Two new reports issued early this week underscore the need for sweeping reforms to the state’s retirement systems, as negotiations on the contentious issue continue between Illinois’ legislative leaders and Gov. Pat Quinn.

Also during the week, State Sen. Ron Sandack (R-Downers Grove) said legislation was signed to reduce the state’s healthcare subsidy for retirees, while another new law mandates that Illinois hire a state actuary to review and report on Illinois’ retirement systems.

The Pew Center on the States—a respected, nonpartisan think tank—is once again reporting that Illinois has the worst-funded pension system in the country. Ranked dead last as of fiscal year 2010, Illinois had only 45 percent of the assets needed to pay $139 billion in long-term pension liabilities, according to the Pew Center report. Many experts maintain a healthy pension system should be funded at least 80 percent.

Though the report notes that most states sustained continued investment losses as a result of the 2008 financial crisis, the Pew Center pointed out that these shortfalls were exacerbated by states’ inability in flush years to set aside enough to sufficiently finance retirement obligations.

The Pew Center report also revealed equally staggering state liabilities with regard to retiree healthcare. Though states’ 2010 liabilities for these benefit add up to about $660 billion, the Pew Center found states only had assets to pay $33.1 billion—a $627 billion hole. The report noted, “States set aside pension dollars in advance, but most pay healthcare costs or premiums as retirees incur those expenses.”

Illinois claims liabilities of $54 billion in state retiree healthcare, a cost concern that prompted the governor’s signing June 21 of a new law that will reduce the state’s healthcare subsidy for retired employees. With the approval of Senate Bill 1313/PA 97-0695, the state took one of the first steps to bring state retirement obligations to a manageable level.

The measure repeals the state's health insurance subsidy, which covers up to 100 percent of healthcare costs for most retired public employees with 20 years or more of service. Though the bill doesn’t specify what the new healthcare costs will be, the new law directs the state's Department of Central Management Services to issue a retiree health insurance premium payment plan for retirees in state pension systems, including state employees, university employees, lawmakers and judges.

While opponents of the legislation acknowledged the need to reduce state retirement costs, they noted that the measure will shift state costs to retirees. They argued that the state must control costs, not push them off onto others. The new law will very likely face a legal challenge.

Concerns surrounding the costs of retiree healthcare and state pension obligations were echoed on June 20 when the Illinois Policy Institute (IPI) unveiled figures showing the total debt for Illinois’ state and local retirement benefits tops a staggering $200 billion.

In a written statement, Ted Dabrowski, IPI Vice President of Policy, noted, “State taxpayers are local taxpayers. And Illinois taxpayers aren’t on the hook for ‘just’ the $83 billion that the state owes; they’re also facing pension shortfalls borne by local government.”

The IPI points out that while state pension debt equals about $83 billion, Illinois taxpayer are on the hook for significantly more than just the states’ retirement systems. Other obligations include:

•    $15.5 billion state pension obligation bonds
•    $54.2 billion state retiree health insurance
•    $38.2 billion local government pension debt
•    $1.9 billion local government pension and benefit bonds
•    $10.7 billion local government retiree health insurance

According to the IPI, this is equivalent to approximately $41,000 in retirement debt per Illinois household.

The Pew Center and IPI reports apply pressure to what lawmakers and the Governor acknowledge is a critical need for reform to reduce obligations associated with Illinois’ state retirement benefits. Despite resistance from Republicans, discussions continue on a proposal that would require suburban and local school districts to eventually cover the cost of teachers’ retirement benefits, as is already the case in Chicago schools.

This week, the Quinn Administration released numbers they say show that more than half of the 800+ downstate and suburban school districts have enough money on hand to operate for six months. They contend the numbers suggest schools can afford to shoulder a phase-in of pension costs.

However, the State Board of Education warned that Quinn’s numbers may not accurately portray the districts’ ability to incur additional costs, pointing out that the figures are a year out-of-date, and saying that the cost shift could lead to “significant property tax increases.” Additionally, ISBE officials pointed out that the upcoming fiscal year 2013 budget currently relies on cutting the education budget. School officials also note those “extra” funds are frequently used to cover bills and other financial obligations, as they struggle to contend with budget reductions and delayed state payments.

Though Senate Republican lawmakers are reviewing the Quinn Administration’s information, they caution the results only provide a glimpse into the schools’ ability to take on the proposed cost-shift. The Senate GOP Caucus has consistently expressed concerns with the proposal, noting that school districts will likely look to property tax increases for the needed revenue to cover pension costs.

Moving forward, Senate Republicans say the proposal should not distract from the ongoing pension benefit reform discussions. Instead, the issue should remain a separate conversation.

Faced with the state’s daunting pension obligations, lawmakers advanced legislation this spring requiring the hiring of a state actuary charged with reviewing, monitoring and reporting on Illinois’ retirement systems. On June 18, Gov. Quinn signed into law Senate Bill 179/PA 97-0694 creating the position.

The state actuary will review the figures presented by the actuaries employed by the retirement systems’ boards of trustees, essentially reviewing and fact-checking the information. The actuary will be responsible for issuing annual reports regarding his or her findings to the Governor and the General Assembly.