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CENTER FOR TAX AND BUDGET ACCOUNTABILITY 70 E. Lake Street Suite 1700 Chicago, Illinois 60601 direct

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Center for Tax and Budget Accountability 2007. Systems ... Center for Tax and Budget Accountability 2007. FY 07 Comparison of Pensions Systems Normal Cost ... – PowerPoint PPT presentation

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Title: CENTER FOR TAX AND BUDGET ACCOUNTABILITY 70 E. Lake Street Suite 1700 Chicago, Illinois 60601 direct


1
  • CENTER FOR TAX AND BUDGET ACCOUNTABILITY 70 E.
    Lake Street ? Suite 1700 ? Chicago, Illinois
    60601 ? direct 312.332.1049 ? Email
    rmartire_at_ctbaonline.org Pensions and the State
    Budget
  • Prepared by Ralph Martire Executive
    Director Thursday, September 20, 2007 400 pm
    600 pm
  • University of Illinois at Chicago
  • Chicago Rooms B C
  • Student Center West
  • 828 S. Wolcott Street
  • Chicago, IL

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If the FY2008 Budget remains as passed and
vetoed, then
  • ? Pension contributions will increase from the
    FY07 level to just over 1 billion to 2.018
    billion in FY2008
  • ? That would mean the percentage of the GRF
    devoted to the pensions would increase from the
    FY2007 level of 3.9 to just over 7 of FY2008

4
GRF Expenditures by Category, 1995 - 2006
Notes Health care includes Medicaid and state
employee health insurance Sources
State of Illinois' Traditional Budgetary
Financial Reports and Fiscal Focus Illinois'
FY2006 Budget National
Association of State Budget Officers
Comptroller Fiscal Focus, January
1997 CPI and ECI based on Bureau of
Labor Statistics
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Figure 3 2006 Funded Ratio and Share of Debt of
the Five Illinois Retirement Systems1
1 Ibid FY 2006 numbers reported by the
Illinois Commission on Government Forecasting and
Accountability.

7
Systems Share of 40.7 billion Unfunded Liability
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HOW DID ILLINOIS GET HERE?
11
Comparable State Local Government Annual
Retirement Benefits
12
Average State Local Government Employment
Annual Retirement Benefits
13
Illinois State Retirement Benefits
14
Participants in the Illinois Pension Plans
15
FY 07 Comparison of Pensions Systems Normal Cost
16
FY07 Normal Costs of the Five Illinois Retirement
Systems
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IS SWITCHING TO A DEFINED CONTRIBUTION SYSTEM THE
ANSWER?
19
Defined ContributionReality
  • Because of Illinois constitutional restraints,
    switching to a defined contribution system does
    not and cannot reduce the state's current 40.7
    billion unfunded liability. The sole way to
    cover this liability is to design a rational
    program that does not back load costs like
    current law.
  • Defined contribution systems have significantly
    higher annual administrative costs than fully
    funded defined benefit systems. If Illinois
    moved to a defined contribution system for all
    current participants in the five Illinois state
    pension systems, that change would cost taxpayers
    from 275 million to 610 million per year in
    additional administrative costs.
  • If contribution rates remained the same, defined
    contribution systems can be expected to generate
    significantly lower retirement benefits. For
    example, when Nebraska switched to a defined
    contribution system, the average benefit was only
    11,230 per year compared to 16,797 per year
    under the defined benefit system.
  • In the defined contribution setting, investment
    returns belong solely to an employee who makes
    the investment in his or her retirement account,
    and are not available to reduce the employer
    contribution. Frequently fully funded defined
    benefit plans attain high enough investment
    returns that public sector employers are able to
    reduce the amount of normal cost paid from tax
    collections, freeing taxpayer revenue to cover
    services. This was the experience of the
    Illinois Municipal Retirement Fund (IMRF). As of
    December 31, 2006, IMRF was 100.5 percent funded
    on an actuarial basis, because of this rates will
    fall from an average10.4 percent in 2006 to 9.72
    percent this year, saving taxpayers millions.

20
Defined ContributionReality
  • Defined contribution systems have the advantage
    of creating fiscal discipline that is absent from
    a defined benefit system. Due to their
    construction, defined contribution systems would
    force the state to make the required employer
    contribution into the employees account on a per
    pay period basis, rather than offering promises
    of future benefits, as under the current defined
    benefit system.
  • From an employee's perspective, a defined
    contribution system would have two advantages
    over a defined benefit system (i) the benefits
    would be portable from job to job and (ii) an
    employee could access his or her defined
    contribution account for emergencies
    pre-retirement (although subject to tax
    penalties, in certain situations).
  • The three main disadvantages of a defined
    contribution system are (i) reduced and
    uncertain retirement benefits (ii) lesser
    investment returns and (iii) market risks.
  • On balance, when funded in a fiscally responsible
    manner, a defined benefit system permits the
    public sector to provide its workers with better
    retirement benefits at lower overall cost to
    taxpayers.

21
The Illinois Structural Deficit (How Revenue
Growth will not Keep Pace with the Cost of
Current Services)
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  • Since 2000, the percentage of general fund
    revenues going to pay off debt has risen from
    under 4 to over 7 of total revenues. That
    means almost 2 billion of all general funds WENT
    to paying off debt and interest in the last,
    complete Fiscal Year (2006) instead of going to
    fund public services.

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Debt Comparisons Illinois v. Other States
  • Illinois has more total debt than only two other
    states, California and New York.
  • In 2004, Moodys reported Illinois owned 7.5 of
    the total national debt.
  • In 2006 Fitch Ratings assigned a negative rating
    outlook to Illinois based on the states
    continued financial constraints, as evidence by a
    budgetary basis fund balance deficit that has
    existed for many years. In addition, Fitch
    Ratings notes that barring a significant revenue
    increase or a substantial reduction in
    expenditures Illinois will be unable to follow
    its own plan to contain the growing billion
    dollar unfunded pension liability. This
    intractable problem, including cash flow pressure
    is able to impair credit quality despite the
    breadth and wealth of the states large economy.
  • The National Association of State Budget Officers
    report that when per capita debt is more than
    1,200, as is Illinois, it becomes unmanageable
    for the state.
  • Illinois has more than double debt per capita
    than the national average.

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  • Illinois also ranks high nationally when
    comparing tax-supported debt as a percentage of
    personal income. Again, the state has almost
    double the national average.
  • Moodys rates Illinois lower than 30 states in
    its credit rating. Thirteen states rank similar
    to Illinois and three are given credit ratings
    lower than Illinois.
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