Illinois’ state budget and the ledgers of local towns are more restricted by changes to pension investments than other states because of automatic annual raises for retirees in Illinois, according to an analysis of state pension rules.
The Center for Retirement Research at Boston College examined how pension funds fared when adjusting the expected rate of return on investments, something many funds have been forced to do in the years since the recession.
In the analysis, researchers found that a fund lowering its expected rate of return, if in reaction to an economic slide, will not cost the fund more in the long run, because most plans pay out benefits that are tied to the health of the economy by inflation.
“...if the lower nominal returns are driven by lower inflation (i.e. the real return remains constant), they will also decrease initial benefits (through lower wage growth) and the cost-of-living adjustment (COLA) paid after retirement,” according to the report.
Illinois’ pension plans, whose participants hired before 2011 have a 3-percent automatic annual compounding increases in their contracts, don’t see any lower costs in a downturn, meaning state and local government have to pay the same amount to retirees regardless of the broader economic conditions.
“When inflation goes up or goes down, it basically pulls up all boats or brings down all boats,” said J.P. Aubry, associate director of State and Local Research at the Center for Retirement Research. “[In Illinois,] inflation isn’t having the same impact of bringing down all boats as it would elsewhere.”
As a state, this means an automatically higher contribution in the next budget because taxpayers must make up the difference in lower expected stock dividends. Fifteen of the nation’s 72 state pension plans give automatic increases that are fixed similar to the five in Illinois, according to a report from the National Association of State Retirement Administrators.
Traditionally, the lower returns on investment have resulted in either a smaller contribution by a local municipality but, as of 2018, Illinois law allows pension boards to certify that a paying municipality is delinquent on contributions and have their state-directed funds diverted into the pension fund until they’re current on their payments, a move that could potentially cripple local government services in the meantime.
Officials in Peoria have been warning about growing pension obligations after having to lay off dozens of firefighters and police officers last year, Peoria City Manager Patrick Urich wrote “growth in pension obligations is crowding out the use of property taxes for operations.” According to projections included in the document, the city will no longer be able to use any property tax dollars for operations starting in 2019.”
Rockford, which Gov. J.B. Pritzker noted last week for its budgetary issues tied to pensions, could see 60 percent of its total property tax levy go toward its pension bill by 2025, Rockford Mayor Tom McNamara said in an interview with WREX.