CENTER FOR TAX AND BUDGET ACCOUNTABILITY
70 E. Lake Street  Suite 1700  Chicago, Illinois 60601  direct: 312.332.1049  Email: rmartire@ctbaonline.org
Pensions and the State Budget
Prepared by:
Ralph Martire
Executive Director
Thursday, September 20, 2007; 4:00 pm – 6:00 pm
University of Illinois at Chicago
Chicago Rooms B & C
Student Center West
828 S. Wolcott Street
Chicago, IL
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© Center for Tax and Budget Accountability 2007
FY 2007 Appropriations by Agency as a Percent of GRF
TOTAL GRF: $25.76 Billion
Environmental
Protection Agency
0.005%
Administration
4.4%
Pensions
3.9%
Agrilculture
0.2%
Other
3.9%
Natural Resources
0.3%
Illinois State Board
of Education
25.4%
Higher Education
8.4%
Corrections
4.4%
Human Services
15.5%
Health Care
30.7%
Children and Family
Services
3.0%
-ISBE and Higher Ed does not include pension contributions
-Pension contributions include FY 2007 GRF appropriated
-Health Care includes Public Health and Health Care and Family
Services
-Administration includes all boards, commissions, agencies,
authorities, districts, councils, OMB, Revenue, CMS, Inspector
General and all legislative, constitutional and judical offices
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© Center for Tax and Budget Accountability 2007
If the FY2008 Budget remains as passed
and vetoed, then:
 Pension contributions will increase from
the FY07 level to just over $1 billion to
$2.018 billion in FY2008
 That would mean the percentage of the
GRF devoted to the pensions would
increase from the FY2007 level of 3.9% to
just over 7% of FY2008
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© Center for Tax and Budget Accountability 2007
GRF Expenditures by Category,
1995 - 2006
Category
GRF
FY 1995
Actual
FY 1995 CPI
Adjusted to
FY2006
FY 2006 Enacted
$ Difference
Between 1995
Adj'd for CPI &
2006 Enacted
FY 1995 ECI
Adjusted to
FY2006
$ Difference
Between 1995
Adj'd for ECI &
2006 Enacted
$17,302.0
$22,613.7
$24,406.4
$1,792.7
$24,776.5
-$370.1
Education
$3,656.0
$4,778.4
$6,123.0
$1,344.6
$5,235.4
$887.6
Health Care
$4,319.0
$5,644.9
$7,034.0
$1,389.1
$6,184.8
$849.2
$519.0
$678.3
$938.4
$260.1
$743.2
$195.2
GRF without Health
Care and Pensions
$12,464.0
$16,290.4
$16,434.0
$143.6
$17,848.4
-$1,414.4
GRF without Health
Care and Pensions
and Education
$8,808.0
$11,512.1
$10,311.0
-$1,201.1
$12,613.1
-$2,302.1
Pension
**Notes: Health care includes Medicaid and state employee health insurance
Sources: State of Illinois' Traditional Budgetary Financial Reports and Fiscal Focus Illinois' FY2006 Budget
National Association of State Budget Officers
Comptroller Fiscal Focus, January 1997
CPI and ECI based on Bureau of Labor Statistics
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© Center for Tax and Budget Accountability 2007
Comparison of State Retirement System Debt
$45
$40.7
$40
Debt ($ in billions)
$35
$29.6
$30
$25
$20
$15
$10
$7.2
$5
$0
Illinois
Ohio
National Average
*Ohio Debt and National Average Debt Based on the 2004 Wilshire Report, the latest national data available. Illinois current debt of $40.7 billion is based on
the Commission on Government Forecasting and Accountability, Report on the 90% Funding Target of Public Act 88-05932004 and the FY 2006 and FY 2007
Pension Holiday.
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© Center for Tax and Budget Accountability 2007
Figure 3: 2006 Funded Ratio and Share of Debt of the Five Illinois Retirement Systems[1]
2006
TRS
SERS
SURS
GARS
JRS
State Total
Funded Ratio
62.0%
52.2%
65.4%
37.1%
46.4%
60.5%
Share of Unfunded Liability (Debt)
$22.41
$9.97
$7.51
$0.139
$0.692
$40.7
[1] Ibid – FY 2006 numbers reported by the Illinois Commission on Government Forecasting and Accountability.
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© Center for Tax and Budget Accountability 2007
Systems Share of $40.7 billion
Unfunded Liability
JRS
1.70%
SERS
24.49%
GARS
0.34%
TRS
55.02%
SURS
18.45%
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© Center for Tax and Budget Accountability 2007
Funded Ratio Comparison: National Average vs. Illinois
90%
83.0%
80%
70%
60.5%
60%
50%
40%
30%
20%
10%
0%
National Average
Illinois
Source: Illinois Commission on Government Forecasting and Accountability. Illinois funded ratio is the FY 2006 reported number adjusted to
account for the Pension Holidays in FY 2006 and FY 2007. The national average is based on the 2005 Wilshire Report on State Retirement
Agencies, the latest national data available.
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© Center for Tax and Budget Accountability 2007
Required Yearly Pension Payments Post Pension Holiday:
FY 2006 - FY 2045
$18,000,000,000
$16,000,000,000
$14,000,000,000
$12,000,000,000
$10,000,000,000
$8,000,000,000
$6,000,000,000
$4,000,000,000
$2,000,000,000
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
$0
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© Center for Tax and Budget Accountability 2007
HOW DID ILLINOIS
GET HERE?
© Center for Tax and Budget Accountability 2007
Comparable State & Local Government Annual Retirement Benefits
$19,848
$20,000
$17,928
$17,568
$17,112
13,788
$15,000
12,884
$10,000
$5,000
a
Fl
or
id
P
en
ns
yl
v
an
ia
oi
s
I ll
in
O
hi
o
N
ew
Yo
rk
$0
Te
xa
s
Average Annual Payments
$25,000
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© Center for Tax and Budget Accountability 2007
Average State & Local Government Employment Annual Retirement Benefits
Average Annual Payments
$20,000
$19,000
$18,000
$17,000
$17,112
$16,488
$16,000
$15,000
$14,000
$13,000
$12,000
$11,000
$10,000
National Average
Illinois
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© Center for Tax and Budget Accountability 2007
$120,000
$96,180
$100,000
$80,000
$60,000
$40,000
$30,096
$23,688
$38,076
$43,800
$24,765
$20,000
ve
ra
ge
W
ei
gh
te
d
A
JR
S
R
S
G
A
TR
S
U
R
S
S
ER
S
$0
S
Average Annual Benefits
Illinois State Retirement Benefits
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© Center for Tax and Budget Accountability 2007
Participants in the Illinois Pension Plans
TRS
SURS
SERS
JRS
GARS
Total
Active Members
250,540
153,475
89,735
947
265
494,962
Beneficiaries
85,153
41,638
54,678
912
395
182,776
Totals
335,693
195,113
144,413
1,859
6,600
677,738
Percent of Total IL Population
5.3%
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© Center for Tax and Budget Accountability 2007
Normal Cost (percentage of active
members' payroll)
FY 07 Comparison of Pensions
Systems Normal Cost
14.00%
12.5%
12.00%
10.00%
9.13%
8.00%
6.00%
4.00%
2.00%
0.00%
Illinois
National Average
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© Center for Tax and Budget Accountability 2007
FY07 Normal Costs of the Five
Illinois Retirement Systems
Normal Cost
Percent of
Payroll
JRS
$32,200,000
23.47%
GARS
$2,400,000
19.42%
SERS
$329,000,000
9.17%
SURS
$319,584,000
10.82%
TRS
$650,835,074
8.20%
Total
$1,334,019,074
Total
Weighted
Average
9.13%
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© Center for Tax and Budget Accountability 2007
FY 2006 and 2007 Pension Holiday
$3,000.0
$2,507.8
$2,500.0
Amount Owed
$2,117.2
$2,000.0
Amount Paid
$1,374.7
$1,500.0
$1,000.0
$938.4
$500.0
$0.0
2006
2007
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© Center for Tax and Budget Accountability 2007
IS SWITCHING TO A
DEFINED CONTRIBUTION
SYSTEM THE ANSWER?
© Center for Tax and Budget Accountability 2007
Defined Contribution—Reality
Because of Illinois constitutional restraints, switching to a defined contribution system does not
and cannot reduce the state's current $40.7 billion unfunded liability. The sole way to cover this
liability is to design a rational program that does not back load costs like current law.
Defined contribution systems have significantly higher annual administrative costs than fully
funded defined benefit systems. If Illinois moved to a defined contribution system for all current
participants in the five Illinois state pension systems, that change would cost taxpayers from
$275 million to $610 million per year in additional administrative costs.
If contribution rates remained the same, defined contribution systems can be expected to
generate significantly lower retirement benefits. For example, when Nebraska switched to a
defined contribution system, the average benefit was only $11,230 per year compared to $16,797
per year under the defined benefit system.
In the defined contribution setting, investment returns belong solely to an employee who makes
the investment in his or her retirement account, and are not available to reduce the employer
contribution. Frequently fully funded defined benefit plans attain high enough investment returns
that public sector employers are able to reduce the amount of normal cost paid from tax
collections, freeing taxpayer revenue to cover services. This was the experience of the Illinois
Municipal Retirement Fund (IMRF). As of December 31, 2006, IMRF was 100.5 percent funded
on an actuarial basis, because of this rates will fall from an average10.4 percent in 2006 to 9.72
percent this year, saving taxpayers millions.
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© Center for Tax and Budget Accountability 2007
Defined Contribution—Reality
Defined contribution systems have the advantage of creating fiscal discipline that is absent from
a defined benefit system. Due to their construction, defined contribution systems would force the
state to make the required employer contribution into the employees account on a per pay period
basis, rather than offering promises of future benefits, as under the current defined benefit
system.
From an employee's perspective, a defined contribution system would have two advantages over
a defined benefit system: (i) the benefits would be portable from job to job; and (ii) an employee
could access his or her defined contribution account for emergencies pre-retirement (although
subject to tax penalties, in certain situations).
The three main disadvantages of a defined contribution system are: (i) reduced and uncertain
retirement benefits; (ii) lesser investment returns; and (iii) market risks.
On balance, when funded in a fiscally responsible manner, a defined benefit system permits the
public sector to provide its workers with better retirement benefits at lower overall cost to
taxpayers.
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© Center for Tax and Budget Accountability 2007
The Illinois Structural Deficit
(How Revenue Growth will not Keep
Pace with the Cost of Current Services)
$49,000
Revenues
Expenditures
$39,000
$34,000
$29,000
20
26
20
25
20
24
20
23
20
22
20
21
20
20
20
19
20
18
20
17
20
16
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
$24,000
20
07
$ in Millions
$44,000
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© Center for Tax and Budget Accountability 2007
Growth in State Issued Revenue and
General Obligation Bond Debt: 2000-2006
$25.000
$21.809
$22.241
$22.820
$20.812
$20.000
$15.000
$9.543
$10.000
$8.444
$7.684
$5.000
$0.000
2000
2001
2001
2003
2004
2005
2006
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© Center for Tax and Budget Accountability 2007
• Since 2000, the percentage of general
fund revenues going to pay off debt has
risen from under 4% to over 7% of total
revenues. That means almost $2 billion of
all general funds WENT to paying off debt
and interest in the last, complete Fiscal
Year (2006) instead of going to fund public
services.
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© Center for Tax and Budget Accountability 2007
General Obligation and State-Issued Revenue Debt
as a Percentage of General Fund Revenues
8%
7.08%
7%
6.40%
6.06%
6%
4.73%
5%
4.42%
3.83%
4.02%
4%
3%
2%
1%
0%
2000
2001
2002
2003
2004
2005
2006
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© Center for Tax and Budget Accountability 2007
Debt Comparisons: Illinois v. Other States
•
•
•
•
•
Illinois has more total debt than only two other states, California and New
York.
In 2004, Moody’s reported Illinois owned 7.5% of the total national debt.
In 2006 Fitch Ratings assigned a negative rating outlook to Illinois based on
the state’s continued financial constraints, as evidence by a budgetary basis
fund balance deficit that has existed for many years. In addition, Fitch
Ratings notes that barring a significant revenue increase or a substantial
reduction in expenditures Illinois will be unable to follow its own plan to
contain the growing billion dollar unfunded pension liability. “This intractable
problem, including cash flow pressure is able to impair credit quality despite
the breadth and wealth of the state’s large economy.”
The National Association of State Budget Officers report that when per
capita debt is more than $1,200, as is Illinois, it becomes unmanageable for
the state.
Illinois has more than double debt per capita than the national average.
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© Center for Tax and Budget Accountability 2007
Tax-Supported Debt Per Capita:
Illinois Ranks 6th Nationally in Debt Per Capita
which is More Than Double the National Average
$2,500
$2,019
$2,000
$1,500
$999
$1,000
$500
$0
Illinois
National Average
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© Center for Tax and Budget Accountability 2007
• Illinois also ranks high nationally when
comparing tax-supported debt as a
percentage of personal income. Again,
the state has almost double the national
average.
• Moody’s rates Illinois lower than 30 states
in its credit rating. Thirteen states rank
similar to Illinois and three are given credit
ratings lower than Illinois.
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© Center for Tax and Budget Accountability 2007