Is it too late for structural reform?
Illinois has over $30 billion in debt. This represents bonds that are issued to pay for prisons, roads and other infrastructure. Annual debt service represents 12.8% of the States $35 billion budget. The State’s outstanding unfunded pension liability is close to $100 billion, 3 times its debt. The annual payment on pensions takes 17% of the budget and this is less than required as pensions are only 39% funded.
If the State could go back in time before increased pension benefits and the great recession that, in part, created a gross underfunding pensions it would surely have done things differently. But, in my view, it is not too late for structural reform.
The states debt must be paid by statute. In fact the first dollars of revenue that come in go to pay debt service. The State, unfortunately, has not treated pensions the same way. Unlike debt, fully funding what is required on an annual basis is not required by statute. The only mandatory obligation of the pension fund is to pay retirees their benefit. This allows the State to not put away what is needed for future retirees. While the state does not skip this payment altogether it is still inadequate enough to have one of the lowest funding levels at 39%.
Pensions are a debt. In fact they are the worst type of debt in that we are having future generations pay for services that were provided in the past. If the State would have treated an adequate payment to fully fund pensions on parity with statutory debt then it would not be in this fiscal mess.
My recommendation is for the State to develop a Debt Affordability Plan as other states have and include not only annual debt service on bonds but pension payments as well. Given the magnitude of both expenditures, as shown above, it will be naïve to think this will force full funding of pensions. It may take a while to fully implement without crowding out infrastructure, education and social services. That said it is never too late to be structurally reformed for the future so we do not repeat the past.
