State Finances (2015 Comprehensive Annual Financial Report) Leslie Geissler Munger, Comptroller

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1 State Finances (2015 Comprehensive Annual Financial Report) Leslie Geissler Munger, Comptroller State continues to show inability to generate sufficient cash from current revenue structure to pay operating expenditures on timely basis. The State s two largest revenue sources, income tax and sales tax, are especially susceptible to changes in the economy (income tax was legislatively decreased). Accumulated deficit in General Fund, continued growth in the net pension liability and postemployment benefit costs, and rating downgrades on debt issuances of State may impact the State s ability to access credit markets to pay operational expenditures more timely and may increase interest costs of those borrowings INCOME TAX Structural Deficit 2011 legislature voted to raise individual income tax rate from 3% to 5% and corporate income tax rate from 4.8% to 7% 2015 individual income tax rate dropped to 3.75% and corporate rate to 5.25% 2025 individual income taxes are scheduled to fall to 3.25% and corporate rate to 4.8% PENSION DEBT 1995 Legislation enacted in set a long-term funded ratio target for the State s five retirement systems at 90% and established plan for contributions in order for the State to reach this target by fiscal year

2 relevant State statutes were amended to allow for significantly lower State contribution levels to the retirement systems, with levels increasing in fiscal years 2008, 2009, and 2010 before returning to the mandated levels of the 1995 law for , 2010, and 2011 general obligation pension bonds were issued in the amounts of $10B, $3.5B and $3.7B new accounting and reporting standard required State to recognize net pension liability of $109B at June 30, State implemented GASB Statement No. 68, Accounting and Financial Reporting for Pensions-an amendment of GASB Statement No. 27 State reassessed the component unit classification of certain bonding authorities subsequent to a change in legislation eliminating certain bonding authorities ability to issue conduit debt (issued by a state agency or public corporation on behalf of borrowers, which include businesses, health care institutions, private higher education institutions, local governments, and qualified individuals. No State credit support is provided). The State no longer has a moral obligation for the debt if the respective authority does not have sufficient monies to pay principal and interest, and thus, the financial accountability criterion defining a component unit is no longer applicable. ( - pg. 69) Summary of Statement GASB No Prior to implementation, a delay was requested based primarily on a concern that audit procedures related to the pension standards were unsettled and, consequently, the financial reports of governments implementing Statement 68 might not receive a clean audit opinion request was denied The Center for State and Local Government Excellence ( found that, out of a sample of 173 municipalities, 92 have cost-sharing pension plans. Within these 92 municipalities, the unfunded liability as a percentage of revenue rises from 37% before GASB 68 to 70% after. Replaces requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers as well as the requirements of Statement No. 50, Pension Disclosures Statement 68 brings the governmental employer accounting and reporting standards closer in line with the private sector requirements. Statement can be difficult to read because it contains technical jargon and new (or redefined) terminology The new calculation for the Net Pension Liability will have a material adverse impact on net position for many governments 25

3 Net Pension Liability = Present Value of Projected Benefit Payments to Current Active and Inactive Employees Attributable to Past Periods of Service Less The Amount of the Pension Plan s Fiduciary Net Position (previously referred to as Net Assets) Governments that previously reported a net pension asset (because they contributed more than the Actuarial Required Contribution) may now report a significant liability Governments that reported a net pension liability may now report a much larger liability New liability is a measure of promised benefits to employees for services performed, compared to the assets set aside to pay for those benefits previously, a long-term rate of return on investments was provided by employer. Large pension funds were well positioned to undergo a long-term investment strategy and invest in a balanced portfolio containing high risk/high reward investment and RoRs of 7 to 8.5% were not uncommon. Blended discount rate will significantly increase liability amount, in most cases new liability will not be the same as the unfunded actuarial accrued liability calculated under previous standards The point at which the projected Plan net position becomes insufficient to provide for current/inactive employee benefits is the crossover point. Once this point is achieved, the RoR used thereafter will be a much lower rate (based on a high quality municipal bond rate). Auditors may identify crossover point as a significant risk. Plans that are extremely underfunded will more rapidly reach the crossover point. Overstating investment RoRs, and/or understating pension benefits promised to employees could alter the crossover date and will likely be a risk evaluated annually by auditors. Many pension plans offered by local governments have special funding situations in which a non-employer governmental entity is legally required to provide for some, if not all, of certain employer s required contributions to the plan. Ex: a state government might be required under law to fund the employer s contribution to the teacher retirement plan for all school district employers in the state. Under Statement 27, these state-funded amounts are recorded in the school district financial statements as on-behalf revenues and expenditures/expenses; however, there is no net pension liability recorded by the districts, and there is no impact on their fund balance or net assets. If state-funded amounts were less than the ARC in a given period, the state recorded the deficiency as a liability. 26

4 Under Statement 68, governmental employers with defined benefit pension plans (and special funding situations) will be required to record a pension liability, with an adjustment for the involvement of the non-employer contributing entity. Certain states, counties and other large units of government will be required to record a net pension liability for pension benefits of nonemployees, resulting from their special funding situations. Entry Age Normal cost method is now required for all plans Keeping actuarial valuation dates and measurement dates aligned becomes much more complex with multiple employer plans Use of an actuarial valuation date coinciding with measurement date will result in less work and more consistent estimates. If AV date and measurement date don t coincide, significant changes in benefit provisions or assumptions may result, creating major changes required in the update of calculation There will be heightened attention on behalf of rating agencies and other parties given to governmental financial statements Statutory funding requirement law enacted in 1996 provides for a 50-year funding plan with a 15-year phase-in and a continuing appropriation and 2007, law was amended allowing for decreased contributions to the systems of only $938M and $1B and requiring equal annual increments from 2008 to 2010 (end of the 15 year phase-in) so that by 2011, State would be contributing at rate otherwise required by State law BENEFITS health, dental, vision, and life insurance benefits promised to retirees $33B liability with no assets set aside to fund liability as State uses pay-asyou go method to make payments for retirees benefits Governmental Activities $125B Deficit Total Revenue $71B $2B decrease in income tax revenues was largest decrease due to lower income tax rates decrease in revenue was offset by $2B increase in federal government revenues $7B deficit in General Fund General Fund expenditures increased to $42B due mainly to increased spending on health and social services programs of $2B. Total Bond Debt $32B 27

5 In addition to general and special obligation bonds, there are $2B of revenue bonds and $15B of non-pension long-term obligations outstanding Total Expenses $75B (deficiency before $3B transfers in) Expenses increased $3B due mostly to increase in health and social service program expenses of $2B Governmental Activities: Expenses Governmental Activities: Program Revenues General Revenues $71B Healthcare +11B Education +6B 2008 *Phase-in payments to pension through *Decreased Pension Contribution $67B $65B $64B $62B $59B $57B $54B $52B 2006 *Decreased Pension Contribution $47B +CPI $55B in 2015 $26B $25B $23B $23B $24B $24B $22B $18B $18B $17B $40B Income taxes +9B Sales taxes +1B $41B $40B $38B $32B $27B $30B $32B $32B $29B 28

6 Business- Type Activities: Expenses Business- Type Activities: Program Revenues Total Revenues Total Expenses $4B $5B $6B $8B $9B $10B $7B $4B $4B $4B $6B $7B $65B Income taxes +9B Sales taxes +10B $69B Healthcare +11B Education +6B $8B + in grants & contributions $9B + in grants & contributions $10B + in grants & contributions $9B + in grants & contributions $6B + in grants & contributions $5B $5B $6B $65B $62B $59B $55B $51B $50B $51B $48B $45B $67B $63B $62B $61B $58B $55B $52B $51B $46B Deficit (- $4B) (- $2B) (- $6M) (- $4B) (- $6B) (- $7B) (- $4B) (- $7M) (- $3B) (- $5M) Debt $613M $1B $4B $19B $4B $6B $9B $152M $182M $1B to $938M to (bonds) Pension Pension Transfers In $7B $6B $6B $6B $10B $11B $10B $12B $9B $9B General Fund expenditures for services in FY2014 were scheduled to be $4.7 billion less in nominal dollars than they were in FY2009, a mere five years ago. Compared to the rest of the nation, Illinois is a very low spending and small government state. o In calendar year 2012, Illinois had the fifth highest overall state Gross Domestic Product (GDP) and 17th highest state GDP per capita in the nation. o Despite that, in FY2012 Illinois ranked 28th in General Fund spending per capita, and 37th in General Fund spending as a share of GDP. o In 2011, (the most recent year for which there is data) Illinois had the lowest number of state workers per 1,000 residents of all 50 states. 29

7 Federal Finances (2015 Financial Report of the United States Government) Leslie Geissler Munger, Comptroller Expenses Revenue Assets/Liabilities ($3.7T revenue, $4.3T expenses, $18.3T debt) $3.2T assets (mostly $1.2T in net loans receivable, primarily student loans) and $893.9B in net property, plant, and equipment) $21.5T liabilities (mostly $13.2T in federal debt securities and accrued interest, $6.7T in federal employee and veteran benefits, $5.1T in intragovernmental debt) $4.3T Expenses - $375.6B Revenue (goods and services provided to public - i.e. Medicare premiums, national park entry fees, postal service fees) - $19B Net Gains from Changes in Assumptions (interest rates, inflation, disability claims rates) = $3.9T Government Net Cost 3.3T Tax and Other Revenues 3.9T Government Net Cost = $519.7B Net Operating Cost 30

8 Congress suspended the debt limit during FY2014 and FY2015: from October 17,2013 through February 7, 2014; and again from February 15, 2014 through March 15, In November 2015, the debt limit was again suspended through March 15, The debt limit was last raised to $18.1 trillion in March As budget deficits continue to occur, the Government will have to continue to borrow from the public. Instances where the debt held by the public increases faster than the economy for extended periods can pose challenges to the sustainability of current fiscal policy. Spending 31

9 Liabilities Improper Payment Old Age, Survivor and Disability Insurance (OASDI) 32

10 Receipts and Non-Interest, Interest, and Total Spending/Public Debt 33