The bad economy creates problems for more than state revenues, pension investments also suffer.  Each system invests the state's pension funds in the market in order to grow that money and put it back into the systems.  During the past few years, the state pension systems have enjoyed positive investment returns.  However, like most other states, corporations and individuals in the market place, the pension systems investment returns are down this year.  That means the State must now put more money into the systems to make up for the loss. 

When the Commission on Government Forecasting and Accountability (COGFA) released the 2008 Report on the Financial Condition of the State Retirement Systems last February, the actuaries for the five systems had projected a total FY 2010 contribution of $3,537.3 million (this projection was based on the June 30, 2007 actuarial valuations of the systems). That projection assumed an 8.5% return on investments in FY 2008. However, due to the poor economy, the systems did not return 8.5% on their investments.  Hence, the total FY 2010 contribution will be approximately $510 million higher than originally assumed, due in large part to negative investment returns in FY 2008. That makes the total increase in FY 2010 State pension payments over FY 2009 $1.2 billion. 

COGFA reports that P.A. 88-593, commonly known as the "1995 funding law," requires that state contributions to the retirement systems must be made in order to achieve a 90% funded ratio by June 30, 2045. The Act stipulated that for fiscal years 2011 through 2045, the required state contribution will be calculated as a level percentage of payroll, following a 15-year phase-in, or "ramp," which began in FY 1996. If the FY 2010 contribution is made in accordance with the requirements of P.A. 88-0593, then FY 2010 will be the last year of the ramp. In FY 2011 and each fiscal year thereafter, contributions to the pension systems will be made as a level percentage of payroll, and the yearly increases will not be as drastic as in recent years.

Illinois gets the revenue to fund its pension contributions primarily from general taxes, like income and
sales. These are the same revenue sources that constitute the bulk of the General Fund. In addition to covering pensions, the General Fund is the source for funding the vast majority of public services the state provides, including everything from education, healthcare, human services and public safety.

While the cost of providing public services grows normally with the economy over time, the
state's poorly designed tax system does not grow with the economy, hence generates less revenue than needed to maintain current public service levels and make the required pension payments from year to year, adjusting solely for inflation.  This fiscal year the situation is even worse, as revenues are predicted to DECLINE from last year.  The combination of declining revenues and poor pension system investment returns means the state will either have to find new revenue sources, skirt pension payments, or cut public services. 

Unfortunately the current situation is nothing new, policymakers consistently have been confronted with the politically difficult choice of either significantly reducing the level of public services to pay pension contributions, or modernizing how the state taxes to raise adequate current revenue for the state to pay its bills. Instead of confronting this politically difficult dilemma head-on, policymakers have generally made the fiscally unsound, third choice year after year: defer making the full employer pension
contributions then due, just to maintain current services.  For example, in FY 2006, the state was unable to meet the required contribution of $2.1 billion, actually paying less than half that amount.  The same happened in FY 2007.

However, the state's pension debt is now so large that it simply cannot be put off to future
generations (The State Retirement System's unfunded liability is $54.3 billion as of June 30, 2008).  But making these pension payments is highly unlikely under the current tax system, without drastically cutting public services for future generations.

For more information on the State Retirement Systems please visit the Illinois Retirement Security Initiative's homepage here. 

CTBA has analyzed the pension system in the following reports.  You can download them at the following links:

 The Illinois Public Pension Funding Crisis: Is Moving from the Current Defined Benefit System to a Defined Contribution System an Option that Makes Sense?

 
Illinois Pension Funding Problem:  Why it Matters