Illinois Public Pensions Face Huge Sinkhole

September 23, 2002 ( - The state of Illinois' $32-billion unfunded pension liability - the largest of any public pension fund in the country - could prove to be a major headache for the Land of Lincoln.

According to a news story in Crain’s Chicago Business, the state’s three pension programs racked up major market losses for the second year in a row for the year ending June 30 and now are suffering a combined unfunded liability of $31.7 billion.

That means the new state administration will have to come up with $60 million to $100 million for the funds – above and beyond the $120 million hike already called for by the Legislature. The obvious and politically distasteful options: cut spending somewhere else or raise taxes.

Union officials already fear state officials will slash existing benefits to make up some of that shortage.

No Short-Term Crisis

No one involved is now predicting any short-term cash crisis. The Teachers’ Retirement System (TRS), State Employees’ Retirement System (SERS) and State Universities Retirement System (SURS) all have billions of dollars in assets and will continue to pay retirees what they are owed, officials say.

Although some officials say the funds will still be able to ride out recent short-term setbacks if they stick to a 50-year financing plan adopted by the General Assembly in 1996, that task has become more difficult and more costly, at least for a while.

In essence, the funds today are worse off than they were in the mid-’90s, despite an historic bull market that raged into 2000, and despite billions of dollars in new money that taxpayers have poured into the pension funds since then.

Prior Attempts

For instance, TRS, which covers 155,000 current or former teachers in districts outside Chicago, now has an estimated unfunded pension liability of $19.5 billion, according to John Bauman, its new executive director. TRS’ coverage ratio of assets to liabilities has dropped to 53%, down from 68% in 2000 and 58% in 1996.

TRS has taken steps to improve its performance, firing several investment managers and bringing in a new outside consultant in the past year. Its investment performance was the best of any of the state funds in fiscal 2002, though it suffered a 2.9% loss, Bauman says.

The story is similar at SERS, which covers 125,000 current or former state workers. SERS has a current estimated unfunded liability of $6.2 billion, and a coverage ratio “below 60%,” compared with 70% in 1996 and 82% at the end of 2000, says the fund’s executive secretary, Michael Mory.

The decline was even bigger at SURS, which has 140,000 members. SURS intentionally chose to concentrate its holdings in equities, which are relatively risky, to make up for earlier underfunding by the state, and lost 6.1% on its investments last year, according to Executive Director James Hacking.

SURS’ coverage ratio has seesawed from 79% in 1997 to 88% in 2000 to an estimated 61% at the end of fiscal 2002.

Wilshire Study

While all states have suffered financial losses of late, Illinois so underfunded its pension plans for so long that it is in an extraordinarily weak position, according to Wilshire Associates Inc., a California-based investment advisory firm.

Wilshire’s latest survey of state employee and teacher pension funds , for the fiscal year ended June 30, 2001, showed Illinois’ unfunded liability was three times that of the state with the next-largest shortfall, Oklahoma.

On a percentage basis, Wilshire found TRS’ and SERS’ combined coverage ratio lagging that of all states except West Virginia and Oklahoma, which was tied with Illinois for 49th. Wilshire’s figures are culled from the official filings of state employee pension funds.