The state of Illinois faces at least $83 billion in unfunded liability between its five pension systems, and is on track to spend more on its government pensions than on education by 2016, a new study released by Governor Pat Quinn’s office says.
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The state budget office conducted the study based on a “district-by-district analysis” if the state does not enact comprehensive pension reform, the governor said in a statement. Governor Quinn released the study a few days after calling a special session dedicated to pension reform on August 17.
Illinois faces severe underfunding in its pension system. It reported a funded ratio of 43.4%, way below the 80% considered healthy. Based on fiscal 2010 data, Illinois had the lowest funded ratio of any state, according to a June 2012 report by the Pew Center on the States.
Among states, Illinois stands out for setting aside a huge 12% of its annual budget just for its chronically underfunded pension.
Credit rating agencies have threatened to lower the state's rating unless lawmakers ease the strain on the budget.
Illinois' structural deficit along with its huge unfunded pension liability have led to credit downgrades, with Illinois rated in the low one-letter A grades by Moody's Investors Service, the lowest level among states it rates.
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Meanwhile, Illinois joins New York, California and Maryland in having the highest state tax rates in the country. Illinois was dinged last year for boosting its taxes 67%.
Pension reform is a hot button issue, with government workers receiving far more than the private sector in retiree benefits, numerous studies have shown.
Ideas for Illinois pension reform include capping abuses of government workers retiring as early as 55 and collecting nearly full pay every year; raising the age of benefits eligibility to a normal retirement age; and reducing the cost of living increases to pension payouts by one percentage point.
Meanwhile, Illinois government workers are entitled to solid state retirement health benefits. Illinois’s gaping credit-default-swap spreads suggest market fears that the state will face an inability to service its bond debt.
“Under current actuarial assumptions, required state pension contributions will rise to over $6 billion in the next few years if no comprehensive pension reform is enacted, which will continue to result in significant cuts to education,” the governor said in a statement, adding “fast-rising pension costs will cost downstate and suburban school districts far more than assuming the responsibility to pay for their compensation decisions over time.”