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 At the same time the clock is running out on the state’s public
pension funds, with the first potential insolvency looming as soon as 2039,
according to an analysis commissioned by the Illinois Policy Institute.
Pension contributions accounted for less than 4% of Illinois’ general funds
budget from 1990 through 1997.1 For fiscal year 2020, pension contributions and
related costs will consume 25.5% of all general revenues at $10.2 billion. This
figure includes:
Direct contributions to the five state systems of $9.224 billion2
Debt service on pension obligation bonds worth $708 million3
The state’s contribution to Chicago Teachers’ Pension Fund normal costs (the
employer share of pension costs created by an additional year of work) of $257.4
million4
$92 million in new debt service costs for pension buyout bonds5
The rapidly increasing cost of pensions is crowding out spending for core
government services.
Since fiscal year 2000, after adjusting for inflation, state spending on
pensions has grown more than 500 percent. Spending on government worker health
insurance has grown 127% percent. Meanwhile, spending on K-12 education, often
touted as a top priority by Illinois politicians, is up just 21 percent. All
other spending, including social services for the disadvantaged, is actually
down in real terms by 32%. Total spending has risen by 15% over that period.
Consider the following list of programs and agency budgets, all of which are
included in the “other spending” category. These programs include the state
police, helping poor students pay for college, protecting children from child
abuse, aiding the poor, and fighting disease and other public health issues.
Whenever media reports on a failure of state government
services, including the ongoing crisis of a failing Department of Children and
Family Services,6 the unsustainable cost of current pension benefits should be
at the top of mind for residents and lawmakers.
Pensions are also a leading cause of Illinois’ high property taxes, causing them
to skyrocket from around the national average in 1996 to the second highest in
the nation today.7 Despite this, local governments are also cutting core
services residents value today to pay for yesterday’s government in the form of
pensions.
For example, in 2018 Peoria was forced to lay off 16 police officers, 22
firefighters and 27 municipal workers to be able to afford its pension payment.8
That same year the South Chicago suburb of Harvey laid off 18 firefighters and
13 police officers to make its own pension contributions.9
Without pension reform, Illinois residents face a future in which they’re asked
to pay more in taxes to receive ever less in valuable government services.
THE STATUS QUO PLACES RETIREES AT RISK, TOO
The Illinois Constitution states that “membership in any pension or retirement
system of the State, any unit of local government or school district, or any
agency or instrumentality thereof, shall be an enforceable contractual
relationship, the benefits of which shall not be diminished or impaired.”10
However, despite the widespread use of the term, this clause is not
appropriately called a pension “protection” clause. By preventing even modest
adjustments in future benefit earnings, the prevailing interpretation of the
clause from the Illinois Supreme Court places government worker retirement
security at risk, through potential insolvency of the funds.
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An actuarial stress test of the systems
commissioned by the Illinois Policy Institute shows if state-run
pension funds lose 20 percent of their asset value as a result of a
recession – the same loss experienced in 2009 – and the average
return on investment matches the roughly 4.6 percent the funds
experienced in the 10 years after the last recession,11 the state’s
major retirement systems will run out of money in fewer than 30
years.
This stress test helps to show how vulnerable pension math is to
guesses about the future. While the state’s official projections
show that each fund will reach 90% funding by 2045, this assumes the
funds are able to obtain a consistent return on investment of
between 6.75 and 7 percent, that the state always makes its full
legally required contribution and that there is not another major
national recession during that time period.
Under the stress test scenario, SURS would be the
first to reach insolvency, and the fund would be unable to pay full
benefits by 2039 with assets on hand. The other systems would see
their funding ratios—the amount of money on hand to pay promised
benefits – decline each year despite constantly increasing employer
contributions. Retirement systems for teachers, state employees and
elected officials would run out of money between 2046 and 2048.
Legal scholar and pensions expert Amy Monahan has argued even
ironclad legal provisions preventing benefit cuts cannot be used to
force states to pay full benefits from insolvent funds.12 Simply
put, if there’s no money, benefits can’t be paid without impairing
the state’s ability to exercise the basic functions of government
and courts cannot force legislatures to spend money or incur debt.
In other words, the status quo is putting public workers and
retirees at risk, not protecting them.
CONSTITUTIONAL PENSION REFORM CAN SOLVE THE CRISIS
Residents across the state deserve the opportunity to vote on an
amendment to the state constitution that would enable common sense
pension reform. Amending the pension clause does not mean striking
it entirely. Lawmakers should adopt language in line with other
states to recognize a distinction between earned benefits, which
should be protected, and the future growth rate of benefits, which
should be open to change to bring them in line with economic
realities.
No retiree needs to see a dollar cut from the check they are
currently receiving and no current worker should see their core
annuity reduced. But state and local elected officials need the
flexibility to make changes to parts of the benefit formula that are
unsustainable, such as the 3% compounding post retirement raises,
which are often mistakenly referred to as a cost of living
adjustment, or COLA. A true COLA would be tied to inflation, so that
retirement benefits keep pace with rising prices but do not exceed
what’s fair and affordable.
The only fair way out of Illinois’ pension crisis – and to stop
economically harmful tax hikes from driving more residents and
businesses out of the state – is to reduce pension liabilities with
benefit reforms. Thoughtful reforms can strike a balance between
guaranteeing retirement security for workers while protecting
taxpayers and the state economy from trying to pay down massive debt
at unaffordable benefit levels. The biggest obstacle standing in the
way of a brighter future for Illinois has been and remains
lawmakers’ lack of political will to pursue transformative reform.
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