Actuarial report puts $5.6B price tag on an Illinois pension fix

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Changes to Illinois state pension benefits that may be needed to comply with federal Social Security rules carry an estimated $5.6 billion tab through 2045, according to an actuarial study published this week.

State employees hired after 2010 get lower pension benefits than those hired before.

Pension experts have long warned the Tier 2 benefits for at least some of the workforce are likely violate rules that require publicly sponsored benefits for participants who don’t also receive Social Security to at least match Social Security in benefits.

The report from Segal published this week by the legislature’s Commission on Government Forecasting and Accountability provides the first look into the potential state costs. It reviews the impact on projected contributions, actuarial liabilities, and funded ratios through the state’s statutory payment schedule that aims for 90% funding by 2045.

“With this report we now have the information we need so we can plan accordingly and account for this liability. It gives us a roadmap,” said Sen. Rob Martwick, D-Chicago.

The potential need to boost Tier 2 benefits would add another burden to the state’s $139 billion of unfunded pension liabilities , for which the state already pays $11 billion a year to less-than-fully fund.

The study assessed where the current benefits provided to Tier 2 employees in the Teachers’ Retirement System, the State Employees’ Retirement System, and the State Universities Retirement System could run afoul of the Social Security Administration Administration’s safe harbor provisions.

“The numbers might seem eye-popping,” but they represent the cost through 2045 and “Tier 2 is still saving the state money,” Sen. Rob Martwick, D-Chicago, said Friday. “With this report we now have the information we need so we can plan accordingly and account for this liability. It gives us a roadmap. The longer we wait it just gets more costly.”

The report concluded that Tier 2 falls short on the final average salary formula referred to as the pensionable earnings cap that is used to establish a retiree’s benefit. Segal factored in the cost of moving the general formula to match the Social Security wage base.

Incorporating the change into the pension landscape as of the last actuarial analysis from June 30, 2022, would add $5.6 billion to state contributions through 2045 which on a present value basis would amount to $2.1 billion.

The total payments to TRS would rise by $3.4 billion, SERS by $1.4 billion, and SURS by $804 million.

The overall unfunded liability would rise by $285 million and there would be no impact on the funded ratios.

Illinois’ fiscal 2022 actuarially based unfunded liability tally improved slightly to $139 billion from $139.9 billion last year, propped up by double-digit 2021 investment returns, according to COGFA’s review of the system’s actuarial reports for fiscal 2022 published late last year. The funded ratio on an actuarial basis rose to 44.1% from 42.4% while on the market value basis it deteriorated to 43.8% from 46%.

“Projections, by nature, are not a guarantee of future results,” Segal noted in the report.

“The modeled projections are intended to serve as estimates of future financial outcomes that are based on the information available to us at the time the modeling is undertaken and completed, and the agreed upon assumptions and methodologies,” the report said.

“It is our understanding that, ultimately, it is the responsibility of the individual employers within each system to determine whether they qualify for exemption from FICA taxes,” Segal wrote, referring to Social Security taxes that aren’t levied on participants in Illinois state pensions.

The analysis does not include the smaller judges and legislative funds that are part of the five-fund state system. TRS, SERS, and SURS account for $137.1 billion of the state’s unfunded tab and collectively they are 44.1% funded, according to the Segal report.

Over the summer, Martwick expects lawmakers will comb through the report and begin discussions on action in coming sessions that not only addresses a Tier 2 fix but other measures that could help improve funding ratios.

Martwick said all ideas should be on the table although seeking a constitutional amendment that eases the state constitutional restrictions against benefit cuts is a non-starter due to Democratic opposition.

Ideas pitched in the past include a re-amortization, a dedicated revenue source, pension obligation bonds, and asset sales.

“I would not want to do anything that punts on pensions and would want guardrails to protect against future lawmakers taking any actions that damage pensions,” Martwick said.

Rep. Stephanie Kifowit, D-Oswego, who chairs the House Personnel and Pension Committee, proposed HB 4098 which calls for various pension changes including targeting a 100% funding goal and other pension changes.

Burgeoning unfunded pension led lawmakers to pass Tier 2 legislation in 2010 reducing benefits for future participants in most public pension funds statewide.

In addition to the pensionable salary and salary cap limits, the new tier raised the retirement age to receive full benefits.

Stakeholders widely agree that Tier 2 fixes will eventually be required. A 2019 estimate put the cost for the state’s funds at $2 billion. If pensions fall short of the safe harbor rule, the state would face penalties and employees could sue.  

The need to address Tier 2 safe harbor violations came under scrutiny during Illinois’ recently ended legislative session when a so-called Tier 2 fix was in play for Chicago firefighters.

Chicago’s new mayor, Brandon Johnson, asked lawmakers to delay passage and tasked a “working group” that includes his finance team and state legislative and labor representatives with finding long-term funding fixes to ease the city’s pension funding woes. Chicago’s $33.7 billion of pension liabilities remain a huge burden on the city’s balance sheet and budget despite progress in recent years.  

The Chicago Civic Federation last month urged lawmakers to “first conduct a comprehensive, statewide evaluation to determine when Tier 2 benefits will violate Safe Harbor rules before moving forward on any binding legislative changes,” acting President Sarah Wetmore wrote.

Lawmakers did sign off on a long planned overhaul of Cook County’s pension system that enshrines supplemental contributions the county has made since 2016 and incorporated changes to the pensionable salary cap for Tier 2 benefits. The county said it would add $3 million to the county’s annual payment tab and $99 million in present value terms over the 30-year amortization period.

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