Gov. JB Pritzker proposed some changes to the state’s pension system during his budget address and State of the State speech last month that will likely please the New York City-based bond rating agencies by giving them something they want, as well as his fellow Democrats by freeing up some money to spend on other things.
Every time the state’s credit is rated, the agencies ding Illinois’ notorious pension payment “ramp” devised in the previous century for only reaching a 90% funding level by 2045, instead of the widely adopted 100%. So, Pritzker proposed bringing the state to 100% funding three years later, in 2048.
To do that, the governor wants to take half the annual budget savings achieved after paying off two big state bonds and use it to pay down pension debt.
For instance, in 2017, $6 billion in general obligation bonds were issued to pay off a portion of the state’s budget impasse backlog. The state is paying $500 million a year on those bonds, which will be retired in six years. When that’s retired, $250 million a year would be devoted to the pension debt.
The state is also still paying off a $10 billion pension funding bond from 2003, which won’t be retired for another nine years. “Increasing the contributions in fiscal years 2030 through 2040 will help pay down the state’s pension debt more quickly and will save taxpayers an estimated $5.1 billion by fiscal year 2045,” an internal administration document claims. That’s well more than $200 million a year, on average.
This is not a new idea, by the way. The state put a much smaller but similar debt-related plan into Senate Bill 1, the pension reform bill that was ultimately struck down as unconstitutional because it reduced pension benefits.
One benefit of this idea is more available cash. The governor’s office predicts that the annual compounded pension payment increase will be reduced from the current 2.6% rate to 1.85%. That’ll free up money to spend on other things.
A problem the state will face as it gets closer to the 2045 end date is that short-term stock market fluctuations will have to be made up in ever-briefer periods of time.
Right now, if the stock market tanks, the lost revenue can be made up over the next 21 years, so the cost can be spread out. But the closer we get to the end, the more expensive it will be to deal with negative market fluctuations.
Several states use what are called “fixed-length amortization strips.” Yeah, that one stumped me, too, but I checked in with former Republican state Rep. Mark Batinick, who is a bit of a pension geek, and with Governor’s Office of Management & Budget Director Alexis Sturm.
From what I gathered, if the market tanks, then catching up with that year’s required pension payment will be confined to a “strip” of funding that could extend well beyond 2045, or 2048. The same but opposite thing would happen if the market over-performs. The idea is to manage volatility and prevent spiking payments to the pension systems as well as big payment reductions.
Now, some will look at all this and say that it’s just a fancy way to reamortize the pension debt (“kicking the can”) without actually saying so. But former Rep. Batinick doesn’t see it that way.
“Current law may create situations where the annual payment is volatile due to short-term market conditions,” the Republican said. “Basing payments on a longer timeline makes sense.”
However, the governor also wants pension funds with members who don’t receive Social Security benefits (mainly in the Teachers Retirement System and the University Retirement System) to review Tier 2 pension benefits to see if they violate federal law, as many have suspected since the legislature passed the reform. That could require more state spending, as the systems find out if their benefits are comparable to Social Security’s benefits, as required by the feds.
On the broader pension issue, Batinick had this to say: “When it comes to state pensions, both Republicans and Democrats need to look in the mirror and admit a hard truth. Republicans need to realize that while pensions are still a big line item in the budget, the problem is getting better, not worse. Pension costs are declining as a percentage of the budget. We are healing. Democrats need to realize that much of the money that has been available for new spending the last few years has come from that healing, not budget magic.”
