A welcome sign at the Illinois state line
Deputy Gov. Dan Hynes, 2019, in a Chicago Tonight appearance (as discussed in a prior article):
“We need to look at the funding schedule that was put in place 25 years ago, that at the time thought we would be spending about $4 billion on pensions and now it’s asking us to put $9 billion in. That is 20 percent of our revenues. And I don’t think the designers of that plan ever envisioned the state of Illinois putting 20 percent of its revenues into the pension systems. So we need to take a hard look at that.”
Hynes, again, at a briefing with bond rating agencies in August 2021:
“A slide was presented to the agencies showing that by next fiscal year the state will have more employees in the much less costly Tier 2 pension program than in Tier 1. ‘That’s why the trend is our friend,’ Hynes said. ‘If we just continue to make the same payment, over time, the demographics are going to work in our favor.’
“Hynes explained that the ‘same payment’ didn’t mean the dollar amount would level off, but payments would remain at about 25 percent of the state’s budget into the future. While that’s a huge chunk of the budget, ‘75 percent of a growing revenue pie is still a lot of money to do the things we need to do and want to do,’ Hynes said. And planning will be easier. Of course, that assumes no major revenue crashes and no successful legal action on Tier 2.” (Emphasis mine.)
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Matthew Strom, FSA, writing on behalf of Segal, advising the Illinois Commission on Government Forecasting and Accountability, November 15, 2021:
“The employer contribution rates are determined in accordance with the funding policy specified under the Illinois Pension Code. The employer contributions are determined such that, together with the member contributions, the plans are projected to achieve 90% funding by 2045. We strongly recommend an actuarial funding method that targets 100% funding of the existing Unfunded Actuarial Accrued Liability (UAAL) over a time horizon not to exceed 25 years and preferably less than or equal to 20 years. Generally, this implies payments that will ultimately cover normal cost, interest on the unfunded actuarial liability, and the principal balance. Furthermore, we recommend that the funding method be changed such that the contribution is equal to the Normal Cost of current active members plus the amortization of the existing UAAL. Under the current funding method, contributions are determined based on a projection of liabilities and assets to 2045 that includes future hypothetical Tier 2 members with lower Normal Cost.
“The State’s Actuary, Cheiron, has also recommended that the funding target be modified to 100% and we concur with their recommendation.” (Emphasis in the original.)
Alexis Sturm, Director, Governor’s Office of Management and Budget, undated, in the November 2021 Special Pension Briefing:
“Given the current fiscal pressures facing the state, this too is inadvisable to consider until Illinois can eliminate the unpaid bill backlog, borrowings undertaken to pay off the debts remaining from the budget impasse and the COVID-driven recession and address the underlying structural deficit.
“Therefore, at this time, the 90% percent funding ratio continues to be a reasonable and achievable goal for the State of Illinois pension systems.”
The statistic:
On December 21, the U.S. Census Bureau released its 2021 national and state population estimates and components of change.
Illinois was third highest in terms of absolute population decline, at 113,776; only New York and California had higher population losses.
And in terms of percentage of population, Illinois came in at -0.9%, with only New York and the District of Columbia experiencing larger percentage population decreases. The population decline is due to a dramatic degree of domestic outmigration, only slightly offset by additional births and international migration.
Why it matters
If the state of Illinois had funded its pensions at the point in time at which they were accrued, it would not matter whether the state’s population is now increasing or declining.
But that didn’t happen.
Instead, the state depends on future generations of taxpayers. What’s more, especially for the Teachers’ Retirement System, on future teachers paying their contributions into the retirement system to support current and future retirees. A declining population needs fewer teachers and pays less in taxes — and the most recent IRS analysis found that the domestic outmigration was associated with the third-worst net loss of Adjusted Gross Income in 2019. And that’s in a single year — these numbers add up over time, the more this decline continues. And the more the population declines, the greater the per-person burden that remains for everyone else.
Readers who spend particularly much time online will have seen the meme of a dog drinking coffee in a room engulfed by flames, saying, “this is fine.” It’s used to point to a person/a public figure seeming to simply deny reality. And at a recent talk, I characterized the approach of Pritzker and his administration as being the “’this is fine’ approach” because of their insistence, after much earlier talk about the need for reform, that there’s nothing of any particular concern regarding pensions in Illinois.
As always, you’re invited to comment at JaneTheActuary.com!
