A recent article in the New York Times discussed Illinois public pension underfunding issues. The problems have progressed to such a degree that 15,000 people rallied in Springfield shouting “raise my taxes!” to any lawmakers who passed by. While reading the article, it is hard not to draw similarities between the State of Illinois and the City of Evanston, a suburb just north of Chicago and the subject of a prior five-part series blog we wrote in April.
The State of Illinois’ public pension plans have a 54% funding ratio, meaning that they have assets sufficient to cover only 54% of the benefits already earned by Illinois public employees. The Illinois General Assembly’s Commission on Government Forecasting and Accountability has put the shortfall at $61 billion, but other sources have placed the public pension shortfall at $79 billion and even $166 billion. The pension shortfall has been caused by a number of things, including overly optimistic projected investment returns for plan assets and insufficient contributions.
Beyond its large public pension underfunding issues, the State of Illinois is also facing severe budget deficits, which has made it difficult for the State to allocate sufficient funds for its public pension plans. The State had sold $3.47 billion in securities to make its required pension contributions this year and Governor Quinn plans to issue up to another $7 billion in 2011. Under the state legislature’s public pension reform, it has until 2045 to have its public pensions 90% financed. However, payments are expected to rise sharply next year because 2010 marks the end of a 15-year ramp-up phase toward much steeper annual contributions. Thus, the State’s public pension and budget issues will only worsen as its required annual contributions increase steeply over the coming years.
The problems facing the State of Illinois are very similar to the problems currently facing the City of Evanston, though the State’s problems are of a much greater magnitude. Evanston, with only about 75,000 residents, owes approximately $160 million to its police and fire pension plans. Like the State of Illinois, Evanston’s pension shortfalls have been caused in part by overly optimistic actuarial assumptions that resulted in the city contributing insufficient amounts to the pension funds in the past. Both the State of Illinois and Evanston continue to use assumed rates of return that are too optimistic when compared to historical rates of return, which causes the plan’s liabilities to be underestimated and lowers the required contributions. These optimistic rates of return will only worsen the pension plans’ future viability.
Beyond its pension issues, the City of Evanston also has budgetary issues and faces a budget deficit of $8 million, which has forced Wally Bobkiewicz, the city manager, to make some difficult budget and personnel decisions. The general budget deficits have also made it difficult for the City of Evanston to make its statutorily-required police and fire pension contributions and has not allowed the City to makes extra contributions to alleviate the pension underfunding.
The State of Illinois’s 1995 public pension reform regarding police and fire plans also caused problems for the City of Evanston. Instead of requiring the City to pay the police and fire pension shortfalls under the original time table, the 1995 reform allowed the City to lower its contributions by spreading the pension shortfalls over a longer period of time. If Evanston has difficulties making its current budget now, the budgetary issues will only worsen as the City’s required police and fire pension contributions increases each year. In all, the City of Evanston is faced with an $8 million budget deficit, a $160 million police and fire pension shortfall, and growing contributions that are mandated by law.
The City of Evanston is dealing with the same issues that many other municipalities and the State of Illinois are dealing with currently. Some individuals have suggested that the State of Illinois may step in and bail out some of the smaller Illinois communities that are having police and fire pension underfunding issues, but the State of Illinois is no position to help these communities given that its three largest pension funds may run out of money by 2018. Difficult decisions must be made in the City of Evanston and the State of Illinois, and the government may have to take the 15,000 protestors up on their offer.
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