Illinois: Pension crisis brings fears about health care

Pension crisis brings fears about health care

By Kate Clements
The News-Gazette, December 19, 2007

SPRINGFIELD – Illinois still has one of the most chronically underfunded state pension systems in the country, but a potentially bigger problem is looming: the health care bills for all those retirees.

According to a 50-state study released by Pew Charitable Trusts on Tuesday, Illinois' unfunded pension liability for state workers, judges, lawmakers, teachers and university employees was $41 billion in 2006, while its projected bill for retiree health care, dental and life insurance benefits was an estimated $48 billion for state workers alone.

"We produced this report because states' fiscal health relies in large part on their ability to wisely manage bills that are coming due, and this one is significant," said Susan Urahn, managing director of the Pew Center on the States.

For the first time, government accounting rules will require states to include estimated actuarial liability for nonpension benefits like health, dental and life insurance in their annual reports starting in 2008. But the analysis of Illinois' liability for those benefits is still being developed, and will not be ready until early next year. As a result, Pew used an estimate from the Civic Committee of the Commercial Club of Chicago in its report.

Susan Hofer, a spokeswoman for the governor's office of management and budget, said neither Pew nor the committee contacted the budget office.

"We think Illinois' liability is much less than the report suggests," she said. "Also, unlike pensions costs, employee health care costs are not guaranteed and are negotiable."

Illinois, like most states, has been providing health care and other nonpension retirement benefits on a pay-as-you-go basis. Those expenses will continue to grow each year, thanks to swiftly rising medical costs, longer life expectancies and increased numbers of retirees from the massive Baby Boomer generation, the Pew report said.

Setting aside enough money to fully fund all that care will not be cheap. According to the report, the median annual contribution needed to do so is about three times what states are currently paying.

Jon Bauman, executive director of Teachers Retirement System of Illinois, said the cost was "certainly a concern," but noted that the new accounting rule doesn't require that any particular amount of funding be set aside.

"It just requires estimating the liability, so that each state knows what their future obligation is going to be," he said. "Different states are dealing with the issue in different ways."

According to Pew, just six states are on track toward full funding of nonpension benefits within 30 years – Arizona, North Dakota, Ohio, Oregon, Utah and Wisconsin. California, Texas, New York, Florida and Illinois were among the more than two dozen states that had not put aside any money for those costs as of June 30, 2006.

Altogether, the Pew report estimated that the states owe a combined $381 billion for health care and other nonpension benefits for state employees, on top of whatever is owed to teachers and other public retirement system participants. Of that amount, 97 percent was unfunded as of the end of 2006. When combined with states' unfunded pension liability, the total owed is $2.73 trillion, according to the report.

"The longer states put off dealing with this bill, the harder it gets to pay," Urahn said.

Overall, states have enough invested to cover 85 percent of their regular pension liabilities, but funding levels vary dramatically from state to state. According to Pew, the pension systems in Oregon and Florida had more than 100 percent of what they needed as of the 2006 budget year, while 20 states were less than 80 percent funded. Illinois' ratio of pension assets to liabilities was a mere 60 percent at the end of the 2006 budget year, one of the worst in the country. By the close of the 2007 budget year on June 30, it was up to 62.6 percent funded, but the total unfunded liability was up from $41 billion to $42 billion.

After two years of reduced pension contributions, state Rep. Bill Black, R-Danville, said it was a good sign that this year's budget included the full recommended amount for the five state retirement systems. But he made no predictions about the future.

"I don't know whether we are going to address pension debt or health care debt," Black said, noting the ongoing gridlock in state government. "We just don't seem to focus on those things. At some point, when it becomes a crisis, they'll have to do it and it won't be easy."

To see the full report, go to www.pewtrusts.org.