yet this increased cost hasn't been recognized in financial statements nor has it been appropriately funded.

    The challenge this situation presents is that either TAXES go up or SERVICES get cut, or BENEFITS get reduced. There is no easy solution or magic wand to address and fix this issue.


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