January 29, 2014
The State of Illinois’ new pension law is expected to reduce statutorily required State contributions by $144.9 million over 30 years and lower its unfunded pension liability by about $24 billion, according to actuarial reports from the largest retirement systems.
An analysis of the actuarial reports can be found in a document issued on January 24, 2014 in connection with the State’s planned sale of General Obligation bonds in February. The reports provide the first formal assessment of the impact of Public Act 98-0599, which was enacted on December 5, 2013.
As previously discussed on this blog here and here, the new law is designed to reduce the State’s pension obligation by limiting automatic annual benefit increases, raising retirement ages for younger workers and capping the salary on which pension benefits are based. The new law applies to four of the State’s five retirement systems: the Teachers’ Retirement System (TRS), the State Employees’ Retirement System (SERS), the State Universities Retirement System (SURS) and the General Assembly Retirement System (GARS). The Judges’ Retirement System (JRS) is not affected.
The new law represents the State’s first actuarially-based pension funding plan, resulting in 100% funding over 30 years. Illinois’ existing pension law, which took effect in 1995, was designed to achieve 90% funding in 50 years. That law and subsequently enacted changes deferred a large portion of required contributions to later years.
As discussed here, the total unfunded liability stood at $97.5 billion on June 30, 2013, based on the market value of assets. Pension assets covered only 41.1% of the State’s total pension liability at the end of FY2013.
Supporters had estimated that the newly enacted pension changes would save the State $160 billion in contributions compared with current law. That number was based on FY2012 projections of current law contributions. Those projections declined in FY2013 due to strong investment results by the retirement systems and changes in actuarial assumptions. As a result of the lower baseline numbers, the estimated savings from the new law also declined by about $15 billion.
The table below shows projected savings on State contributions under the new law compared with current law. The total at the bottom of the table includes years that are not displayed in the table.
As explained here, the new law requires the State to begin making significant supplemental payments in FY2019 to pay off the unfunded liability more quickly. Full funding is reached by FY2039 under the new law, resulting in large contribution reductions thereafter.
The State savings now projected in FY2016 and FY2017 are much larger than indicated in Governor Pat Quinn’s three-year budget projection, which was issued on January 1. As discussed here, the three-year projection indicated FY2016 savings of roughly $756 million on total pension contributions.
Those numbers were compiled before TRS, the State’s largest pension fund, provided contribution estimates based on the final version of the new law. The latest TRS estimates show much greater contribution reductions under the new law for TRS than for SERS or SURS. An analysis for the smallest system, GARS, was not available.
The next table compares projected savings on State contributions under the new law by retirement system for FY2016 to FY2019.
The impact of the new pension law is also being reviewed by actuaries for the legislature’s Commission on Government Forecasting and Accountability.
Although the law takes effect on June 1, 2014, its implementation is expected to be delayed by legal challenges. The retirement systems have certified FY2015 contribution amounts required under existing pension law.
The State is already facing lawsuits from employees and retirees, who allege that the pension changes represent an illegal impairment of pension benefits under the pension protection clause in the Illinois Constitution. The We Are One Illinois coalition of public employee unions filed the latest lawsuit on January 28 in Sangamon County court.