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PENSION
REFORM FOR ILLINOIS IS ESSENTIAL, NOT IMPOSSIBLE
Illinois Policy Institute/
Adam Schuster
Pension reform is a moral imperative. The
alternative is a future in which core services are cut, taxes are
raised, and pensioners risk losing what they’ve already been promised as
the funds go insolvent.
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 Imagine you took out a $1 million mortgage on a $40,000 annual
income.
Your monthly mortgage payment — not including property taxes — would total
$3,800 using today’s standard interest rate. Problem is, your monthly take-home
pay — after accounting for state and local taxes — is about $2,650.
As much as you wanted that house, you never would have been able to afford that
monthly cost, given your ability to pay. Before long, the bank will come
knocking to repossess the property. Bad financial decisions always have
consequences.
Illinois pension systems, at both the state and local levels, are in much the
same situation.
Today, Illinois’ five state pension systems have less than 40 cents out of every
dollar on hand needed to pay future benefits, which equates to $130 billion in
pension debt. The largest portion comes from the Teachers’ Retirement System, at
over $73 billion in debt. The worst-funded system, the General Assembly
Retirement System, has a funded ratio of less than 15 percent.
 Why?
Politicians signed up state taxpayers for salaries and benefits that never were
and never will be affordable.
Some like to point to the state’s history of kicking the can on pension
contributions as the cause of these financial woes. While it’s true that
politicians at the state and local levels often skimp on required contributions,
they do so because the full pension payments — much like a $3,800 monthly
mortgage on a working-class income — are budget busting.
The debate about underfunding vs. overpromising misses a simple truth: one
follows from the other.
Illinois governments can’t afford the generous pension systems promised by
politicians of the past, and that’s why the systems have been underfunded.
Pension liabilities are already growing far faster than inflation and personal
income, meaning they’re outpacing their funding source. On top of that, the
financial pressure of pensions is crowding out core government services at all
levels.
An extreme example of pensions crowding out services is already on display in
the south Chicago suburb of Harvey. The beleaguered municipality had to lay off
nearly half of its police officers and firefighters due to pension-related
financial trouble.
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But Harvey is far from alone. Nearly 400 downstate
police and fire pension systems — over half — reported receiving
less in contributions than the Illinois Department of Insurance says
was necessary in 2016, according to Wirepoints. At the state level,
the pension systems are the leading cause of Illinois’ near-junk
credit rating and already consume over a quarter of the state budget
when you tally up all pension related expenditures.
In Springfield, the police and fire pension funds
combined have less than half the money on hand required to fund all
future promises.
Government workers aren’t to blame for the pension crisis. In fact,
it’s a problem for them just as much as it is for government
finances and taxpayers generally. More than 1,000 miles away in
Central Falls, Rhode Island, pensioners rejected voluntary changes
to their pension systems. When the city went bankrupt, pensioners —
including those already retired and collecting a check — saw their
benefits cut by up to 55 percent.
Central Falls and Harvey are warning signs for Illinois.
Our state’s only viable option is meaningful pension reform that
starts with a constitutional amendment to allow changes to unearned,
future benefits. Rather than deleting the pension protection clause
entirely, Illinois should seek to modify it to match states like
Hawaii or Michigan which protect only “accrued benefits.” Subsequent
pension reforms should include raising retirement ages for younger
workers, capping maximum pensionable salary, and doing away with
guaranteed permanent benefit increases in favor of a true
cost-of-living adjustment pegged to inflation.
The concept of future benefit reforms has been successfully enacted
in states like Colorado and Arizona, the latter of which had support
from the state’s public sector unions.
Pension reform is a moral imperative. The alternative is a future in
which core services are cut, taxes are raised, and pensioners risk
losing what they’ve already been promised as the funds go insolvent.
If Illinoisans come to the table and work together, we can find
solutions that work for everyone.
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