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 A plan intended to ease the cost of Illinois’ pension
contributions has fallen wildly short of expectations.
One year after giving certain pension enrollees the option to immediately
collect their pension earnings and trim future benefits, the state’s voluntary
“pension buyout” program has seen just $13 million of the $400 million in
projected savings.
In other words, the program delivered around 3% of what state leaders
anticipated saving over the year.
In June 2018, the Illinois Policy Institute underscored that these savings were
speculative, cautioning that overly optimistic expectations of the buyouts could
dig a hole in the already-unbalanced budget by hundreds of millions of dollars
more.
Speculative savings
The buyout program, which came as part of former Gov. Bruce Rauner’s budget for
fiscal year 2019, was extended to those enrolled in three of the state’s five
major pension systems: the State University Retirement System, or SURS;
Teachers’ Retirement System, or TRS; and State Employees’ Retirement System, or
SERS.
SERS accounted for all the program’s savings over the year, according to the
Civic Federation. SURS and TRS still had not fully implemented the program by
the end of the fiscal year. Each of the three participating systems endured
delays in rolling out the program, but SERS officials told the Civic Federation
delays did not factor into that system’s failure to reach savings projections.
The program consisted of two separate buyout plans: One was a cost-of-living
adjustment buyout offered to Tier 1 members, who are enrollees hired before
2011. This plan gave members the option to voluntarily adjust their future 3%
compounding increases to a 1.5% simple annual increase, in exchange for an
immediate lump payment of 70% of the net value of their future increases under
the higher formula. Lawmakers claimed this would save $382 million.
The other applied to “inactive” members – those eligible for state pensions but
no longer employed by the state. This option allowed pensioners to collect 60%
of the net value of their pension annuity in a lump sum payment. Lawmakers
projected $41 million in savings from this plan.
The scope of the problem
With minimal outside input, lawmakers’ flawed budgeting inflated the amount of
possible savings from the program. As the Civic Federation points out, the plan
had not been subject to thorough public debate nor had it received a proper
actuarial analysis before passing the Illinois General Assembly.
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Importantly, even if the
state’s projections were sound, the program’s savings would not have
come close to resolving Illinois’ severe pension crisis. Illinois’
pension debt stands at $134 billion, among the worst in the nation,
according to state estimates. But Moody’s Investors Service – known
to use more realistic assumptions in its analyses – pegs the state’s
unfunded liability even higher, at over $250 billion.
Illinois spends nearly double the national average on pensions, with
government worker retirement and health care costs consuming 25% of
state revenue. Despite hiking the state’s income tax in 2011 and
again in 2017, Illinois’ pensions systems remain among the
worst-funded in the nation.
In April, a report from J.P. Morgan found that in order to properly
fund the state’s pensions, it would need to devote more than half of
all state revenue to pension benefits.
Constitutional pension reform
Why has increased spending failed to adequately fund the state’s
pensions? Because the state uses defined-benefit pension systems
with compounding interest rates that have no tie to actual
inflation. They are simply unsustainable, enabling promises that far
exceed taxpayers’ ability to pay. At the local level, the impact of
soaring pension costs is already being felt across the state,
subjecting government workers to uncertain retirement security and
taxpayers to diminished standards of living.
Unfortunately, the Illinois Supreme Court’s interpretation of the
state constitution’s pension clause has derailed even the most
modest reforms.
Only through a constitutional amendment – not accounting gimmicks –
will Illinois keep its pension funds solvent. Sensible reform would
protect all earned pension benefits for government workers, while
allowing for the adjustment of future benefit accruals that have not
yet been earned. The state’s high court in 2015 ruled it
unconstitutional for governments to modify unearned accruals.
State lawmakers who carried Gov. J.B. Pritzker’s “fair tax” proposal
to the 2020 ballot stressed the importance of “letting voters
decide.” Constitutional changes that could truly restore Illinois’
finances without tax hikes, such as pension reform and a state
spending cap, have not been shown the same consideration.
Illinois is not the first state to find itself in crisis, but if it
ignores the steps other states took – constitutional pension reform
– it would be to the detriment of not just taxpayers, but to those
they’ve made reliant on a dysfunctional retirement system.
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