Illinois not alone in underfunding retiree benefits

 By Jamey Dunn

According to a new study, Illinois’ management of retiree pension and health care benefits is “cause for serious concern,” but the state is not alone.

The study from the Pew Center on the States ranked Illinois among a dozen states whose unfunded pension and health care liabilities raise red flags. The other states on the list were Arkansas, California, Connecticut, Hawaii, Louisiana, Mississippi, Montana, New Hampshire, New Jersey, New Mexico and Rhode Island. The analysis was a follow up to the center’s 2011 report, The Widening Gap, which looked at state’s pension plans for Fiscal Year 2009. The new study focuses on FY 2010. In the initial 2011 report, Illinois ranked as the state with the lowest pension funding level in the country, and the state held that unfortunate distinction again in FY 2010.

Illinois may be the worst, but it is far from alone when it comes to unfunded pension liability. The unfunded liability for state employee retirement systems nationwide totaled $757 billion in FY 2010, up from $660 billion in FY 2009. Experts say pension systems should be funded at 80 percent, but 34 states failed to make that mark. Illinois’ system was funded at 45 percent in FY 2010. Connecticut, Kentucky, and Rhode Island were all under 55 percent funded in FY2010.

David Draine, senior researcher for the Pew Center on the States, said that generally, the states struggling the most have skipped or shorted their annual pension payments. Illinois is among these states. “When states fail to make a required contribution and their unfunded liabilities grow, they pay for it later.” He pointed to New York and New Jersey. The Garden State skipped payments in recent years and now has a liability that is much larger than New York’s, even though New York’s pension system is much larger than New Jersey’s. New Jersey’s unfunded liability is $36 billion. New Jersey failed to consistently pay into its system from 2005 to 2010. But the state has taken some recent steps to address its funding problem. “New Jersey lawmakers approved pension benefit cuts in 2010 and 2011, including increasing employee and taxpayer contributions, reducing annual cost-of-living increases for current and future retirees, raising the retirement age from 60 to 65 for new employees, and cutting final compensation for new employees,” the report said.

As a contrast, New York made payments from 2005 to 2010, and its pension system was 94 percent funded in fiscal year 2010. However, that is a slip from when it was 100 percent funded in FY 2009.

Draine said that the pension funding problem is due to a combination of lawmakers increasing benefits with no way to pay for them, states skipping annual payments and pension fund investments suffering in the economic downturn.

Ron Snell, senior fellow at the National Conference of State Legislatures, said states have responded to their pension funding problems with “unprecedented” changes to their employee retirement systems. For the most part, states have cut benefits for employees hired after the change. Such changes would not affect those states' current unfunded liabilities. However, Snell said some states have targeted cost of living adjustments for current retirees, which would reduce the liabilities. Illinois lawmakers are considering reducing COLAs for current retirees. (For more on pension changes across the county, see this series on the Illinois Issues Blog: part 1, part 2 and part 3.)

Snell said it is hard to predict whether courts will uphold changes to benefits for current retirees or for employees hired before benefit cuts were voted in. “It’s a little early to be able to do a headcount on that.” He said courts in four states have upheld cuts to COLAs, but there will likely be appeals in three of those cases. He added that other high profile reform, such as recent sweeping pension reforms enacted in Rhode Island, will face court challenges, as well. “It will be several years before we have an answer.”

 The report also highlights underfunding of retiree health care benefits. In FY 2009, states had underfunded retiree health care by $627 billion. That number increased to $649 billion in FY 2010. Nationally, retiree health care is funded at about 5 percent.

According to the report, Illinois has an almost $44 billion liability for retiree health coverage. This spring, the General Assembly passed Senate Bill 1313, which could lower the state's contribution to retiree health care going forward. Retired employees would then pick up some of the costs through premiums. Gov. Pat Quinn was a vocal supporter of the proposal but has yet to act on the bill.

Draine said states have “by and large fallen short” on funding retiree health care.