STUMP » Articles » Illinois Pensions: How Did We Get Here? Development of Unfunded Liability » 19 May 2015, 07:05

Where Stu & MP spout off about everything.

Illinois Pensions: How Did We Get Here? Development of Unfunded Liability  


19 May 2015, 07:05

One of the biggest disputes in the public pensions brou-ha-ha is who is at fault with regards to underfunded pensions.

Mind you, there’s plenty of blame to go around.

But it would be nice to quantify the sources of the underfundedness, wouldn’t it?

Well, luckily, part of many of the publicly-available reports on pensions is an analysis of the change in the unfunded liability during the year. If you look at one year in isolation, you may get a misimpression of where the fault lies — after all, usually any one year of development is going to be dwarfed by the already huge unfunded liability.

So I decided to push back to long enough ago that the starting point would end up being dwarfed by the final unfunded liability. How about end of fiscal year 1984? Is thirty years of development long enough for you?

There is a lot going on in this graph, so let me explain how it was developed. First, the information backing this graph can be found in this spreadsheet, and I list my original data sources as well. It is all based on publicly-available data. This encompasses the main Illinois state pension funds: Teachers Retirement System, State Universities Retirement System, State Employees Retirement System, Judges Retirement System, and General Assembly Retirement System. For the above graph, all funds are combined. In future posts, I will look at plans individually, because they’re not of equal size, and they’re not all underfunded to the same extent.


The royal blue portion of the columns is the initial unfunded liability, as measured on 6/30/1984. Obviously, as time goes forward, that amount never changes.

Each year, I add onto the changes in the unfunded liability, color-coded by cause. This is cumulative, so that the top point of each column represents the total unfunded liability.

The vertical axis is nominal dollars – it’s not inflation-adjusted, it’s not in units of thousands of dollars. I wanted to keep all the zeros in because when you see 100,000,000,000 in all its glory, it hits you a bit more than “100 billion”.


  • The unfunded liability is positive every year — the pensions have never been fully-funded
  • The unfunded liability decreases only once: in 2004. Was the Illinois state legislature particularly virtuous that year?


That was the year of the fake contribution called a pension obligation bond. All it did was add another liability to the Illinois balance sheet. It was a balance transfer from the pensions to bondholders, and we know how dangerous that is for bondholders.


The largest portion of the final column, wherein the liability is more than $100 billion, is green — meaning that employer undercontributions have been the largest cumulative contributor to the current unfunded liability.

But wait — what about investments? Indeed, if we look at that portion, in yellow, it doesn’t look that bad compared to the undercontributions…. but you need to look at the light blue portion that represents changes in actuarial assumptions. Those changes, in the past few years, have almost all been decreasing the assumed return on assets. (Go to the Notes tab in the spreadsheet for explanations of large changes)

If you add the change in actuarial assumptions to the investments experience… it’s still smaller than the undercontribution effects. Undercontributions led to $47.3 billion of the unfunded liability — 42.5% of the whole unfunded liability. Investment results + changes in actuarial assumptions led to $33.5 billion of the unfunded liability — 30.1% of the unfunded liability, so still substantial.

By the way, I can’t even see how the benefit changes that were just undone by the Illinois Supreme Court decreased the unfunded liability, because it’s not coming through the numbers here. I guess I will go digging through the reports for details later.


The Illinois state legislature chose to underfund the state pensions for decades. In every single year, going back to 1984, there was deliberate underpayment.

If I back out the impact of the 2004 pension obligation bond, the undercontribution history would look even worse than it does now.

And it’s still really bad, even if I do keep the POB in.

The pension obligation bonds did nothing for the pensions, other than to buy a little time by making the financial condition of the funds looks better while the overall state finances got worse.

Unfortunately for everybody involved in Illinois, it does not much matter the source of the unfunded liability at this time to fix the problem going forward. The only thing to note is that it’s mainly the result of deliberate choices on the part of elected officials, many of whom were elected with public union support to keep the gravy train going, and not just some bad investment results or too-high expectations of investment results (though that’s the number two reason).

If the state had required fully-funding the pensions all these years, even with too-high investment expectations, they probably would have been able to weather some of the resulting unfunded liability (and would not have escalated benefits, if they knew they had to pay for the increases in full).

As mentioned, in later posts, I will pull out plans one-by-one, because they’re not all equally bad, though they all are underfunded.

Compilation of Illinois posts

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