Study Findings: Short payments increased long-term pension debt.  In response, new retirement security group urges action to avert forced budget cuts. 

A study issued today by the Center for Tax and Budget Accountability reveals that the state's worst-in-the-nation unfunded pension liability has grown by more than $7 billion in just the last two years. Lawmakers must act to pay down the debt now, the study said, or its impact on the state budget will soon affect everything from education and health care to the state's bond rating and its ability to pursue capital improvement projects. 

The recent $7 billion debt increase is due in part to the state's failure to make its full pension payments in the 2006 and 2007 fiscal years, the report concludes, pointing out that the skipped payments must be repaid plus interest that compounds annually. Those added liabilities have seriously eroded the funding gains made in FY 2004, when the state issued pension obligation bonds to pay down the debt. As a result, Illinois now owes more than $42 billion to its pension funds for retired teachers, university and other public employees. 

"Illinois public pension liabilities are growing out of control, and the state's failure to pay keeps making them worse," said Chrissy Mancini, Director of Budget and Policy Analysis for CTBA, a bipartisan fiscal think tank based in Chicago. "If lawmakers don't act to meet these obligations now, the cost of catching up later will force cuts to education, health care and other essential public services." 

The report concluded that, because Illinois has the nation's fewest state employees per capita, ranks 42nd in state spending per capita, and offers public pension benefits no richer than the national average, the pension debt can only be solved by adding revenue. The best available option is to fix "the state's poorly designed tax system [that] doesn't grow with the economy" or produce enough revenue to fund both state services and pension obligations. 

In response to today's report, several statewide retiree organizations and unions representing teachers and other public employees have joined with CTBA to form the Illinois Retirement Security Initiative (IRSI), a partnership dedicated to ensuring that public retirement benefits are both properly financed and designed to attract high-quality employees to the public sector. 

The CTBA report also noted that the recent failure to adequately fund the pensions is far from the first time lawmakers have made short payments. In fact, recent budgets have worsened an ongoing pattern of under-funding that began more than 30 years ago and is the fault of both political parties. 

"The challenge of tackling this pension debt is bigger than politics," said Shawn Brown, who will head the new coalition as IRSI director.  "Lawmakers have to put partisanship aside and consider only what's best for the state of Illinois in terms of policy. We hope our findings help to frame that discussion and point the way to a possible solution. Every day we wait for that solution is one day closer to the point when these liabilities are so huge they force the state to cut health care, education, and other services that citizens rely on." 

The "first and best" fix, the report concluded, "is modernizing the state's tax system" through "comprehensive reform ... like the framework of SB/HB 750." That bill "would generate renewable revenue" to pay the pension obligations and enhance funding for public education while granting tax relief to 60% of Illinois taxpayers. The report also discussed the possibility of issuing additional pension bonds or dedicating a specific new revenue source to pay pension debts. 

Conversely, the study found, continued failure to confront the pension liability is a recipe for fiscal disaster. Interest generated by the debt will add an estimated $3.4 billion to the liability this year alone. Left unaddressed, those costs will continue to skyrocket. 

"Illinois is at the brink," IRSI director Brown said. "Either the state starts paying its pension bills or they will swallow the rest of the budget."

 

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