Report: 5 state pension funds owed $100.5 billion

SPRINGFIELD — Illinois lawmakers thought they were saving money five years ago by changing the way the cash-strapped state counts its pension debts, but a report released Wednesday suggests the effort may have landed taxpayers with billions of dollars in extra costs.

Auditor General William Holland reported the systemwide pension debt hit $100.5 billion last summer. But the total would have been $3 billion less had the legislature not required “smoothing,” an actuarial process that considers gains and losses over a five-year span, not current market values.

If another state law switched back to counting current market value instead of “smoothed” value, it could save taxpayers money in the amount the state must put up as its annual pension contribution in the budget year that begins in July, although the savings were not reported.

Pension leaders advise against that.

“Market value is a snapshot, but is it the correct snapshot, or should we be looking more over time?” asked Rep. Elaine Nekritz, a Northbrook Democrat who was instrumental in landmark legislation signed into law last month to deal with the huge pension debt. “Smoothing looks more over time.”

Smoothing, Holland said in an interview, gives a more realistic look at the numbers.

But five years ago when the economy was in the tank, it made them rosier. Now that the market has improved, assets “smoothed” over the past five years makes the outcome gloomier than current market value of the pension systems’ assets. That calculation puts the debt at $97.5 billion, according to Holland’s audit.

The pension law followed years of debate about how to reverse decades of lawmakers and governors shorting or skipping pension contributions.

The law, which cuts benefits and raises the retirement age for younger workers but also reduces employees’ contributions and includes a state funding guarantee, would cut the systems’ debt by $21 billion and save $160 billion over 30 years. But it doesn’t take effect until June 1, and several lawsuits have been filed challenging its constitutionality.

Wednesday’s report does not take the reform law into consideration because its numbers are older.

Using the market value of assets, the pension systems have 41 percent of the money they need to cover obligations to current and future state retirees. Smoothing puts the so-called funded ratio at 39 percent.

“The good news is, the market is making the funded ratio look better than it has over the past few years,” Holland said.

But that could prove tempting to a lawmaker who wants to use the higher number in figuring the state’s contribution — $7 billion in the coming year. A higher funded ratio would mean lowering the state contribution. Nekritz warned against that because of the uncertainty of the new law and the vagaries of the market.

“One of the lessons I’ve learned through this is it’s important to be on an actuarially sound schedule,” Nekritz said. “We’re on that course. I don’t want to veer from it.”