Pension Underfunding Contributes To Illinois Credit Downgrade

A recent article by the St. Louis Post-Dispatch reports that the Moody’s Credit Agency has downgraded the State of Illinois’ credit rating to A2. The Post-Dispatch reports that this is the lowest mark Moody has given to any state, and, in part, the state’s severe pension underfunding has contributed to this credit problem.

The impetus of the story is new legislation passed by the Illinois legislature which outlaws “double dipping” by union officials. According to the article, union officials allegedly misused the pension system to secure large public pensions based upon short teaching stints and even substitute teaching for as little as a single day. Certainly this kind of abuse, if true, is, or should have been, discouraged by all the players involved, including both the state and the public pension plan trustees.

As highlighted by the rest of the article, Illinois continues to face a significant fiscal and budgetary problem, due to many factors, including public pension liabilities. The author notes that the crisis currently amounts to an $83 billion funding shortfall, resulting in the worst unfunded pension liability in the nation, with only 43% of the long-term pension obligations currently funded. Part of the fault certainly lies with the State of Illinois for its failure to fund in earlier, more prosperous times. If uncorrected, this funding shortfall will continue to cause headaches for Illinois lawmakers and public pension plans alike. Ultimately, if not corrected, the continuing trend could possibly cause personal financial losses to deserving retirees across the state.

While unions and public pension plan officials urge the state to fully fund the pension liabilities, lawmakers continue to evaluate plans for both the temporary and permanent fix to the state’s pension woes. Employees and retirees will be keeping a close eye on these legislative developments, and some options may threaten continued benefits for future and/or existing employees.

As the author of the article correctly points out, any attempt by the Illinois legislature to modify the retirement benefits of existing employees entitled to those pensions will almost certainly raise serious legal and constitutional questions that the Illinois, or perhaps even Federal courts, will ultimately decide.

Posted by Attorney Jeffrey R. Schmitt. Schmitt practices in commercial litigation including banking, real estate, construction, and other matters for individuals and businesses.