Major loses in stock market could hurt Illinois’ underfunded pensions, analysts say

A public finance watchdog said Illinois taxpayers could face greater pension pressure with the stock market in decline because of the state’s underfunded public employee pensions.

The stock market has lost around 20 percent of its peak value in the past few weeks with significant daily drops ranging from 5 to 7 percent. The Dow lost 1,464 points, or 5.86 percent of its value on Wednesday. That’s after Monday’s loss of more than 7 percent. On Feb. 12, the Dow peaked at 29,551. It closed Wednesday at 23,553. The losses come amid concerns about the economy amid a global coronavirus pandemic.

The other major indices, the Nasdaq and S&P 500, had similar declines.

Illinois’ taxpayer-funded public employee pension systems have investments in the markets. They’re also underfunded, with the state’s five pension funds combined being around 40 percent funded with more than $136 billion in unfunded liability.

Wirepoints President Ted Dabrowski said Illinois’ underfunded pensions were already problems before the markets plunged over the past week. Those problems could become more acute. Dabrowski said it should be a wakeup call for Illinois politicians, but he said he feared politicians will only ask for tax increases to make up the funding shortfalls for pensions that he said are too generous and too costly for taxpayers already.

The stock market declines will compound the pressure on taxpayers, he said.

“These ordinary taxpayers just took massive hits on their 401(k)s,” Dabrowski said. “And this whole crisis may hit a lot of people’s jobs. It will certainly hit a lot of people’s incomes, so the ordinary people shouldn’t put up with this. They should be demanding reforms.”

He also said public sector workers preparing to retire should see the declines as a wakeup call.

“This kind of crisis should wake them up to saying ‘hey, maybe reforms wouldn’t be so bad,’ because right now they see the risk of seeing their pensions cut, or seeing their future retirements gone,” Dabrowski said.

Dabrowski said he expects sustained investment losses will make Illinois’ pension problems even worse.

Efforts to address pension liabilities have been slow at the Illinois statehouse. One move Dabrowski has advocated for is a constitutional amendment to allow for future pension benefits to be reduced to bring the funds into better health. He also has said all future public retirees should be put into 401(k)s like most of the private sector.

Truth in Accounting Research Director Bill Bergman said the recent stock market downturn was not good news for Illinois’ pensions.

“In Illinois, until the latest stock market troubles, we’ve actually had a pretty good tailwind on investments over the last ten years,” Bergman said, but he noted that Illinois’ unfunded liabilities still increased even during the bull market.

It’s not just the state’s pensions.

“State and local governments are exposed to economic cycles just like companies are,” Bergman said. “Their spending requirements tend to go up in downturns and tax revenues go down during downturns.”

Illinois’ near-junk bond credit rating is among the worst in the nation.

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