Pension Underfunding Contributes To Illinois Credit Downgrade

Jeffrey R. Schmitt

By Jeffrey R. Schmitt



The St. Louis Post-Dispatch reports that the Moody’s Credit Agency has downgraded the State of Illinois’ credit rating to A2. According to the Post-Dispatch, 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. The article reports that 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.

Governmental Pension Plans – Section 401(a)(9) Regulations and IRS Notice 2009-68

Cheryl Beebe-Snell

By Cheryl Beebe-Snell



Regulations under Section 401(a)(9) have been finalized effective September 8, 2009 for governmental plans. Under these final regulations, a governmental plan will be treated as having complied with the minimum mandatory distribution rules if the plan applies a reasonable and good-faith interpretation of the rules.

Whether or not the plan’s actions constitute a reasonable and good-faith interpretation of the distribution requirements is a question of fact.

If plan administrators and/or trustees are not sure whether their plan’s distribution policies either meet the literal requirements of Section 401(a)(9) or the reasonable and good-faith interpretation of the same, they should consult their legal and tax advisors. Failure to meet the 401(a)(9) requirements may result in penalties to the plan’s participants or adverse consequences to the plan itself.

On another note relating to plan distributions, the IRS recently issued Notice 2009-68 that contain two separate safe harbor explanations that may be provided to plan recipients of eligible rollover distributions. Plan administrators should review the new safe harbor notice explanations to determine whether or not the use of the same would be appropriate under the terms of their plan.

The new safe harbor explanations have been updated to take into account changes in the law. Prior to Notice 2009-68, the most recent safe harbor language was published in Notice 2002-3.