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Report: COVID-19 pushes Illinois public pension plans closer to brink

A 50-state survey finds that six of the nation’s 15 weakest pension funds are in the state

Analysis by Wirepoints

The impact of COVID-19 has created an unprecedented crisis for the nation’s weakest public pension funds. Many plans were facing insolvency even before the virus hit and the recent stock market meltdown will only accelerate their decline. Six of the nation’s 15 weakest pension funds are located in Illinois, according to a new 50-state Wirepoints analysis.

Wirepoints President Ted Dabrowski says some politicians will try to make pension support a part of any assistance they receive from the federal government.

“That’s certainly true for fiscally irresponsible states,” he said. “The country’s state and local pension funds already faced a collective shortfall of more than $5 trillion in 2018, so how the federal government doles out state aid, and what strings it attaches, will have long-term implications.”

Illinois is the first to test the waters. Its 40-member Democratic caucus recently requested $10 billion in state pension relief and $9.6 billion for municipal pensions – as well as a $15 billion block grant – as part of a $41.6 billion federal bailout package.

To put Illinois’ pension crisis in perspective, Wirepoints analyzed the asset-to-payout ratios of 148 state and local pension funds across the United States with $2 billion or more in assets, using data collected by the Center for Retirement Research (CRR) at Boston College. The asset-to-payout ratio – one of the statistics Moody’s Investors Service uses to measure pension health – compares a fund’s total assets to how much it pays out in benefits each year.

“In other words, it measures how many years a pension plan can make benefit payouts before it runs out of money, assuming no new contributions or investment income,” Dabrowski said.

Worst-off are funds in the states known for their pension crises: Kentucky, Illinois, New Jersey and Connecticut. Some highlights from 2018, the most recent year of full CRR data:

•              In Illinois’ neighbor to the south, Kentucky, the state’s Employee Retirement System had the worst asset-to-payout ratio in the CRR database. The fund had just 2.5 years’ worth of assets with which to make future payouts.

•              Collectively, Illinois is the worst state in the CRR database. Of the 15 worst-off funds, six of them are in Illinois – three at the state level and three in Chicago. All of them had eight years or less of payouts left.

•              The worst among them is Chicago’s police pension fund. In 2018, its total assets were $3.1 billion and its pension payout for that year was $760 million. That means it had about four years’ worth of payouts on hand.

If those low-ratio plans run out of funds, they’ll end up as pay-as-you-go systems, where pensioners are forced to rely directly on the operating budgets of their employers, and not pension fund assets, to get their retirement checks.

“Collapsing to pay-go status is risky given that sponsoring governments would have to consistently make bigger contributions directly from their operating budgets. With no pension assets left, they’d be responsible for paying the full amount of pension benefits each year,” Dabrowski said. “Some governments can’t afford that, considering they’re at risk of going broke themselves.”

With so many cities and states suffering significant budgetary shortfalls due to COVID-19, it’s likely that more of the nation’s worst-off governments will push for a bailout of their pension funds.

Last Wednesday, Senate President Mitch McConnell proposed an alternate solution. He prefers allowing states to declare bankruptcy rather than granting them a bailout.

“Illinois’ pension crisis, its budget deficit, its unpaid bills, it’s unemployment trust fund – all of those problems have been created over decades. Illinois politicians shouldn’t use the pandemic as a cover to bail out the state’s long-running problems,” says Dabrowski.

Find the full Wirepoints Special Report on this topic, including a case study on Illinois pension funds, here:

Wirepoints is a financial news and analysis website that focuses on Illinois.

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