insight magazine

Capitol Report | Fall 2021

The Two Elephants in the Statehouse

Even after an extraordinarily productive spring legislative session, two big problems face Illinois: funding public pensions and the unemployment insurance trust.
Marty Green, Esq. Senior VP and Legislative Counsel, Illinois CPA Society

While Illinois’ spring legislative session typically sees 300-400 bills passed and sent to the governor, an unprecedented 652 bills made their way to Gov. J.B. Pritzker this year. Still, two massive elephants are roaming under the statehouse dome that no one wants to address: the state’s public pension problem and the estimated $5 billion deficit in the unemployment insurance trust fund.

The Public Pension Problem

Illinois has long struggled with funding its public pensions and aligning the pension system with contemporary economic and workplace realities. In fact, public pensions weren’t even discussed during the spring legislative session, nor do they appear to be a priority. The last substantive attempt at pension reform was in 2014 with Public Act 98-599, which among other things reduced retirement annuity benefits for individuals who first became members of one of Illinois’ five state-funded pension systems prior to Jan. 1, 2011. However, the Illinois Supreme Court invalidated the act in its entirety for violating the pension protection clause embedded in the Illinois Constitution.

Unsurprisingly, the situation has only grown more dire. Earlier this summer, the Illinois General Assembly’s nonpartisan fiscal unit, the Commission on Government Forecasting and Accountability (COGFA), released a report highlighting the financial instability of our public pension systems. According to the report, the unfunded pension liability for the state’s five retirement systems increased by $7 billion in fiscal year 2020 to reach a total liability of $144.2 billion. To put that in perspective, taxpayer contributions to the pension systems are scheduled to increase by $500 million to a total of just $9.76 billion in 2021.

The COGFA report provides two reasons for the deepening pension debt: First, even with the $9.76 billion taxpayer contribution, the state still isn’t paying what actuaries say is needed to hit the goal of 90 percent funding by 2045. Second is the faulty assumption that investments would yield returns of 6.5-7 percent, which has not happened. The Teachers’ Retirement System, for instance, only achieved a 0.6 percent return on investments.

While Gov. Pritzker suggests that we’re approaching a pivot point as more Tier 1 workers with higher retirement benefits are replaced by Tier 2 workers hired after 2011, the COGFA report illustrates that Tier 2 worker contributions will slowly rise over the next 10 years, moving from 47 percent to 54 percent—leaving a substantial funding gap to close.

Admittedly, the pension systems don’t have to come up with cash to satisfy their liabilities all at once. However, the numbers show that the gap is widening, not narrowing, necessitating action for long-term fiscal sustainability. It’s clear that something needs to be done. If not, pension obligations will continue to absorb ever-larger portions of the state budget and discretionary spending, edging out other important programs and services for Illinois’ citizens.

The Unemployment Insurance Trust Fund Fallout

Each state has an unemployment insurance trust fund maintained by the U.S. Department of the Treasury that’s funded by the state’s employers through insurance premiums collected via payroll taxes. The rates that employers pay into Illinois’ fund are determined by a complex formula using unemployment rates, the balance of the trust fund, employer experience, number of employees, and other factors.

During normal economic times, incoming funds outpace the amount of outgoing unemployment benefits, keeping the trust fund solvent. The devastating economic impacts of COVID-19 and the sustained high unemployment rate have taken a toll on the fund that cannot be fixed by the reimbursable benefits of the federal pandemic relief measures.

Business and labor groups have sounded the alarm to legislators about the mounting deficit, which now stands at an estimated $5 billion, and the potential for payroll tax increases and cuts to unemployment benefits if the growing deficit isn’t addressed. The current fiscal year state operating budget allocates $100 million to the fund, but it’s earmarked to cover expanding unemployment insurance benefits, non-instructional education employee claims, and the excess unemployment money sent to some Illinoisans through no fault of their own.

Worse, Illinois is set to pay hefty interest payments on the $5 billion deficit as the state “borrowed” from the Title XII advance to pay unemployment insurance claims. As a part of the COVID-19 relief packages, Congress imposed a moratorium on Title XII interest payments, but that expired on Sept. 6, 2021. Illinois has allocated $10 million for interest payments in the current fiscal year, with the first payment due on September 30. There are estimates that interest payments could be as high as $14 million for the fourth quarter of 2021 and up to $60 million annually while the deficit remains.

So far, the governor and legislative leaders have been reluctant to use the remaining unallocated $5 billion of the $8.1 billion the state received from the American Rescue Plan for this purpose. This money can be used through 2024 as long as expenditures fall within the four categories allowed under the Treasury’s rules—using federal relief funds for pension fund deposits and directly or indirectly offsetting tax revenue is specifically prohibited. However, one of the broad categories of authorized expenditures is responding to negative economic impacts. It would seem that the payment of unemployment benefits would fall within the category of a necessary measure due to the economic hardships caused by COVID-19.

Gov. Pritzker hasn’t publicly addressed the enormity of the situation and its potential impact on employers other than saying he’s seeking further federal aid. Unless there’s yet another federal stimulus package, or a significant portion of the remaining $5 billion from the American Rescue Plan is allocated to the unemployment insurance trust fund, ultimately employers are looking at higher payroll tax rates coupled with a reduction in benefits—and kicking the can down the road will only exacerbate the problem.

Oddly enough, the three major credit rating agencies surprisingly upgraded Illinois’ bond ratings over the summer due to an improved fiscal situation, which could lower the cost of Illinois’ debt. But while Illinois’ leaders have focused on paying down the state’s remaining debt with the Federal Reserve, these two looming issues continue to threaten our economic recovery and degrade the state’s long-term fiscal viability. As former Illinois Senate Majority Leader W. Russell Arrington once said in response to an impasse on critical legislation: “We’re here to solve problems, and we didn’t solve the problem.” Perhaps we should take note of Arrington’s wisdom now and turn our focus toward the two elephants stuck in the statehouse.

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  1. James welge | Dec 31, 2021

    It is my understanding that Illinois is saddled with three realities regarding its Defined Benefit Plans, these being:

    1 By Illinois State Law, the 5 pension trusts are required to pay benefits to retiree beneficiaries. As you noted above in 2014 an attempt was made to pass a law, Public Act 98-599 , reducing the benefits payed to employees who became part of one of the 5 pensions systems prior to 1/1/2011. I believe the Illinois Supreme Court ruled this unconstitutional, unless Im wrong.

    2. There is nothing requiring the State of Illinois to appropriate the money as part of the annual budget, and legally set aside the funds which the pension actuaries have indicated need to payed to the 5 pension trusts in order to properly fund the pension funds, and enable assetts to compound to pay benefits.

    3. The rates of return on plan assets which were implicit in the actuaries computation of required minimum payments by the 5 state pension funds were grossly overstated, with the probable result that the minimum payments (normal cost) estimated the be required to be payed were understated. The assumed 6.5% to 7.0% returns were unrealistic, assuming that the only investment vehicles used were corporate bonds. If there were a stock component, it might be realistic to expect an average return of 6 to 6.5% over a ten year period. This 6% figure is based on a quote in the book "The Intelligent Investor".



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