Illinois has the worst-funded state pension system in the nation.
Carrying $142 billion in pension debt, our state has only 45% of the resources needed to cover its obligations to workers and retirees.
Pension-related payments eat about a quarter of the state budget. This sucks money away from schools, health care, public safety and infrastructure.
The looming pension debt depresses Illinois credit rating, discourages business investment and prompts residents to leave Illinois.
When it comes to pension reform, the state constitution restricts government’s options.
The last serious pension-reform effort led by an Illinois governor came from Gov. Jim Edgar—30 years ago this year.
None of this comes as news to people in this room.
What is news now is that, at long last, there may be a way out of this mess. And the path forward can be taken without breaking commitments to state retirees or amending the Illinois constitution.
Put simply, the state can fix its pension problem without diminishing or impairing benefits. We can do so in a fiscally responsible fashion.
We can do so now.
The key question facing this legislature is what path forward would best serve our state and its fiscal future. Gov. Pritzker’s plan merits serious consideration. So does one from the Civic Committee of the Commercial Club of Chicago.
Both should be looked at as ways to reinvest in state pensions. And neither can be looked at in isolation.
That’s because, in today’s context, pension reform also must take into account what it will take to fix an error in the construction of the Tier 2 pension regime.
Tier 2 benefits are not keeping pace with the growth in Social Security benefits. This violates a safe-harbor provision of federal law. The problem must be addressed. But if a so-called “fix” becomes more than that—if it becomes an effort to “Undo Tier 2”—this would cancel out the benefits of pension reform and set back our state’s fiscal stability.
In short, this legislature faces consequential choices. Decisions taken on pensions in the days and months ahead will reverberate over decades.
If the legislature follows these guidelines, and seizes this opportunity, it will be a rare instance in which a state acts to overcame its pension problems without being forced to by a fiscal or political crisis.
Such action could be an important inflection point for Illinois’ fiscal future, one that would inure to our benefit immediately and for decades to come.
Gov. Pritzker’s pension plan merits serious consideration. It would get the state to 100% funding by 2048. It would retire $142 billion in pension debt without raising taxes or cutting pension benefits. And the plan would do so with no additional cost to budgets until 2030.
At that point, the state’s contributions toward pensions would jump by as much as $750 million per year through fiscal 2040. But the source is a form of found money: As a series of bonds retire—including the detestable $10 billion of pension bonds passed by Gov. Rod Blagojevich in 2018—half of the sums previously earmarked for interest payments would instead go toward pensions.
The other half would go toward the state’s rainy day fund—the rebuilding of which under Gov. Pritzker and Comptroller Susana Mendoza is an unalloyed good.
The most singular part of Gov. Pritzker’s plan is his goal to achieve full funding without increasing taxes or reducing benefits.
Illinois’ current goal of 90% funding, under the so-called Edgar Ramp plan, makes this state an extreme outlier. We are the only state in the union with a stated goal that has set a target of less than 100%.
There are valid questions about Gov. Pritzker’s plan, to be sure.
Execution risk is one of them. Six years would pass before implementation begins, meaning it’s likely some future governor would be responsible for following this governor’s blueprint.
Projected savings is another concern. Gov. Pritzker forecasts his plan to save taxpayers $5.1 billion over time. But that’s just one-seventh the savings the Civic Committee projects from its plan.
Current state policy has pension payments reaching $18 billion in 2045, then dropping steeply afterward. Gov. Pritzker’s plan has pension payments remaining above $16 billion for three more years. By that point, under the Civic Committee plan, state pension payments would be about half that amount.
These are valid issues and deserve serious discussion. But at the outset, let me be clear:
Any material progress on pension reform should be encouraged. It is long overdue. And Gov. Pritzker’s plan represents material progress on a pension problem that has stymied state government for decades.
If all goes according to Gov. Pritzker’s plan, Illinois by 2048 would achieve full funding—more than double its current, dismal state. That’s a mere three years longer than the state’s current goal of achieving 90% funding in 2045.
The direct fiscal effect of Gov. Pritzker’s plan would not be felt for years. But the impact on our state’s credit rating–and on the sense of confidence in Illinois’ fiscal future–could be immediate.
The Civic Committee’s plan is stronger medicine, which could make it more politically challenging to pass into law.
The Civic Committee calls for an incremental tax surcharge of .5% each year for 10 years on individuals, and .7% on corporations. That’s $28.5 billion in new taxes over a decade—all of it set aside for pension payments.
The idea is for Illinois, in that decade, to achieve a kind of exit velocity—out of the bottom tier of states in terms of pension funding. The decade of increased pension payments fueled by that tax surcharge would save Illinois taxpayers $37 billion on pension costs over the plan’s first 22 years.
And those savings could go toward schools, health care and other public needs.
As with Gov. Pritzker’s plan, the Civic Committee aims for 100% funding. But it takes six more years to get there than Gov. Pritzker’s plan would.
The Pritzker and Civic Committee plans are not the only two ways to fix Illinois’ pension problem. A third approach would involve the re-amortization of pension debt over a more extended period of time than under current law.
One leading proposal calls for the sale of pension bonds. It also aims for a targeted 80% funding ratio.
That’s less than the state’s current objective, and any reduction of the state’s goal would have immediate, negative repercussions for Illinois credit rating.
And any re-amortization, no matter how rational, likely would be seen as a kicking-the-can-down-road approach—for a state that has kicked such cans for far too long.
Add it up, and it’s no surprise that the Pritzker and Civic Committee plans are attracting such serious discussion. Neither is perfect, but each has a lot to offer.
It’s worth noting, too, that the plans need not be mutually exclusive. If the legislature passes the Pritzker plan, that could be seen as a down payment for more sweeping reform at some later time. There may also be a way to blend the best ideas of each plan in ways that optimize benefit for the state.
Such questions about the way forward must not and cannot take place without taking into account the need to fix Tier 2.
A Tier repair 2 is a second, mandatory step toward Illinois pension reform. And this panel is well familiar with the necessity for fixing Tier 2.
Tier 2 pension benefits were imposed on new state employees beginning in 2011. The main savings came from increasing the retirement age and eliminating the compounded 3% annual increases in benefits previously promised to state retirees.
Most of those retirees are not eligible for Social Security. Yet the benefits for Tier 2 retirees are not keeping pace with the growth of Social Security benefits. This does not meet a safe harbor provision under federal law and must be addressed.
A state consultant’s report last year estimated the cost of the Tier 2 make-up payments alone at $5.6 billion through 2045. That’s nearly enough to wipe out the projected savings from Gov. Pritzker’s pension fix.
The political problem, for this legislature, is the pressure being applied to do more than just fix Tier 2. Some parties would even like to claw back all the cost-saving measures of the Tier 2 reforms.
Given that Tier 2 employees now make up nearly half of the state workforce, such measures could add untold billions to the state’s costs.
There are no firm estimates available. And it would be reckless for this legislature to adopt any Tier 2 reform without updated, independent actuarial accounting of the costs involved.
Taxpayers have a right to know. And even Tier 2 employees and retirees need to understand the cost of demands their representatives are making on their behalf.
All these pension questions are difficult, and the stakes could not be higher.
As the 103rd General Assembly convened in January, few people expected much action on pensions during this spring session. Veto or lame duck seemed more likely.
This committee’s work on the pension issue has made it possible that at least some measure could move forward yet this year.
In fact, if Gov. Pritzker’s plan could get the votes to pass, the state would be better for it.
No plan is perfect, and the realistic objective of achieving 100% funding by 2048, without reducing pension benefits, is the most serious proposal yet put forward by any elected official in Illinois.
If pension reform does take more time, taxpayers could still benefit. Lawmakers, taxpayers, state workers, retirees, investors and others all would have a chance to assess the relative merits of the two leading plans, based on reliable data, and weigh in with their concerns.
Time also would allow all stakeholders to measure the full cost of any Tier 2 fix.
A year ago, no one in Springfield was talking seriously about pension reform. That’s not the situation today. In fact, we have two estimable plans, either offering creative, substantive approaches that would benefit the state and offer retirement security to workers.
We are gaining a clearer understanding of what it will take to fix Tier 2.
Meaningful pension reform may not come as quickly as some people wish. But it looks as if reform is possible. And that’s an opening that our elected representatives, our state and the people of Illinois cannot afford to miss.
Thank you for your attention, and I would be happy to answer any questions.
