S&P: Growing debt, refusing reforms, population loss doom Illinois public pensions

S&P Global Ratings upgraded Illinois’s bond rating for the first time in 25 years, but the slight bump came with harsh criticism of how Illinois handles its public pension funds.

S&P agents argued the public pension systems are in danger because the pensions have massive obligations, the politicians won’t fix them and thousands of taxpaying Illinoisans are moving out.

Despite spending more on pensions than any other state, Illinois does not have nearly enough set aside to pay for projected growth in future pension benefits. Illinois reports it owes $144.2 billion in net pension debt to the five statewide systems. Illinois’s debt projection assumes pension fund investments will return between 6.5% and 7% per year, depending on the system. Moody’s Investors Service, which uses more realistic risk assumptions in line with private sector accounting, calculates Illinois’ net pension debt to be $317 billion.

That’s the difference between every Illinois household owing nearly $30,000, or owing over $65,000, for state pensions – which doesn’t include local government pension debt.

S&P’s analysts blamed the state’s 90% funding goal as one of the missteps. Best practices recommended by experts unanimously recommend a 100% funding target.

Also contributing to the pension crisis is a decline in payroll headcounts in state and local government. Fewer people are paying into the systems as the number of retirees grows, leaving taxpayers to make up the difference.

Retired teacher John Hasten of Marshall, Ill., sees it in the largest of the statewide systems, the Teachers Retirement System.

“Now that there are fewer children in Illinois schools, there are fewer teachers paying into the system, exacerbating the pension problem,” he said. “In contrast, [the Illinois Municipal Retirement Fund] is the most secure pension system in the state. Why? Because the amount of money required to be paid by employers and employees must be actuarially sound. Each year the amount to be paid into the system is adjusted to make it so.”

Illinois population loss is also a factor, with the 2020 census showing the state lost population for the first time in 200 years. When working families leave Illinois it narrows the tax base that supports the pensions.

The sad truth: the tax burden and pension crisis contribute to the population loss, resulting in a potential death spiral for the financial wellbeing of the state. The politicians, according to S&P, lack the will or desire to reform, meaning the population loss and pension crisis will only get worse.

For pension reform to occur, the state must amend the Illinois Constitution. The amendment proposed in Illinois Forward would preserve the earned benefits of workers while adjusting future benefit growth, such as pegging the cost-of-living increase to inflation rather than providing a 3% raise that compounds yearly.

Those changes to future, unearned benefits would save Illinois $50 billion through 2045 and eliminate 100% of the pension debt over that time. It would also stop the dysfunction that feeds pensions and crowds out the needs of the state’s most vulnerable, such as abused children, adults with disabilities and low-income college students.

“I just know that, at one point, communities had access to a lot of great services, and I don’t think there’s access to that catalog of things that used to exist, so the loss of very important services persists,” said Cjay Harmer, a school behavior interventionist in Lakemoor, Illinois. “It’s not fair to the families. It’s not fair to the people involved when services aren’t provided and the state doesn’t follow through with what they say they’re going to do and services have to be cut.”

Amending the Illinois Constitution to allow changes to the pension systems would not only improve Illinois’ credit ratings, it would allow the state to keep its promises to its people.