1. © Center for Tax and Budget Accountability 2007 1 CENTER FOR TAX AND BUDGET ACCOUNTABILITY 70 E. Lake Street Suite 1700 Chicago, Illinois 60601 direct: 312.332.1049 Email: rmartire@ctbaonline.org Pensions and the State Budgetrmartire@ctbaonline.org Prepared by: Ralph Martire Executive Director Thursday, May 17, 2007; 9:30 am – 10:30 am “Pensions Issues” Illinois Association of School Board Officials 56 th Annual Conference Peoria Civic Center 201 SW Jefferson St., Peoria, Illinois 61602

2. © Center for Tax and Budget Accountability 2007 2

3. 3 GRF Expenditures by Category, 1995 - 2006 CategoryFY 1995 Actual FY 1995 CPI Adjusted to FY2006FY 2006 Enacted $ Difference Between 1995 Adj'd for CPI & 2006 Enacted FY 1995 ECI Adjusted to FY2006 $ Difference Between 1995 Adj'd for ECI & 2006 Enacted GRF$17,302.0$22,613.7$24,406.4$1,792.7$24,776.5-$370.1 Education$3,656.0$4,778.4$6,123.0$1,344.6$5,235.4$887.6 Health Care$4,319.0$5,644.9$7,034.0$1,389.1$6,184.8$849.2 Pension$519.0$678.3$938.4$260.1$743.2$195.2 GRF without Health Care and Pensions$12,464.0$16,290.4$16,434.0$143.6$17,848.4-$1,414.4 GRF without Health Care and Pensions and Education$8,808.0$11,512.1$10,311.0-$1,201.1$12,613.1-$2,302.1 **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

4. © Center for Tax and Budget Accountability 2007 4

5. 5 Figure 3: 2004 Funded Ratio and Share of Debt of the Five Illinois Retirement Systems[1][1] 2004TRSSERSSURSGARSJRSState Total Funded Ratio59.7%51.8%64.7%45.1%38.7%58.9% Share of Unfunded Liability (Debt)$23.01$9.78$7.29$0.689$0.131$40.9 [1][1] Ibid – FY 2004 numbers reported by the Illinois Commission on Government Forecasting and Accountability adjusted to cover the impact of the Pension Holiday taken for Fiscal Years 2006 and 2007, under P.A. 94-0004.

6. © Center for Tax and Budget Accountability 2007 6

7. 7 Comparable State & Local Government Annual Retirement Benefits

8. © Center for Tax and Budget Accountability 2007 8 Average State & Local Government Employment Annual Retirement Benefits

9. © Center for Tax and Budget Accountability 2007 9 Participants in the Illinois Pension Plans TRSSURSSERSJRSGARSTotal Active Members250,540153,47589,735947265494,962 Beneficiaries85,15341,63854,678912395182,776 Totals335,693195,113144,4131,8596,600677,738 Percent of Total IL Population5.3%

10. © Center for Tax and Budget Accountability 2007 10 FY07 Normal Costs of the Five Illinois Retirement Systems Normal Cost Percent of Payroll JRS$32,200,00023.47% GARS$2,400,00019.42% SERS$329,000,0009.17% SURS$319,584,00010.82% TRS$650,835,0748.20% Total$1,334,019,074 Total Weighted Average 9.13%

11. © Center for Tax and Budget Accountability 2007 11

12. © Center for Tax and Budget Accountability 2007 12

13. © Center for Tax and Budget Accountability 2007 13  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. Defined Contribution Myths

14. © Center for Tax and Budget Accountability 2007 14 Defined Contribution Myths  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.

15. © Center for Tax and Budget Accountability 2007 15 The Illinois Structural Deficit (How Revenue Growth will not Keep Pace with the Cost of Current Services)

16. © Center for Tax and Budget Accountability 2007 16 Growth in State Issued Revenue and General Obligation Bond Debt: 2000-2006 $7.684 $8.444 $9.543 $20.812 $21.809 $22.241 $22.820 $0.000 $5.000 $10.000 $15.000 $20.000 $25.000 20002001 2003200420052006

17. © Center for Tax and Budget Accountability 2007 17 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.

18. © Center for Tax and Budget Accountability 2007 18 General Obligation and State-Issued Revenue Debt as a Percentage of General Fund Revenues 3.83% 4.02% 4.42% 4.73% 6.06% 6.40% 7.08% 0% 1% 2% 3% 4% 5% 6% 7% 8% 2000200120022003200420052006

19. © Center for Tax and Budget Accountability 2007 19 Debt Comparisons: Illinois v. Other States Illinois has more total debt than only two other states, California and New York. In 2004, Moody’s reported Illinois owned 7.5% of the total national debt. 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.

20. © Center for Tax and Budget Accountability 2007 20 Tax-Supported Debt Per Capita: Illinois Ranks 6th Nationally in Debt Per Capita which is More Than Double the National Average $2,019 $999 $0 $500 $1,000 $1,500 $2,000 $2,500 IllinoisNational Average

21. © Center for Tax and Budget Accountability 2007 21 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. Moody’s 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.