Mission Possible: solve the state’s pension funding crisis.
The
An update to the Pension
Funding & Fairness Act
Introduction
Much has been written in the press and among
public policy organizations on the need for
public employee pension reform. The vast
majority of these discussions revolve around
reforming pension benefits. Recent legislation
reforming benefits for new government
employees is a small step in the right direction,
June 9, 2010
but it remains inadequate. Benefit reforms must
also be put into place for current employees
going forward.
While worthwhile, however, none of these
reforms address the critical root causes of the
state’s existing $83 billion unfunded pension
liability and ongoing budgetary crisis. Pension
funding—providing funds to pay for the
Policy Brief
benefits already earned—must be secured. All
benefit reforms, however worthy, will be for
naught if this fundamental issue is neglected.
• First, until a reliable pension funding
mechanism is put into place, future legislatures
and governors will simply continue the bad
behavior that created the current crisis in the first
place.
• Further, the root problem of Illinois’s perpetual
deficit spending (despite a balanced budget re-
quirement) is a lack of a spending brake that
prevents continuous irresponsibility on the part of
the General Assembly and successive governors.
On January 19, 2010, the Illinois Policy Institute
issued a groundbreaking policy proposal1 to
John Tillman is CEO of the Illinois Policy Institute. J. Scott Moody, M.A., has worked as a tax policy economist for over
12 years. Dr. Wendy P. Warcholik has worked as an economist in public policy settings for over 12 years. This paper is an
update of our original Pension Funding & Fairness Act study, which was originally released January 19, 2010.
Pension Funding & Fairness Act creates
“rules of the game” to stop the state’s annual
budgetary shenanigans that lead to unbalanced
budgets, underfunded pensions and an ever-
growing debt burden despite record revenues
flowing into state coffers.
This report updates and revises our initial
Pension Funding & Fairness Act proposal to
account for developments that have occurred
since its release. This report is designed to be
used in conjunction with our in-depth Budget
Solutions 2011 alternative budget.2
The Problem
With the understanding that pension benefit
reforms are necessary for current and new
employees, it remains a fundamental truth that
the reason we have an $83 billion unfunded
pension liability in the first place is because
the Illinois General Assembly and successive
governors have not fully funded the annual
pension payment for many years.
Further, the General Assembly has negotiated
salaries, benefits and pensions that are not only
unaffordable but create inequity between those
who pay for them and those who receive them.
Today, on average, an Illinois public employee
earns 15.7 percent more than a private sector
worker.3 Public employees also receive generous
benefits, pensions and job security.
Illinois’s debt per capita has risen from $676
in 2001 to $1,682 in 2010.4 How does this
happen? Legislatures and governors appropriate
more than what comes in each year and bond
additional spending. They use budgetary
legerdemain to paper over actual deficits, ignore
the balanced budget requirement, and place
 Page 2 of 24
borrowing costs on tomorrow’s taxpayers.
There is no mechanism in place to stop this
budgetary recklessness, and it comes with a
high price. Each and every Illinois household is
now burdened with $4,423 in state government
debt.5
Until a mechanism that prevents irresponsible behavior
by state leaders is put into place, Illinois will continue
the long, slow economic decline that has been underway
for over 30 years.
The Solution
It is a The Pension Funding & Fairness Act solves
fundamental this problem by:
truth that • Instituting a constitutional amendment
the reason that establishes a Spending Growth Index
of inflation plus population growth. This
we have an allows state spending to grow each and
every year in a predictable way, helping
$83 billion policymakers provide services efficiently
unfunded and effectively. Historically, over the last
20 years, state tax growth has increased
pension at an average annual rate of 4.8 percent,
while inflation plus population is pro-
liability in jected to grow at an average annual rate
the first place of 2.4 percent.6
is because • Requiring that the first appropriation each
year be to the annually required public
the Illinois employee pension payment. We have a
General moral obligation to fund pensions that
have been promised and earned. Illinois
Assembly must put the pension contribution at the
and successive top of the payment list, just as a home-
owner puts the mortgage payment first on
governors the payment list at the kitchen table. We
need to make this payment first in order
have not to stop burying our children and grand-
fully funded children with unsustainable debt that de-
stroys their economic opportunity.
the annual
With these two steps in place, policymakers
pension can then allocate the remaining general funds
payment for to core government priorities. These two steps
will, for the first time, require legislators and
many years. governors to set priorities while allocating finite
taxpayer resources.
Additional steps required by the Pension
Funding & Fairness Act include:
• Using initial surpluses above the Spending
Growth Index to pay down the past due
debt, now estimated to be nearly $6 bil-
lion coming into Fiscal Year 2011.7 Sever-
al years of overspending created this debt,
and it will take several years to reduce it
to zero. We estimate that this debt can
be paid down by Fiscal Year 2014 with a
Past Due Paydown Fund.8
• Establishing a Budget Stabilization
Fund. This fund would be filled from
revenues above the Spending Growth In-
dex once the past due debt is paid down.
The Budget Stabilization Fund would
equal no more than 8 percent of the Gen-
eral Revenue Fund’s total spending and
could only be accessed during revenue
shortfalls that occur during economic
downturns. This provides a safety mecha-
nism to ensure smoother, more predict-
able state spending on core services dur-
ing an economic crisis.
• Establishing a Taxpayer Relief Fund.
This fund would be filled from revenues
above the Spending Growth Index once
the past due debt has been paid down
and the Budget Stabilization Fund is fully
funded. We anticipate that the Taxpayer
Relief Fund would begin being funded in
2015. Refunds would then be issued annu-
ally to Illinois taxpayers according to the
number of exemptions filed on their most
recent tax returns.
Please see Graphic 1 for a summary of the
effects of this proposal.9
Our proposal provides a safety mechanism (see
Appendix A for model legislation language)
so that future legislatures can put a question
before the voters of Illinois to use surplus
revenues above the Spending Growth Index for
designated purposes.
 Graphic 1. How A Spending Growth Index Secures Pension Funding & Provides Taxpayer Relief
Fiscal Years 2011 to 2045
All Dollar Amounts are in Millions
Pension Funding & Fairness Act under Public Act 096-0889 (Pension Reform for New Employees)

Budget Cumulative
Past Due Taxpayer
Fiscal General Fund General Fund Budget Stabilization Budget
Paydown Fund Relief Fund
Years Spending (a) Revenue (b) Surplus Fund Stabilization
Contribution(c) Contribution (d)
Contribution Fund

2011 $26,820 (e) $27,064 (f) $243 $243 $0 $0 $0

2012 $26,950 $28,370 $1,420 $1,420 $0 $0 $0
2013 $27,496 $29,739 $2,244 $2,244 $0 $0 $0
2014 $28,167 $31,175 $3,008 $1,961 $1,047 $1,047 $0
2015 $28,840 $32,679 $3,839 $0 $1,260 $2,307 $2,579
2016 $29,530 $34,256 $4,726 $0 $55 $2,362 $4,671
2017 $30,236 $35,910 $5,674 $0 $56 $2,419 $5,617
2018 $30,959 $37,643 $6,684 $0 $58 $2,477 $6,626
2019 $31,700 $39,460 $7,760 $0 $59 $2,536 $7,701
2020 $32,457 $41,364 $8,907 $0 $61 $2,597 $8,846
2021 $33,233 $43,360 $10,127 $0 $62 $2,659 $10,065
2022 $34,027 $45,453 $11,426 $0 $64 $2,722 $11,362
2023 $34,841 $47,647 $12,806 $0 $65 $2,787 $12,741
2024 $35,673 $49,946 $14,273 $0 $67 $2,854 $14,207
2025 $36,525 $52,357 $15,832 $0 $68 $2,922 $15,764
2026 $37,398 $54,884 $17,486 $0 $70 $2,992 $17,416
2027 $38,291 $57,533 $19,242 $0 $71 $3,063 $19,171
2028 $39,205 $60,309 $21,104 $0 $73 $3,136 $21,031
2029 $40,141 $63,220 $23,079 $0 $75 $3,211 $23,004
2030 $41,099 $66,271 $25,172 $0 $77 $3,288 $25,095
2031 $42,080 $69,470 $27,390 $0 $78 $3,366 $27,311
2032 $43,084 $72,822 $29,738 $0 $80 $3,447 $29,658
2033 $44,112 $76,337 $32,225 $0 $82 $3,529 $32,142
2034 $45,165 $80,021 $34,857 $0 $84 $3,613 $34,772
2035 $46,242 $83,883 $37,641 $0 $86 $3,699 $37,555
2036 $47,345 $87,932 $40,587 $0 $88 $3,788 $40,499
2037 $48,474 $92,176 $43,702 $0 $90 $3,878 $43,611
2038 $49,630 $96,624 $46,994 $0 $92 $3,970 $46,902
2039 $50,813 $101,288 $50,475 $0 $95 $4,065 $50,380
2040 $52,024 $106,176 $54,152 $0 $97 $4,162 $54,055
2041 $53,264 $111,300 $58,036 $0 $99 $4,261 $57,937
2042 $54,533 $116,672 $62,139 $0 $102 $4,363 $62,037
2043 $55,833 $122,303 $66,470 $0 $104 $4,467 $66,366
2044 $57,163 $128,206 $71,043 $0 $106 $4,573 $70,936
2045 $58,524 $134,393 $75,869 $0 $109 $4,682 $75,760
Total $1,411,876 $2,358,244 $946,368 $5,868 $4,682 n.a. $935,818

(a) Spending growth based on population + inflation projections from U.S. Census and Congressional Budget Office.
(b) Revenue growth based on 20-year historical average of 4.8 percent.
(c) Accounts for the past due operating debt from Fiscal Years 2009 and 2010.
(d) This analysis does not include the increased growth in the economy and revenues associated with the tax refunds from the
Taxpayer Relief Fund.
(e) FY 2011 $26,820 spending = $21,299 (Budget Solutions 2011 appropriations) + $169 (net value of transfers) + $3,520 (pension
contribution) + $488 (add-back for half-year pension savings) + $542 (2003 POB payment) + $802 (2009 pension note).
(f) FY 2011 $27,064 revenue = $19,684 (state sources) + $5,300 (federal sources) + $1,728 (statutory transfers in) + $352 (fund sweeps).
Source: Commission on Government Forecasting and Accountability and Illinois Policy Institute.
 Page 4 of 24

Why This Works the good times that build in spending levels
that become unsustainable when inevitable
The fundamental problem in Illinois state economic slowdowns occur.
government is a lack of spending discipline.
For years, the taxpayers provided Illinois The Pension Funding & Fairness Act solves
government with record revenues. State these issues. It limits overall spending growth
spending increased 39 percent after inflation to a reasonable, affordable amount through the
from 1998 to 2008.10 State leaders spent every use of the Spending Growth Index. This index
dime and borrowed billions more, with the total will let government grow each year to keep
general obligation and capital debt growing pace with inflation and population growth;
from $8.4 billion in fiscal year 2001 to $25.4 according to U.S. Census and Congressional
billion in fiscal year 2011.11 Illinois now ranks Budget Office projections, inflation plus
37th in debt service as a share of revenue population will increase at an average annual
among the 50 states; only 13 states have worse rate of 2.4 percent. The Pension Funding &
burdens than Illinois.12 Fairness Act will also change incentives for
government policymakers. For the first time
The General Assembly and successive ever, Illinois government will be required to
governors have demonstrated year after year become more productive—just as the private
The Pension that they lack the discipline to set priorities and sector must do when resources are finite but
Funding & rein in spending. Each year they have spent
more and more by expanding government
demands for services continue.

Fairness Act obligations to unsustainable levels. These The Pension Funding & Fairness Act also
expansions of state government obligations creates a mechanism to pay down past due
limits overall create structural overspending, in turn leading debt, the Past Due Payment Fund. Further,
spending to the so-called structural deficits. It is the
rapid, excessive growth in spending during
during those periodic years when revenues
don’t grow with inflation plus population, the
growth to a
Chart 1

Graphic 2
reasonable, How A Spending Growth Index Secures Pension Funding & Provides
affordable Taxpayer Relief

Fiscal Years 2011 to 2045

amount
$80,000

through the $70,000

use of the
Millions of Dollars

$60,000

Spending $50,000

Growth $40,000

Index. $30,000

$20,000

$10,000

$0

2011
2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044

Fiscal Years

Taxpayer Relief Fund
Source: Commission on Government

Contribution


Budget Stabilization Fund
Forecasting and Accountability and


Contribution


Illinois Policy Institute.


Past Due Paydown Fund
Contribution


 Page 5 of 14
Budget Stabilization Fund creates the safety
net to allow spending to continue without a
tax hike or difficult spending cuts. This creates
continuity and certainty for policymakers and
the entrepreneurs, investors and workers who
fund government.
Finally, the Pension Funding & Fairness Act
provides a mechanism to reward taxpayers
for the sacrifices they make every day. With a
constitutionally-protected spending brake in
place, taxpayers know that government will be
well funded—but not excessively funded. When
the hard work of entrepreneurs, investors and
workers pays off, the rewards will be returned
to those who took the risks and delivered: the
taxpayers.
Is This Politically Possible?
Our purpose is to illustrate that there is a
workable, and yes, difficult, solution to solve
Illinois’s perpetual fiscal crisis once and for all.
The November 2010 election will tell us much
about whether these policies are viable in 2011.
We believe the Pension Funding & Fairness Act
is both necessary and appealing, but it will not
be achieved without hard work. As to creating
the political will and the coalitions necessary
to implement the policies discussed here, that
will take active effort by the Illinois public, its
civic organizations, the media and courageous
leadership from genuinely reform-minded
political decision makers and candidates of
both parties.
It is true that this proposal will require
the General Assembly itself to refer out a
constitutional amendment for a vote by the
people of Illinois. While we explicitly propose
that the Pension Funding & Fairness Act be
adopted immediately by statute, the key for
Illinois’s long-term health is to amend the
constitution so that when the current crisis
passes future legislatures and governors cannot
undo the difficult, but effective, policy changes
advocated here.
The only way the constitution can be amended
is if the people of Illinois send a signal to
candidates and legislators that the time is now
to once and for all turn Illinois around—to
turn our state away from perpetual decline and
instead put us on the path to prosperity. The
public must become engaged and advocate for
policies that will work.
Further, the policies proposed must offer
something to all interested parties. The Pension There is a
Funding & Fairness Act offers the following
groups real advantages over the status quo: workable,
• Public employees. In return for supporting
and yes,
the reforms outlined here, public em- difficult,
ployee unions and their members receive
a constitutionally-protected funding solution to
mechanism that puts pension payments at solve Illinois’s
the top of the appropriation list. Current
and future retirees will rest easy knowing perpetual
their earned pensions are safe from politi-
cal shenanigans from future legislatures
fiscal crisis
and governors. True, the public employee once and for
unions and its members must concede on
some fronts. They must forego inequi- all.
table salaries, benefits and pensions. They
must accept that there must be equity
between those who pay the taxes to fund
government and those who benefit from
government. For more on the current
inequity, please see our May 2009 report13
on public employee and private sector
compensation disparity.
• Taxpayers. Illinois residents, too, must
sacrifice by continuing to pay a high level
of taxes until the Taxpayer Relief Fund
is funded and tax refunds begin. They
will bear the burden of paying down the
past due debt and funding the Budget
Stabilization Fund. But in return, Illinois
taxpayers will rest easy knowing that Il-
linois state government is constitutionally
limited from taking too much from their
wallets.
• Public aid recipients. Those who benefit
from government spending in education,
in health and human services, in public
safety and in other areas will know that
spending will be based upon core priori-
ties. As demands for services increase, so
too will resources—within the Spending
Growth Index’s proscribed limit.
 Page 6 of 24
• Service providers. State vendors and contrac-
tors who provide services on behalf of
the state, and advocates for state spending
on social services, health care services,
education, and public safety will know
that resources will grow each and every
year in a reasonable, affordable way. If
demands for services grow beyond the
financial resources available, state workers,
vendors, contractors and advocates must
seek productivity improvements in order
to expand services.
It is time for a new paradigm to begin—
the paradigm of increasing government
productivity rather than increasing government
consumption of the taxpayer’s wallet.
The time is What This Proposal Does Not Address
now for real This is a comprehensive proposal that accounts
reform and for many of the root causes of today’s fiscal
crisis in Illinois. Nevertheless, it does not
revitalization. attempt to address every single issue, many
Illinois can of which are important. In this proposal we
do not address the issue of converting Illinois
once again to accrual accounting, nor do we address
stand as an the issues of post-employment benefits or
expanded pension benefit reforms. Others
economic have done good work in these areas, including
the Institute for Truth in Accounting, the
powerhouse Civic Committee of the Commercial Club of
and a beacon Chicago, Americans for Prosperity, the Civic
Federation and the Taxpayer Action Board.
of prosperity. Broadly speaking, we are supportive of their
recommendations.
Our guiding focus remains that we first
restructure the rules of the game to put Illinois
on a cash basis surplus annually. We must make
the pension payment the first appropriation
each year, pay down past due debt, establish
a workable safety net with the Budget
Stabilization Fund and then begin returning
the taxpayers their hard-earned cash. Further,
we believe that this must be done without tax/
fee hikes, without creating new categories of
taxation and without borrowing.
When we have fixed the root causes of
the current crisis, as this proposal does, we
encourage those who want to solve these and
other issues to put the choice before the voters
for debate and decision.
Conclusion
Illinois was once a growing, vibrant state
admired the world over. Illinois stood tall as a
colossus of economic might. Illinois built the
tallest buildings; it reversed rivers; it produced
more manufacturing goods than just about any
other state; it was an agricultural and energy
giant; it was a transportation hub by road,
by rail, by air and by river; it was a pioneer in
financial markets; and its reputation as the can-
do state had not yet faded.
Our history is filled with stories of a can-do
spirit—the American spirit—of opportunity,
self-reliance and accomplishment. People were
once proud to be from Illinois.
Not so much today. Most of us are
embarrassed. We are embarrassed by our
reputation for corruption. We are worried
about our long economic decline. And too
many—too many that work in Springfield, to be
frank—have resigned themselves, accepting a
“business as usual” attitude that will inexorably
lead to perpetual decline.
It does not have to be that way. And that is why
we are providing this proposal.
We do not see these policies as partisan, but
rather common-sense solutions to what ails
our state. The solutions won’t be easy and they
will require political courage and will. The
time is now for real reform and revitalization.
Illinois can once again stand as an economic
powerhouse and a beacon of prosperity.
But only if we choose the right path. The
Pension Funding & Fairness Act, in concert
with the Institute’s Budget Solutions 2011, if
adopted, will put Illinois back on that path to
prosperity.
The time is now to turn Illinois around—
before it is too late.
 Page 7 of 24

Endnotes as calculated by the Commission on Government

Forecasting and Accountability.
1 See J. Scott Moody and Wendy P. Warcholik,
10 Kristina Rasmussen, “Out Of Control: The
“Mission Possible: Fully Funding Illinois’s State
Explosion of Illinois State Government Spending,”
Pensions While Respecting Hardworking Taxpayers,”
Illinois Policy Institute, August 21, 2009, http://
Illinois Policy Institute, January 19, 2010, http://
tinyurl.com/illinoisspending.
tinyurl.com/illinoispensions.
11 The Institute for Illinois’ Fiscal Sustainability
2 “Budget Solutions 2011: A New Way
at the Civic Federation, “A Fiscal Rehabilitation
Forward,” Illinois Policy Institute, March 15,
Plan for the State of Illinois,” February 22,
2010, http://www.illinoispolicy.org/news/article.
2010, http://civicfed.org/sites/default/files/
asp?ArticleSource=2284.
IllinoisFiscalRehabilitationPlan.pdf.
3 U.S. Department of Labor’s Bureau of Labor
12 Arthur B. Laffer, Stephen Moore & Jonathan
Statistics, “Quarterly Census of Employment and
Williams, “Rich State, Poor State: 2010 ALEC-
Wages,” http://www.bls.gov/cew/.
Laffer State Economic Competitiveness Index:
4 The Institute for Illinois’ Fiscal Sustainability Illinois,” American Legislative Exchange Council,
at the Civic Federation, “A Fiscal Rehabilitation 2010, http://www.alec.org/AM/Template.
Plan for the State of Illinois,” February 22, cfm?Section=Rich_States_Poor_States.
2010, http://civicfed.org/sites/default/files/
13 Kristina Rasmussen, “Robbing Peter to Pay Paul:
IllinoisFiscalRehabilitationPlan.pdf.
A Closer Look at Public Employee Pay,” Illinois
5 Household debt of $4,423 equals per capita debt Policy Institute, May 26, 2009, http://tinyurl.com/
of $1,682 multiplied by average Illinois household publicemployeepay.
size of 2.63. The Institute for Illinois’ Fiscal
Sustainability at the Civic Federation, “A Fiscal
Rehabilitation Plan for the State of Illinois,” February
22, 2010, http://civicfed.org/sites/default/files/
IllinoisFiscalRehabilitationPlan.pdf. U.S. Census,
Illinois QuickFacts, http://quickfacts.census.gov/qfd/
states/17000.html.
6 The historical state tax data and projected
population change is from the U.S. Department of
Commerce’s Census Bureau, while the projected inflation
rate is from the Congressional Budget Office.

7 State of Illinois, FY 2011 Budget, http://www2.

illinois.gov/budget/Pages/default.aspx.
8 An alternative to pay this past due debt down faster
would be to sell or lease assets, including the Illinois
Tollway. However, the proceeds in excess of the past due
debt should not be used to fund general operations—that
spending level must stay within the limits proscribed in
the Illinois Policy Institute’s Budget Solutions 2011
and the Pension Funding & Fairness Act’s Spending
Growth Index. Excess proceeds after paying down
the past due debt could be used either to pay down the
unfunded pension debt or for capital projects. Another
alternative would be to use the savings from prospective
benefit reform for the same purpose.
9 These calculations reflect the state’s reduced
contribution schedule under Public Act 096-0889,
 Page 8 of 24

Appendix A: Model Pension Funding & Fairness Act

The following provides a general outline of how the Pension Funding & Fairness Act would look, at a level of detail
to serve as a platform for actual legislation (and including all of the features described in this study). This Act would
initially be implemented statutorily and then referred by the legislature to the voters for consideration as a constitutional
amendment. Only by amending the Illinois Constitution in this way can future legislatures be prevented from taking
Illinois back down the irresponsible course it has long been following.

Pension Funding & Fairness Act

Definitions

Emergency. “Emergency” means extraordinary circumstances outside the control of the

Legislature, including:

Catastrophic events such as a natural disaster, terrorism, fire, war and riot;

Court orders or decrees.

Increase in Revenue. “Increase in revenue” means any legislation or tax levy that is estimated to
result in a net gain in state revenue of at least 0.01 percent of General Fund revenue in at least
one fiscal year, and:

Enacts a new tax (or fee);

Increases the rate or expands the base of an existing tax (or fee);

Repeals or reduces any tax exemption, credit or refund; or

Extends an expiring tax increase (or fee).

Inflation adjustment factor. “Inflation adjustment factor” means the increase in the Chicago
Metropolitan Statistical Area Consumer Price Index for the most recently available calendar
year as calculated by the United States Department of Labor, Bureau of Labor Statistics. The
inflation adjustment factor may not be less than zero but never more than 10 percent.

State spending. “State spending” means any authorized state appropriations and allocations.

Population adjustment factor. “Population adjustment factor” means the average annual
percentage increase in population for the three most recent years for which data is available,
as determined annually by the United States Department of Commerce, Census Bureau. The
population adjustment factor may not be less than zero.

Revenue. “Revenue” means taxes and fees collected by the State.

Tax. “Tax” means any amount raised for the general support of government functions.

Spending Growth Index

State Spending Growth Index. Beginning with the fiscal year that starts after this section takes
effect, the maximum annual percentage change in state fiscal year spending in the categories
 Page 9 of 24

specified equals the inflation adjustment factor plus the population adjustment factor and
any increases attributable to measures approved under “Approval of revenue increases.” This
limitation must be calculated separately for the following categories:

General Fund;

Highway Fund; and

Other Special Revenue Funds.

Exceptions. The following may not be counted in calculating expenditure limitations:

Amounts returned to taxpayers as refunds of amounts exceeding the expenditure limitation in

a prior year;

Amounts received from the Federal Government;

Amounts collected on behalf of another level of government;

Pension contributions by employees and pension fund earnings;

Pension and disability payments made to former government employees;

Amounts received as grants, gifts or donations that must be spent for purposes specified by
the donor;

Amounts paid pursuant to a court award; or

Reserve Transfers.

Approval of Expenditure increases. The following form of approval is required to adopt an

increase in state spending beyond the limitation:

For an increase in state spending:

The measure must be approved by a three-fifths supermajority vote of all members of

each House of the Legislature; and

The measure must be approved by a majority of voters.

Exceptions. Voter approval is not required if the spending is as a result of an increase in state
revenue under “Approval of revenue increases.”

Approval by voters; emergency approval. The question of whether to adopt legislation to impose
an increase in State spending beyond the limitation must be submitted to the voters for approval
at the next general election. If the Legislature determines by a three-fifths supermajority vote that
legislation to increase spending beyond the limitation should take effect sooner than the next general
election, the Legislature may provide for submission of the question to the voters at any regular or
special election.

Spending estimates. A measure submitted to the voters must include an estimate of the spending
increase by the measure for the first three fiscal years of its implementation.
 Page 10 of 24

Notice. At least 30 days before an election, the Secretary of State shall mail, at least cost, a titled
notice or set of notices addressed to “All Registered Voters” at each address of every active
registered voter. Notices must include the following information and may not include any
additional information:

The election date, hours, ballot title and text, and local election office address and telephone
number.

For each proposed spending increase, the estimated or actual total of fiscal year spending for
the current year and each of the past four years, and the overall percentage and dollar
change; and

For the first full fiscal year of each proposed spending increase, estimates of the maximum
dollar amount of each increase and of fiscal year spending without the increase.

Ballot questions for spending increases must begin: “Shall state spending increase by (amount
of first or, if phased in, full fiscal year dollar increase) annually for the purpose of . . .?”

Costs. The State shall reimburse municipalities for the costs of a special election.

Approval of Revenue Increases

Approval of increase. The following form of approval is required to adopt an increase in state
revenue:

For an increase in revenue of the State:

The measure must be approved by a three-fifths supermajority vote of all members of

each House of the Legislature; and

The measure must be approved by a majority of voters.

Exceptions. Voter approval is not required if:

Annual state revenue is less than annual payments on general obligation bonds, required
payments relating to pensions and final court judgments; or

The measure is an emergency tax.

Approval by voters; emergency approval. The question of whether to adopt legislation to

impose an increase in revenue of the State must be submitted to the voters for approval at the
next general election. If the Legislature determines by a three-fifths supermajority vote that
legislation to increase revenue via an emergency tax should take effect sooner than the next
general election, the Legislature may provide for submission of the question to the voters at
any regular or special election.

Revenue estimates. A measure submitted to the voters must include an estimate of the amount
to be raised by the measure for the first three fiscal years of its implementation.
Notice. At least 30 days before an election, the Secretary of State shall mail, at least cost, a titled
notice or set of notices addressed to “All Registered Voters” at each address of every active
 Page 11 of 24

registered voter. Notices must include the following information and may not include any
additional information:

The election date, hours, ballot title and text and local election office address and telephone
number.

For each proposed revenue increase, the estimated or actual total of fiscal year spending for
the current year and each of the past four years, and the overall percentage and dollar
change; and

For the first full fiscal year of each proposed revenue increase, estimates of the maximum
dollar amount of each increase and of fiscal year spending without the increase.

Ballot questions for revenue increases must begin: “Shall (description of the tax increase) to
increase state revenues by (amount of first or, if phased in, full fiscal year dollar increase)
annually for the purpose of . . .?”

The State shall reimburse municipalities for the costs of a special election.

Emergency Taxes

Emergency taxes permitted; condition. The state may impose

emergency taxes only in accordance with this section:

The tax must be approved for a specified time period by a three-fifths majority of the
members of each House of the Legislature;

Emergency tax revenue may be spent only after other available reserves are depleted and must
be refunded 180 days after the emergency ends if not spent on the emergency; and

The tax must be submitted for approval by the voters at the next regular election.

Absence of approval. If not approved by the voters as provided in this section, an emergency tax
expires 30 days following the election.

Past Due Paydown Fund

Establishment. The Past Due Paydown Fund, referred to in this section as “the fund,” is
established and must be administered for the purposes identified in this section.

Transfer to fund; limits. At the close of each fiscal year beginning in 2011, the State Comptroller
shall identify the amount of General Fund unappropriated surplus above the Spending
Growth Index limitation and transfer to the fund any amount necessary up to the total past
due operating debt owed by the state as of the close of fiscal year 2010.

Use of fund. The Legislature must authorize transfers, appropriations and allocations from the
fund only to fund the costs of paying down the remaining past due debt until such debt is
zero. Remaining funds shall be transferred to the Budget Stabilization Fund.
 Page 12 of 24

Budget Stabilization Fund

Establishment. The Budget Stabilization Fund, referred to in this section as “the fund,” is
established and must be administered for the purposes identified in this section.

Transfer to fund; limits. At the close of each fiscal year, the State Comptroller shall identify the
amount of General Fund unappropriated surplus above the state Spending Growth Index
expenditure limitation and above the amount necessary to fully fund and pay down the past
due operating debt to zero. The fund may not exceed eight percent of the total General Fund
revenues received in the immediately preceding fiscal year.

Use of fund. The Legislature may authorize transfers, appropriations and allocations from the
fund only to fund the costs of State Government up to the expenditure limit calculated under
“Expenditure Limitation” in years when state revenues are less than the amount necessary
to finance the level of expenditures permitted under “Spending Growth Index Expenditure
Limitation.” Transfers require a three-fifths supermajority vote of the Legislature.

Investment of funds; proceeds. The money in the fund may be invested as provided by law, with
the earnings credited to the fund. At the close of every month during which the fund is at the
eight percent limitation, the State Comptroller shall transfer the excess to the Taxpayer Relief
Fund.

Taxpayer Relief Fund

Establishment. The Taxpayer Relief Fund, referred to in this section as “the fund,” is established
and must be administered for the purposes identified in this section.

Transfer to fund; limits. At the close of each fiscal year, the State Comptroller shall identify
the amount of General Fund unappropriated surplus above the state expenditure limitation
and above the amount necessary to fully fund the Past Due Paydown Fund and the Budget
Stabilization Fund.

Notification. By September 1st annually, the State Comptroller shall notify the Legislature and the
Department of Revenue of the amount in the fund as a result of the transfers.

Refund. If the amount in the fund exceeds 1 percent of General Fund expenditures, the
Legislature shall, by September 15th, enact legislation to provide for the refund to taxpayers
of amounts in the fund. Refunds may take the form only of temporary or permanent broad-
based tax rate reductions.

Refund in case of legislative inaction. If the Legislature does not enact legislation by
September 15th to provide refunds, then the State Comptroller shall, by September 30th,
notify the Department of Revenue of the amount in the fund. The Department of Revenue
shall calculate a one-time bonus personal exemption refund. The amount of the personal
exemption refund must be calculated by dividing the amount in the fund identified by the State
Comptroller by the number of personal exemptions claimed on income tax returns filed for
tax year beginning in the previous calendar year. The Department of Revenue shall issue a
refund by October 15th to a taxpayer who filed an income tax return by April 15th of the same
calendar year based on the number of exemptions claimed (times refund per exemption) on
the taxpayer’s return without regard to the taxpayer’s tax liability for the year.
 Page 13 of 24

Appendix B: Legislation to Prioritize the Pension Payment

The following provides a general outline of how the Pension Funding & Fairness Act’s requirement to make the
pension payment the first appropriation authorized each fiscal year would work. The goal is to ensure that the actual
expenditures are made as a first action each month. This provision would initially be implemented statutorily and
then referred by the legislature to the voters for consideration as a constitutional amendment. Amending the Illinois
Constitution will prevent future legislatures from taking Illinois down the irresponsible course it has long been
following. This language is intended to provide a framework and guide only.

Pension Funding & Fairness Act

Provision to Make the Pension Payment the First Appropriation and Actual Expenditure
Each Year

Definitions

Pension Payment. “Pension Payment” means the total annual required pension payment for each
fiscal year as defined by the Commission on Government Forecasting and Accountability
(COGFA) and in keeping with generally accepted accounting principles (GASB).

First Appropriation. “First Appropriation” means any legislation as part of the annual budgetary
and appropriation process must be directed to authorize and require the full pension payment
prior to any other appropriations or expenditures.

Actual Expenditures. “Actual Expenditures” means the payment of state funds to satisfy any
state financial obligation.

First Expenditure. “First Expenditure” means that any authorized state appropriation and
subsequent actual payments must have the first payment be made toward the annual required
pension payment as defined herein.

Monthly Pro Rata Pension Payment. “Monthly Pro Rata Pension Payment” means the average
monthly pension payment calculated by dividing the total fiscal year annual pension payment
by 12 months.

Pension Appropriation and Payments

Pension Appropriation. Beginning with Fiscal 2011 and for each budget year thereafter, the
General Assembly’s first appropriation each year must be directed to make the full annual
pension payment defined by COGFA and in compliance with generally accepted accounting
principles (GASB). This appropriation must be made first and executing it (making the actual
payments required by it) shall take precedence over any other appropriation or expenditure.

Exceptions. There shall be no exceptions to this requirement.

Actual Expenditures. The following terms define how actual expenditures must be made to
comply with the pension payment appropriation defined above:

By March 1 of each year, the State Comptroller shall take the total annually required pension
payment for the upcoming fiscal year (beginning on July 1) and divide that number by
12. This amount becomes the Monthly Pro Rata Pension Payment for each month of the
upcoming fiscal year.
If during the fiscal year, COGFA adjusts the annually required pension payment for the current
 Page 14 of 24

year upward, the State Comptroller shall recalculate the Monthly Pro Rata Pension Payment
upward accordingly and allocate the increase evenly over the remaining months to ensure that
the full annual pension payment is made for the fiscal year.

If during the fiscal year, COGFA adjusts the annually required pension payment downward, the
original payment schedule shall be maintained. Payments in excess of the revised payment
schedule shall be allocated to any existing unfunded pension liability.

If during the fiscal year, COGFA adjusts the annually required pension payment downward, and if
there is no remaining unfunded pension liability as calculated by COGFA and in compliance
with generally accepted accounting principles, then the State Comptroller shall recalculate the
Monthly Pro Rata Pension Payment downward accordingly and allocate the reduction evenly
over the remaining months to ensure that the full annual pension payment is made for the
fiscal year.

By no later than the 5th of each month, the Comptroller will disburse funds as authorized by
the Pension Payment Appropriation to the various state retirement funds such that the total
payment equals the Monthly Pro Rata Pension Payment. Said payments will be allocated
proportionally to each retirement fund as calculated by COGFA.

Exceptions. There shall be no exceptions to this provision.

State Spending Freeze. If for any reason the Monthly Pro Rata Pension Payment is not made by
the 5th of the month, or if for any reason the accumulated payments for the year do not equal
the sum of the Monthly Pro Rata Pension Payments for the months having passed during the
fiscal year, the State Comptroller shall cease all payments from state resources until such time
as the pension payment is brought current for the year.

Exceptions. There shall be no exceptions to this provision.

 Page 15 of 24
Appendix C: How Did We Get Here? Defining the Pension Funding Problem.
This appendix comes from our original Pension Funding & Fairness Act report (released in January 2010), which
has since been updated in this paper.
Whether you are a public employee worried
about how your pension is going to be funded
or an Illinois taxpayer concerned you will have
to pay even higher taxes to fund pensions, we
have a solution that will put your mind at ease.
By law, the Illinois pension system must be 90
percent funded by FY 2045. But in fact, the
pension system is running a large deficit, called
the “unfunded pension liability.” For example,
in FY 2010, pension system assets are estimated
to be $48.6 billion, while liabilities are estimated
to be $131.6 billion. If you subtract the assets
from the liabilities, this leaves an unfunded
pension liability of $83 billion—which is the
equivalent of three years’ worth of General
Fund revenue.
A common way to show the unfunded pension
liability is the “funded ratio,” which is assets
divided by liabilities. The overall funded ratio
in FY 2009 was a dismal 38.2 percent. More
disturbingly, the trends show the funded ratio
continuing to deteriorate as time marches on,
rather than increase. The State Employees’
Retirement System recently released funded
ratio for FY 2009 showed a dramatic decline of
26 percent—from 46.1 percent in FY 2008 to a
paltry 33.9 percent in FY 2009.
In order to make up the unfunded pension
liability, the state government’s contribution will
have to be larger. Under current law, the annual
state contribution to the state retirement system
and debt service is estimated to grow more than
six-fold, from $4.5 billion in FY 2010 to $25.7
billion by FY 2045. To put this into perspective,
the FY 2010 state pension contribution alone
would consume nearly half (40 percent) of
individual income tax collections, or more than
half (60 percent) of sales tax collections.
Unfortunately, politicians have every incentive
to defer payment into the pension fund because
the consequences of not doing so are years,
if not decades, away—certainly well beyond
the next election cycle. Not surprisingly,
finding creative ways to postpone the state’s
responsibility to state retiree programs has
become endemic. Consider the following
examples of such irresponsibility:
• The largest cause of the unfunded pension
liability is insufficient state contributions.
• The FY 2003 Pension Obligation Bond
(POB) was severely back-loaded. This is
an enormous gamble, and if it fails, future
Illinois taxpayers will pay the price.
• The other postemployment benefits
(OPEB) bill has been entirely ignored and,
as a result, is also unfunded.
• The recent legislation mandating “asset
smoothing” injects politics into what
should be straightforward actuarial analysis
for short-term budget savings.
• Bond rating downgrades by rating agencies
have raised future borrowing costs, and
threats of additional bond downgrades
have been ignored.
The Pension Funding & Fairness Act will
eliminate this destructive behavior. It will put
reasonable speed limits on the growth of state
government spending, based on the increase
in inflation plus the increase in population.
In effect, this will prevent politicians from
neglecting to pay the bills. The limits can only
be exceeded with approval by the majority of
voters in a statewide referendum. Furthermore,
all surplus revenue above the spending limit
will be required to fund the annual state
contribution to the pension system first and
foremost. Once the annual state contribution is
at 100 percent, the surplus revenue would flow
to (in order of priority): pension debt payback,
the Budget Stabilization Fund and the Taxpayer
Relief Fund.
This comprehensive approach to solving
Illinois’s unfunded pension liabilities is bold and
forward thinking. As with any policy proposal,
the idea does come with transitional challenges,
 Page 16 of 24
including initial borrowing while the economy
continues to recover, a budget freeze for up to
three years in the beginning, and an increase
in the amount public employees pay for their
health care benefits. Yet all of these matters are
temporary and surmountable.
Beyond the Pension Funding & Fairness Act,
the state needs to work toward the eventual
implementation of a two-tier system, with
new employees shepherded into a defined
contribution system rather than a defined
benefit program. Governor Quinn’s pension
reform proposal was only a modest step toward
this goal, but analysis of the plan shows how
even small changes can yield large savings.
By embracing the Pension Funding & Fairness
Act, Illinois will be able to fully fund the annual
required contribution in compliance with the
spirit of the law and pay off all pension-related
debt by FY 2024—with the exception of the
30-year FY 2003 Pension Obligation Bonds.
These bonds cannot be paid off early since
they are not callable bonds. Further, this will
put a permanent spending brake in place to
prevent state government from letting spending
growth spiral out of control once again.
Overall, this plan will help the government
honor its commitments while also honoring its
responsibility to the taxpayers—all while
launching a new period of growth and
government accountability in Illinois.
Understanding the Unfunded Pension
Liability
The Illinois pension system consists of five
separate retirement systems: the Teachers
Retirement System (TRS), State Employees’
Retirement System (SERS), State Universities’
Retirement System (SURS), Judges’ Retirement
System (JRS) and the General Assembly
Retirement System (GARS)—they will hereafter
be referred to collectively as the “Illinois
pension system.”
The health of the Illinois pension system is
based on two elements—assets held versus
liabilities accrued:
• Assets: The market value of stocks, bonds
and other investments that are held by the
pension system. Each year assets grow in
one of two ways. First, the value of the
assets changes, and second, the Illinois
state government deposits an annual
contribution.
• Liabilities: The present value of pension
benefits to be paid out to current and
future retirees. Each year liabilities grow
based on a number of assumptions, such
as expected salary increases, mortality,
turnover and other factors.
For the pension system to be considered “fully
funded,” assets must equal liabilities. Under
Public Act 88-0593 passed in 1995, the Illinois
pension system must be 90 percent funded
by FY 2045. Chart 1 and Table 1 show the
projected game plan to reach this funding goal.
Unfortunately, the Illinois pension system is far
from being fully funded. Instead, it is currently
running a large deficit called the unfunded
pension liability. For example, in FY 2010,
pension system assets are estimated to be $48.6
billion, while liabilities are estimated to be
$131.6 billion. This leaves an unfunded pension
liability of $83 billion—which is the equivalent
of three years’ worth of General Fund revenue.
A common way to show the unfunded
pension liability is the “funded ratio,” which is
assets divided by liabilities. Table 1 shows the
projected funded ratio for the entire pension
system, while Table 2 shows the actual funded
ratio by each separate retirement system. The
overall funded ratio in FY 2009 was a dismal
38.2 percent. However, the funded ratio varies
considerably by individual retirement system,
from a low of 22.7 percent for the General
Assembly Retirement System to a high of 41.9
percent for the State Universities’ Retirement
System.
More disturbingly, the trends show the funded
ratio continuing to deteriorate. As shown in
Table 2, the State Employees’ Retirement
System recently released its funded ratio for FY
2009. The funded ratio fell by a dramatic 26
 Page 17 of 24

Table 1
Unfunded Pension Liability is the Gap Between Assets and Liabilities
Fiscal Years 2010 to 2045
Billions of Dollars
Projections under Current Law (a) Projections under Gov. Quinn's Proposal (a)
Fiscal Unfunded Unfunded
Year Funded
Assets Liabilities Pension Ratio Assets Liabilities Pension Funded Ratio
Liability Liability
2010 $48.6 $131.6 $83.0 36.9% $46.3 $131.5 $85.1 35.2%
2011 $52.1 $138.1 $86.0 37.7% $49.1 $137.9 $88.8 35.6%
2012 $55.7 $144.8 $89.2 38.4% $51.8 $144.4 $92.6 35.9%
2013 $59.4 $151.8 $92.3 39.2% $54.6 $151.0 $96.4 36.2%
2014 $63.3 $158.8 $95.5 39.9% $57.5 $157.7 $100.2 36.5%
2015 $67.4 $166.1 $98.7 40.6% $60.4 $164.4 $104.0 36.7%
2016 $71.6 $173.5 $102.0 41.2% $63.3 $171.2 $107.9 37.0%
2017 $76.0 $181.2 $105.2 41.9% $66.3 $178.0 $111.7 37.2%
2018 $80.5 $189.0 $108.5 42.6% $69.3 $184.9 $115.6 37.5%
2019 $85.4 $197.1 $111.7 43.3% $72.4 $191.8 $119.4 37.7%
2020 $91.4 $205.4 $114.0 44.5% $75.6 $198.8 $123.2 38.0%
2021 $95.8 $214.0 $118.2 44.8% $78.8 $205.8 $126.9 38.3%
2022 $101.4 $222.9 $121.4 45.5% $82.3 $212.8 $130.5 38.7%
2023 $107.5 $231.8 $124.4 46.4% $85.8 $219.7 $133.8 39.1%
2024 $113.9 $241.1 $127.2 47.2% $89.6 $226.5 $137.0 39.5%
2025 $120.8 $250.8 $130.0 48.2% $93.5 $233.4 $139.9 40.1%
2026 $128.1 $260.7 $132.6 49.1% $97.7 $240.2 $142.5 40.7%
2027 $136.0 $271.1 $135.1 50.2% $102.1 $247.0 $144.9 41.3%
2028 $144.4 $281.8 $137.3 51.3% $106.9 $253.7 $146.8 42.1%
2029 $153.5 $292.8 $139.3 52.4% $112.0 $260.3 $148.3 43.0%
2030 $163.3 $304.4 $141.1 53.7% $117.5 $266.8 $149.3 44.0%
2031 $173.8 $316.3 $142.5 55.0% $123.4 $273.2 $149.8 45.2%
2032 $185.2 $328.7 $143.5 56.3% $129.9 $279.4 $149.5 46.5%
2033 $197.5 $341.6 $144.1 57.8% $137.0 $285.5 $148.5 48.0%
2034 $212.2 $355.0 $142.8 59.8% $144.8 $291.4 $146.7 49.7%
2035 $228.1 $368.9 $140.8 61.8% $153.3 $297.2 $143.9 51.6%
2036 $245.5 $383.4 $137.9 64.0% $162.8 $302.8 $140.0 53.8%
2037 $264.2 $398.5 $134.2 66.3% $173.2 $308.2 $134.9 56.2%
2038 $284.7 $414.1 $129.3 68.8% $184.9 $313.4 $128.6 59.0%
2039 $307.0 $430.2 $123.2 71.4% $197.8 $318.6 $120.8 62.1%
2040 $331.1 $446.9 $115.8 74.1% $212.3 $323.8 $111.5 65.6%
2041 $357.3 $464.3 $107.0 76.9% $228.5 $329.0 $100.5 69.5%
2042 $385.8 $482.5 $96.7 80.0% $246.9 $334.4 $87.6 73.8%
2043 $417.1 $501.7 $84.6 83.1% $267.6 $340.2 $72.6 78.7%
2044 $451.2 $521.8 $70.5 86.5% $291.2 $346.5 $55.2 84.1%
2045 $488.6 $542.9 $54.3 90.0% $317.9 $353.2 $35.3 90.0%
(a) Based on state actuarial estimates prior to the enactment of "asset smoothing."
Source: Commission on Government Forecasting and Accountability and Illinois Policy Institute.
 
 Page 18 of 24

Table 2
Funded Ratios by Retirement System
Various Fiscal Years
Retirement System 6/30/06 6/30/07 6/30/08 6/30/2009 (b)
General Assembly 37.1% 37.6% 32.0% 22.7%
Judges' 46.4% 48.4% 42.0% 31.2%
State Employees' 52.2% 54.2% 46.1% 33.9%
Teachers' 62.0% 63.8% 56.0% 39.1%
State Universities 65.4% 68.4% 58.5% 41.9%
Total 60.5% 62.6% 45.7% 38.2%
Other Postemployment Benefits (a) n.a. n.a. 0.0% n.a.
(a) Includes health, dental, vision and life insurance.
(b) Without asset smoothing.
Source: State Comptroller, Commission on Government Forecasting and Accountability and Illinois Policy
Institute.

percent, from 46.1 percent in FY 20081 to just The Status Quo Has Failed—Why Illinois
33.9 percent in FY 2009. Needs the Pension Funding & Fairness Act

In order to make up the unfunded pension
liability, the state government’s contribution
will have to be larger. As shown in Chart 2 and
Table 3, under current law, the annual state
contribution to the state retirement system and
debt service is estimated to grow more than
six-fold, from $4.5 billion in FY 20102 to $25.7
billion by FY 2045. To put this into perspective,
the FY 2010 state pension contribution alone
would consume a full 40 percent of individual
income tax collections, or 60 percent of sales
tax collections.3
More worrisome, even if the state were to make
its full contribution, the unfunded pension
liability will grow from its current level of $83
billion in FY 2010, before peaking at $144
billion FY 2033. Only within the last thirteen
years prior to FY 2045 will the unfunded
liability drop significantly to $54 billion—finally
yielding the required 90 percent funding ratio
that is currently mandated by law. This back-
loaded payoff schedule leaves little room for
error, so the state must be prepared to meet its
annual state pension contribution.
In addition to the annual state contribution,
the state government must also finance
the repayment of the $10 billion Pension
Obligation Bonds issued in FY 2003 and the
$3.5 billion Pension Notes issued in FY 2010.
These will be discussed in more detail later in
the study.
Under current political realities, politicians
have every incentive to defer payment into
the pension fund because the consequences
of not doing so are years, if not decades,
away—certainly well beyond the next election
cycle. Not surprisingly, finding creative ways
to postpone the state’s responsibility to state
retiree programs has become endemic.
Consider the following examples of such
irresponsibility:
• The largest cause of the unfunded pension liability
is insufficient state contributions.
Chart 3 shows the reasons for the addition
of $39 billion to the unfunded pension
liability between June 30, 2000 and June
20, 2008.4 Nearly 35 percent of the $39
billion shortfall, or $13.6 billion, is due to
insufficient state contributions. The second
reason is lower-than-expected investment
returns at $9.5 billion—although even this
does not fully reflect the toll the recent
recession has taken on investment returns.
Unfortunately, deferments come at a
significant long-term cost. Since the state
government is under constitutional and
legislative mandates to reach a 90 percent
funding ratio in the pension system by FY
2045, any deferment will eventually have to
be paid with interest. The implicit interest
rate is 8.5 percent, since that is the assumed
 Page 19 of 24

Table 3
The Growing Burden of Pension Funding
Fiscal Years 2010 to 2045
Billions of Dollars
State Pension State Pension State Pension
State Pension FY 2003 Pension
Contribution (Gov. FY 2010 Pension Contribution Plus Contribution Plus
Fiscal Year Contribution Obligation Bond
Quinn's Proposal) Note Pay-Off (b) POB and Note POB and Note
(Current Law) (a) (POB) Pay-Off
(a) (Current Law) (Gov. Quinn's Plan)
2010 $4.0 $4.0 $0.5 $0.0 $4.5 $4.5
2011 $5.4 $4.4 $0.5 $0.8 $6.7 $5.8
2012 $5.6 $4.6 $0.6 $0.8 $6.9 $6.0
2013 $5.8 $4.8 $0.6 $0.8 $7.2 $6.2
2014 $6.1 $5.0 $0.6 $0.8 $7.5 $6.4
2015 $6.4 $5.2 $0.6 $0.8 $7.8 $6.6
2016 $6.7 $5.4 $0.6 $0.0 $7.2 $6.0
2017 $7.0 $5.7 $0.6 $0.0 $7.6 $6.3
2018 $7.3 $5.9 $0.6 $0.0 $7.9 $6.5
2019 $7.6 $6.2 $0.6 $0.0 $8.2 $6.8
2020 $7.9 $6.4 $0.7 $0.0 $8.6 $7.1
2021 $8.3 $6.7 $0.7 $0.0 $9.0 $7.4
2022 $8.6 $7.0 $0.7 $0.0 $9.4 $7.8
2023 $9.0 $7.3 $0.8 $0.0 $9.8 $8.1
2024 $9.4 $7.7 $0.8 $0.0 $10.3 $8.5
2025 $9.8 $8.0 $0.9 $0.0 $10.7 $8.9
2026 $10.3 $8.4 $0.9 $0.0 $11.2 $9.3
2027 $10.8 $8.7 $0.9 $0.0 $11.7 $9.7
2028 $11.3 $9.1 $1.0 $0.0 $12.2 $10.1
2029 $11.8 $9.5 $1.0 $0.0 $12.8 $10.5
2030 $12.3 $10.0 $1.1 $0.0 $13.4 $11.0
2031 $12.8 $10.4 $1.1 $0.0 $14.0 $11.5
2032 $13.4 $10.9 $1.2 $0.0 $14.6 $12.0
2033 $14.0 $11.3 $1.2 $0.0 $15.2 $12.5
2034 $16.0 $11.8 $0.0 $0.0 $16.0 $11.8
2035 $16.7 $12.3 $0.0 $0.0 $16.7 $12.3
2036 $17.4 $12.9 $0.0 $0.0 $17.4 $12.9
2037 $18.2 $13.5 $0.0 $0.0 $18.2 $13.5
2038 $19.0 $14.1 $0.0 $0.0 $19.0 $14.1
2039 $19.8 $14.7 $0.0 $0.0 $19.8 $14.7
2040 $20.6 $15.3 $0.0 $0.0 $20.6 $15.3
2041 $21.5 $16.0 $0.0 $0.0 $21.5 $16.0
2042 $22.5 $16.7 $0.0 $0.0 $22.5 $16.7
2043 $23.5 $17.4 $0.0 $0.0 $23.5 $17.4
2044 $24.6 $18.2 $0.0 $0.0 $24.6 $18.2
2045 $25.7 $19.0 $0.0 $0.0 $25.7 $19.0
Total $456.9 $354.7 $18.9 $4.0 $479.7 $377.6
(a) Based on state actuarial estimates prior to the enactment of "asset smoothing."
(b) Estimated.
Source: Commission on Government Forecasting and Accountability and Illinois Policy Institute.
 Page 20 of 24
rate of return on investments. But if the
return is not earned on investments, it is up
to the state to compensate for it through
higher future pension contributions.
Therefore, if the $9.5 billion loss due to
lower-than-expected investment returns
is not recouped in the future, the state
pension contribution will be increased in
order to compensate for the loss. Current
pension contribution deferments mean
fewer assets in the pension system, which,
if invested wisely, could plausibly make up
for the recent investment losses over the
long-term.
• The FY 2003 Pension Obligation Bond (POB)
was severely back-loaded. This is an enormous
gamble, and if it fails, future Illinois taxpayers
will be on the hook.
The purpose of the POB was two-fold.
First, $3.4 billion was used to pay part of
the state’s FY 2003 pension contribution,
all of the state’s FY 2004 pension
contribution, and administrative fees. This
was a shortsighted gimmick to balance
the budget. Second, the remaining $7.3
billion was used as a one-time infusion into
the pension system in order to increase
the funding ratio. After the infusion, the
funding ration rose to 60.9 percent in FY
2004 from 48.6 percent in FY 2003.
Chart 4 and Table 4 show the structure of
the payoff on the FY 2003 POB, which
is severely back-loaded. In fact, in the last
year of the bonds, the state’s payment
will be $1.156 billion. This is almost 2.5
times the size of the first payment of $481
million.
More disturbingly, the back-loading of
payments is due to the structure of the
principal payments, which grow from $0
in the first four years to an average of $1
billion in the last four years. In other words,
the first four years of the POBs were an
interest-only loan! As a result, to date, a
mere $100 million in principal has been
paid. By the end of the 30-year schedule,
Illinois taxpayers will have paid $11.934
billion in interest on the original $10 billion
bond.
Finally, the notion of borrowing money in
an attempt to reduce the unfunded pension
liability is a game of chance for the state.
The gamble is that the returns earned on
investing the borrowed money will exceed
the costs of borrowing the money—
commonly referred to as risk arbitrage.
Fortunately, the POBs were issued with
a favorable average interest rate of 5.05
percent. If the assumed rate of return
of 8.5 percent comes to fruition, then
the pension system will have netted 3.45
percentage points. However, that is a big
“if.” Recent economic conditions
 Page 21 of 24

remind us that one never knows when the Table 4

economy might take a nosedive, or how FY 2003 Pension Obligation
Bond Payoff Schedule
long it may take to recover.
Fiscal Years 2004 to 2033
Millions of Dollars
Economist James B. Burnham, the Murrin
Fiscal
Professor of Global Competitiveness at Principal Interest Total
Year
Duquesne University, summed up the 2004 $0 $481 $481
situation by saying, “Facing a $5 billion 2005 $0 $496 $496
2006 $0 $496 $496
budget deficit for fiscal year 2004, the 2007 $0 $496 $496
State of Illinois recently turned to its 2008 $50 $496 $546
five retirement systems for savings in its 2009 $50 $495 $545
2010 $50 $494 $544
operating budget. The plan: borrow money 2011 $50 $492 $542
to refinance a portion of the state’s $36 2012 $100 $490 $590
billion unfunded pension liability and use a 2013 $100 $486 $586
2014 $100 $483 $583
chunk of the proceeds to cover operating 2015 $100 $479 $579
budget contributions to the pension 2016 $100 $475 $575
systems, thus freeing up nearly $2 billion 2017 $125 $470 $595
2018 $150 $465 $615
to offset budget deficits. As attractive as $175 $458 $633
2019
this plan may appear from a budgetary 2020 $225 $450 $675
perspective, the issuance of pension bonds 2021 $275 $438 $713
generally carries significant risks that are 2022 $325 $425 $750
2023 $375 $409 $784
often downplayed in light of immediate 2024 $450 $390 $840
fiscal pressures and the concerns of 2025 $525 $367 $892
pensioners.”5 2026 $575 $340 $915
2027 $625 $311 $936
2028 $700 $279 $979
Overall, the FY 2003 POB was a good 2029 $775 $244 $1,019
short-term deal for politicians, but a 2030 $875 $204 $1,079
2031 $975 $159 $1,134
potentially very bad long-term deal for 2032 $1,050 $110 $1,160
taxpayers. Unfortunately, the outcome of 2033 $1,100 $56 $1,156
this gamble is out of everyone’s hands, Total $10,000 $11,934 $21,934
since the FY 2003 POB are not callable— Source: Commission on Government
meaning they cannot be paid off before Forecasting and Accountability and
Illinois Policy Institute.

 
 Page 22 of 24
their date of maturity in FY 2033. All
taxpayers can do is hope the long-term
benefits outweigh the potential costs.
• The unfunded other postemployment benefits
(OPEB) bill has been entirely ignored and, as a
result, is also unfunded.
As alarming as the state of the pension
system is, the OPEB bill is even worse,
with a funded ratio of 0 percent in FY
2008 (see Table 2) and a total liability of
$24 billion. Unfortunately, there is not
yet much information on the status of
the OPEB liability because reporting
requirements are still fairly new under the
recent Government Accounting Standards
Board (GASB) 45 ruling. GASB 45 covers
all other postemployment retirement
benefits, which include health, dental,
vision and life insurance.
This recent revelation from GASB 45
shows substantial negligence by Illinois
state policymakers. It is much more
serious than a mere oversight. To put it
into perspective, imagine the uproar if
the State Comptroller’s Office discovered
that General and Special Obligation Bond
principal in FY 2008 was not $21.6 billion
as reported, but was actually $46.6 billion,
due to “found” bonds worth $24 billion.6
In essence, GASB 45 has resulted in
“found” debt worth more than double the
amount of currently outstanding General
and Special Obligation Bonds.
Of course, there is a rational explanation
for such negligence—budget savings. For
comparisons, in FY 2008, the $24 billion
OPEB liability was slightly less than the
$30 billion unfunded teachers’ pension
liability. The state’s required contribution
on the unfunded portion (interest costs)
to the teachers’ retirement system in FY
2008 was $2 billion. As such, we could
surmise that state’s minimum contribution
to the unfunded OPEB liability would be
approximately 80 percent of the teachers’
contribution—or $1.6 billion.
To put it another way, ignoring the
unfunded OPEB liability saved the state
budget at least $1.6 billion in FY 2008.7
And it was relatively easy to ignore, because
it is not constitutionally protected (unlike
pension benefits, which are constitutionally
protected).
• The recent legislation mandating “asset smoothing”
politicizes the actuarial analysis for short-term
budget savings.
When politicians play actuaries, taxpayers
need to hide their checkbooks. In FY
1997, Illinois politicians wanted to
boost the funding ratio of the pension
system without having to increase the
state contribution. They accomplished
this goal by changing the asset valuation
methodology from book value (value of
asset at time of purchase) to market value
(current market value of asset), also called
fair value.
The Civic Federation found that “… the
funded ratio jumped from 54.9 percent in
FY 1996 to 70.1 percent in FY 1997 due
primarily to a change in asset valuation
methodology (changed from book value to
market [fair] value of assets).”8
Now politicians are at it again. The
enactment of Public Act 96-0043 (effective
July 15, 2009) mandates that the pension
system should replace fair valuation of
assets with actuarial valuation of assets—a
method known as “asset smoothing.” Asset
smoothing recognizes any unexpected gains
or losses over a five-year period, rather
than in the year of change.
Asset smoothing is a thinly-veiled attempt
to mitigate the market losses incurred
during the recent financial crisis. According
to a fresh analysis of the State Employees’
Retirement System, the fair valuation of
assets shows a decline of 19.56 percent for
FY 2009.9 As shown in Table 2, the funded
ratio plummets to 33.9 percent in FY 2009
from 46.1 percent in FY 2008.
 Page 23 of 24

However, under the new actuarial valuation
of assets, the drop in the funded ratio
appears significantly less severe, falling
only slightly to 43.5 percent in FY 2009
from 46.1 percent in FY 2008. Better
performance is due to the $2.4 billion
increase in asset values, from $8.6 billion
under fair valuation to $10.9 billion under
actuarial valuation.
Clearly, this shell game from book value
to fair value to actuarial value undermines
the integrity of the actuarial valuations of
the pension system. Without a consistent
benchmark, it is impossible for simple
judgments to be made about the pension
system—such as whether or not the state is
actually making real progress in tackling the
unfunded pension liability.
lowered Illinois’ bond rating again to A2
from A1.13
Additionally, both Standard and Poor’s and
Fitch IBCA, Inc. have recently downgraded
Illinois’s general obligation bond rating
from AA to AA-.14
Overall, Illinois now has the second
lowest bond ratings from the three credit
rating agencies—only California has lower
ratings.15 These downgrades in Illinois’s
bond ratings will mean higher future
borrowing costs.

Unfortunately, actuarial integrity takes a

back seat to the bottom line. In addition
to the improved funded ratio, the analysis
also states that “[b]ecause asset smoothing
will produce artificially higher asset levels
in FY 2009, the required FY 2011 state
contribution to the systems pursuant to the
current pension funding law will be lower
than it would otherwise be had P[ublic]
A[ct] 96-0043 not been enacted.”10 Once
again, short-term budget maneuvers trump
paying the unfunded pension liability.

• Bond rating downgrades by rating agencies have

raised future borrowing costs, and threats of
additional bond downgrades have been ignored.

With the explosion in the unfunded

pension, OPEB liabilities and other debt,
such as the FY 2003 POB, Illinois’s once
pristine debt rating has been taking hits.

In April 2009, Moody’s Investors Service

dropped Illinois’s bond rating from
Aa3—the bottom tier of high grade,
high quality bonds—to A1—the top tier
of upper-medium grade bonds.11After
the downgrade, another Moody’s review
also suggested further downgrades were
possible.12 Unfortunately, in December
2009, Moody’s did act on the warning and
 Page 24 of 24
Endnotes for Appendix C
1 Mallory Morton, “Highlights of the State
Employees’ Retirement System’s FY 2009 Actuarial
Valuation,” Commission on Government Forecasting
and Accountability, Monthly Briefing, October,
2009, http://www.ilga.gov/commission/cgfa2006/
Upload/1009revenue.pdf
2 Dan Hankiewicz, “Fiscal Analysis of the
Governor’s Pension Reform Proposals,” Commission
on Government Forecasting and Accountability,
Pension Briefing, April 2009, http://www.ilga.
gov/commission/cgfa2006/Upload/409%20
PENSION%20BRIEFING.pdf
3 “FY 2010 Economic and Revenue Forecast and
Updated FY 2009 Revenue Estimate,” Commission
on Government Forecasting and Accountability,
April 1, 2009, http://www.ilga.gov/commission/
cgfa2006/Upload/FY2010%20Economic%20
&%20Revenue%20Update%20APRIL%201,%20
2009%20FINAL.pdf
4 “Pensions: A Report from the Commission on
Government Forecasting and Accountability on the
Financial Condition of the State of Illinois Retirement
Systems as of June 30, 2008,” Commission on
Government Forecasting and Accountability, February
2009, http://www.ilga.gov/commission/cgfa2006/
Upload/2009FinCondReport2.pdf
5 James B. Burnham, “Risky Business? Evaluating
the Use of Pension Obligation Bonds,” Government
Finance Review, June 2003, http://www.gfoa.org/
downloads/GFRJune03.pdf
6 “Bonded Indebtedness and Long Term Obligations,”
Illinois State Comptroller, March 2009, pg. 1, http://
www.apps.ioc.state.il.us/ioc-pdf/2008BondReport.pdf
7 This is in addition to current year’s OPEB cost or
“normal costs.”
8 “The State of Illinois Retirement Systems: Funding
History and Reform Proposals,” The Civic Federation,
September 30, 2008, http://civicfed.org/sites/default/
files/civicfed_279.pdf
9 Mallory Morton, “Highlights of the State
Employees’ Retirement System’s FY 2009 Actuarial
Valuation,” Commission on Government Forecasting
and Accountability, Monthly Briefing, October,
2009, http://www.ilga.gov/commission/cgfa2006/
Upload/1009revenue.pdf
10 Ibid.
11 Kerry Grace Benn, “Moody’s Warns
on Illinois Bond Ratings,” Wall Street
Journal, July 16, 2009, http://online.wsj.
com/article/SB124775413237351801.
html#articleTabs%3Darticle
12 “State’s Debt-laden Budget Prompts Moody’s
to Put it on Watch List,” Daily Herald, July
16, 2009, http://www.dailyherald.com/
story/?id=307415&src=109
13 “Moody’s Knocks Down Illinois’ Bond
Rating,” Chicago Business, December 8, 2009.
http://www.chicagobusiness.com/cgi-bin/news.
pl?id=36373&seenIt=1
14 Bonded Indebtedness and Long Term Obligations,”
Illinois State Comptroller, March 2009, pg. 1, http://
www.apps.ioc.state.il.us/ioc-pdf/2008BondReport.pdf
15 Kapp, Lynnae, “State’s Bond Rating Lowered,”
Commission on Government Forecasting and
Accountability, Monthly Brief, December, 2009.
http://www.ilga.gov/commission/cgfa2006/
Upload/1209revenue.pdf