Illinois can borrow $1 billion for pension payouts

Illinois lawmakers could borrow $1 billion to extend pension purchase programs through 2026. Experts warn the effort has been a disappointment and will do little to ease the nation’s worst pension crisis in Illinois.

Illinois lawmakers are considering new legislation that would extend two state employee pension purchase programs by another two years and borrow $1 billion in bonds to meet the costs.

House Bill 4292 would amend the General Obligation Bond Act and authorize an additional $1 billion in State Pension Obligation Acceleration Bonds. Lawmakers suggest the proceeds from the sale of the bond could then be used to buy up future benefits promised to annuitants in a large upfront payment.

Proponents of the policy of extending the adoption option to 2026 claim the move will save the state hundreds of millions in future pension payments. However, history has shown that the maneuver has historically underperformed projections, generating just 3% of the state’s estimated savings in 2019.

Nearly four years after its enactment, the program was awarded a $1 billion reduced liability by the Legislature’s Commission on Government Forecasting and Accountability. These savings amount to less than 1% of the state’s total pension debt, according to optimistic estimates. Proponents originally forecast annual savings of $400 million, meaning the program should achieve savings of $1.6 billion.

As Illinois continues to try to fund its way out of the nation’s worst pension crisis — valued at $144 billion by state pension systems and more than $317 billion by credit agencies — the urgent need for constitutional pension reform is becoming ever clearer .

Illinois introduced the Accelerated Pension Benefit Payment Program in June 2018 as an alternative way to save money for the state and its underfunded pension systems by offering early retirement to retirees.

The early buyout program offered Tier 1 and Tier 2 participants in the State Teachers’ Pension Scheme, State Employees’ Pension Scheme and State University Pension Scheme a lump sum equal to 60% of the present value of their accrued benefits. The retiree would then be permanently removed from the system.

A second offer, available only to Tier 1 recipients still working for the state, would give retirees a lump sum upon retirement, in exchange for halving the automatic 3% annual increase in their benefits after they retire . This sum corresponds to 70% of what the pensioner would have received in full benefits if he had not taken the lower rate.

The program options were originally limited to 2021 to provide an incentive for retirees to accept a short-term opt-out. Gov. JB Pritzker expanded that horizon in his first budget through 2024. Pritzker publicly claimed that extending the programs could save the state $25 billion — a statement later ruled “largely false” by Politifact.

HB 4292 would result in the expiration date being pushed back to 2026, although most pensioners considering the takeover, which represents the biggest savings potential, would likely have already accepted the deal.

Some experts have also raised concerns that the pension buyout program is targeting Illinoisans who can least afford it, appealing to retirees with unexpected medical expenses or those who lack the financial literacy to understand that they accept a reduction in their lifetime benefits.

Bill Sponsor State Rep. Bob Morgan reinforced those concerns, encouraging retirees to use the program for a quick buck rather than planning for their long-term financial future.

“This allows retirees to pay their medical bills, pay their mortgage and pay other expenses,” Morgan said. “It doesn’t accept the idea that in 20, 30, 40 years her pension will cover the necessary expenses.”

Whether the state pension systems will be able to pay the promised pension benefits in full in 40 years’ time also remains in question.

While the state’s official projections show that all five state funds will reach 90% funding by 2045, the funds are projected to deliver at least a 6.5% return on investments over the next two decades. The state has a history of consistently underperforming those optimistic investment forecasts, even as the economy grew, leaving Illinois taxpayers to make up the difference.

From 2010 to 2019, taxpayers were forced to pay $7.6 billion more into the pension system than government sources estimated. On average, taxpayers’ contributions to annual pension obligations over the past period have been 15% higher than government estimates.

But even though taxpayers have had to pay more and more than expected each year, they still have not been able to keep up with the growing pension debt.

A 2019 actuarial stress test of pre-pandemic pension systems commissioned by the Illinois Policy Institute showed that this underfunding makes pension funds highly vulnerable to bankruptcy in the event of a severe economic downturn.

If state pension funds had averaged about the same returns as they did in the 10 years after the Great Recession and lost 20% of their assets during the COVID-19 pandemic — the same loss as in 2009 — the state’s main pension systems would be out of money in less than 30 years.

Although Illinois averted this horrible outcome with the help of multibillion-dollar federal stimulus programs to boost the state economy, it still showed how fragile the current system is and the need for reform.

The only viable solution to Illinois’ pension crisis begins with a constitutional amendment to allow cuts in future benefit growth for current workers and retirees.

A pension reform plan developed by the Illinois Policy Institute for the state’s systems that could “keep harmless” can save about $2.4 billion for the state budget in the first year and more than $50 billion by 2045. The plan would also completely eliminate the state’s pension debt during this period, rather than the 90% reduction that state leaders are hoping for.

All of this is accomplished while preserving every dollar of retirement benefits promised to public employees for work already done.

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