Five Reasons Illinois’ Pension ‘Fix’ Is a Step Backward

Five Reasons Illinois’ Pension ‘Fix’ Is a Step Backward
November 29, 2013

There’s immense pressure on Illinois legislators to pass a pension bill. Legislators are scheduled to be back in session December 3. With the state pension system nearing insolvency and credit agencies warning of further downgrades, the perceived wisdom is that any pension fix, no matter how small, is a “step forward” that must be passed.

But when it comes to pension reform in Illinois, that logic has driven the state into a fiscal death spiral.
 Illinois’ history is full of pension fixes that were billed as steps forward but have proven to be disastrous for Illinois and its residents. House Speaker Mike Madigan’s (D-Chicago) latest proposal, announced Wednesday, is just the next in a long line of disastrous pension maneuvers:

  • In 1996, then-Gov. Jim Edgar’s famed ‘pension ramp’ was meant to gradually eliminate the state’s $20 billion pension shortfall. But just eight years later, that shortfall had risen to $43 billion.
  • Former Gov. Rod Blagojevich’s 2003 solution was to borrow $10 billion to help plug the pension hole. More debt did nothing to solve the problem, and by 2009 the shortfall had jumped to $78 billion.
  • Gov. Pat Quinn copycatted Blagojevich by borrowing $3.5 billion in 2009 and another $3.7 billion in 2010. That, too, failed. By 2011, the shortfall had increased to $83 billion.

The state’s most recent failure was the 2011 tax hike. Illinois’ tax coffers have raked in nearly $20 billion in additional tax revenues since 2011 – much of it to fund pensions – and yet the pension shortfall will exceed $100 billion when fiscal year 2013 results are released.
Madigan has yet to release the full details of his latest deal, but caucus leaders have reportedly agreed to it. And though full details are still forthcoming, what’s already been leaked means Madigan’s plan will do nothing more than delay real reform and keep Illinois in a chronic state of crisis.

Here are five reasons Madigan’s bill will be more of the same:

1. The bill only reduces Illinois’ pension shortfall to 2011 levels. No real reform will be achieved in Illinois without a major reduction in the state’s $100 billion unfunded pension liability. And though projections have yet to be released, Madigan’s plan is said to reduce that liability by no more than $20 billion to $23 billion. Only 60 percent of those savings are reportedly from benefit reductions, so it’s unclear where the remainder of the cuts come from and how lawmakers have justified them as savings.

At best, Madigan’s bill reduces the state’s unfunded liability to 2011 levels – levels that had already thrown Illinois into crisis and that Democrat leadership used as justification for its 2011 tax hike. That’s hardly reform, and the remaining $80 billion pension shortfall will continue to cripple Illinois.

2. The bill doesn’t means-test COLAs. Reforming cost-of-living adjustments, or COLAs, is the single-largest lever for bringing down the state’s $100 billion unfunded liability. A full suspension of COLAs until the pension systems are healthy again can cut Illinois’ pension shortfall by nearly a third.
But Madigan’s bill continues to provide an automatic 3 percent COLA to all retirees, regardless of need. His bill bases COLAs on the number of years worked by a retiree, multiplied by $1,000. A retiree who worked 25 years, for example, will receive a COLA on $25,000.
That means COLAs will continue to be paid to tens of thousands of retirees with five-figure and six-figure yearly pensions, some as high as $500,000. That’s hardly fair to a 29-year-old teacher who sees little chance of receiving a pension check in the future.

To save teachers’ retirement, COLAs should be means-tested and limited to workers who dedicated their full careers to public service and have yearly pensions below $30,000. That would protect Illinois’ most vulnerable state retirees, yet ensure the solvency of the state’s pension systems.

3. The bill continues to allow state workers to retire in their late 50s with full benefits. Madigan’s bill increases the retirement age for workers who are younger than 45. For each year a worker is younger than 45, his retirement age increases by four months. No information as to the maximum age of retirement has been released.
But Madigan’s bill still allows today’s 40-year-old state workers to retire in their late 50s with full benefits. That means private sector workers, still stung by a weak job market, declining earnings and low home values, will have to work longer to support state retirees who retire early.

Illinois needs to adopt a plan like the one adopted by Rhode Island, which moves workers to the retirement age required by Social Security. Their plan protects those workers near retirement, yet aligns public sector retirements with those in the private sector.

4. The bill reduces state worker contributions, putting an even larger burden on taxpayers. The previous version of the (former House Minority Leader) Tom Cross/Madigan bill required workers to increase their contributions by 2 percent of their pay. Even the recent Chicago Park District pension bill increased worker contributions by 2 percent. This version of the bill, however, cuts worker contributions by 1 percent of their pay. That’s a 3 percent swing in the wrong direction.
Pension contributions are already way out of sync with benefit payouts. This will only make the situation worse and increase the burden on taxpayers.

5. The bill adds a pension-funding guarantee, prioritizing government worker pensions over all core spending. If pensions weren’t already squeezing out core spending enough already, Madigan’s bill adds a pension-funding guarantee to appease the unions. With Madigan’s minimal reforms, this funding guarantee will lock in further tax increases and increase the burden on taxpayers. A vote for this bill is a vote for tax hikes.

This bill falls dramatically short of the reforms needed to save Illinois. Even more, this bill, much like the 2011 tax hike, will deflate pressure for real reform for years. And by keeping the defined benefit system at the core of state worker retirements, Madigan’s bill ensures the unfunded liability will rise, just as it did over the past 20 years.

In typical Illinois fashion, the public, news media and legislators have been given little information on one of the most critical reforms this state faces. No summary has been provided. Bill language is likely to be provided just hours before the Legislature will be called to vote on the bill.
Make no mistake: This bill is a step backward.
 

Ted Dabrowski (dabrowski@illinoispolicy.org) is vice president of policy at the Illinois Policy Institute.