Illinois Passes Pension Reform Opposed by Some Reformers, Unions

Illinois Passes Pension Reform Opposed by Some Reformers, Unions
December 4, 2013

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

Illinois lawmakers approved a bill they and Gov. Pat Quinn (D) say will fix the state’s worst-in-the-nation pension system but which many analysts say will do no such thing.

Illinois has the lowest credit ratings among the 50 states. The state's huge unfunded pension obligations are the main reason.

The bill in the Democrat-dominated General Assembly enjoyed bipartisan support, as many Republicans jumped on board to approve it during a special session in early December. Among other things, the law aims to reduce the state’s $100 billion pension shortfall by approximately $20 billion, leaving an unfunded liability of $80 billion.

It also ends the automatic 3 percent annual increase in pension payments retirees have enjoyed. Instead, the 3 percent annual increase applies to a portion of a person’s pension benefit using a formula that multiplies years worked by $1,000. For example, a retiree with 30 years of service would receive the annual increase on a pension benefit of up to $30,000. Any pension benefit above that amount for that same retiree would not receive an increase.

The retirement ages to qualify for pension benefits also begin to rise. However, workers currently in their 40s still will be allowed to retire with full benefits in their 50s.

No 401(k) Guarantee

There is also a provision allowing the state’s pension funds to sue if lawmakers fail to make the state’s required payments into the pensions. Lawmakers have often used pension money to fund other spending. This provision appears to put pension funding above all other state spending priorities except debt repayments.

The state also will create a 401(k)-style plan similar to those that are common in the private sector. In this plan, workers and employers contribute funding, but there is no guaranteed retirement payout as there is with the existing defined-benefit plan. Though pension-reform advocates typically like 401(k)-style plans, this one is already coming in for harsh criticism because it limits participation to only 5 percent of workers hired before 2011, and it allows the state to cancel the plan at any time and “recover” the money. This raises fears that the state could seize program participants’ funds.

Though Gov. Quinn declared after the House and Senate votes “This is a great day for the taxpayers of Illinois,” taxpayer advocates such as Illinois Policy Institute CEO John Tillman disagree. History is on their side.

House Speaker Michael Madigan (D-Chicago) has been Speaker more than 30 years and has presided over pension benefits increases and diversions of state pension system payments to fund other spending. In the 1990s he helped orchestrate a pension system rescue, and since then the state’s unfunded pension liability has grown seven times bigger. Tillman says this latest Madigan-engineered reform, developed with Senate President John Cullerton (D-Chicago) and the two minority leaders, will perform no better.

Still at Crisis Levels

“The conversation about pension reform became serious in 2011. At that time, Illinois had an unfunded liability of approximately $80 billion. Today, the official unfunded liability is $100 billion. The bill passed today would – at best – reduce the unfunded liability to $80 billion. It dials back the crisis just to 2011 levels,” said Tillman in a statement.

“The bill passed today purportedly cuts the state's pension payment by $1 billion next year. Know where that gets us? To the same level payment as the state had for the fiscal year that ended on June 30, 2013,” he added.

Meanwhile, government worker advocates also have serious criticisms of the reform.

"This is no victory for Illinois, but a dark day for its citizens and public servants,” read the statement from “We Are One,” a coalition of unions representing Illinois government workers and retirees. “Teachers, caregivers, police, and others stand to lose huge portions of their life savings because politicians chose to threaten their retirement security, rather than pass a much fairer, legal, negotiated solution in Senate Bill 2404.”

Union Lawsuits Likely

The unions threatened to sue and followed through on the threat a few days before the start of 2014 in a lawsuit filed by a group of teachers and public school officials. They allege the reform violates a provision in the Illinois Constitution that guarantees pension benefits to government workers cannot be cut.

Dan Montgomery, president of the Illinois Federation of Teachers, said in a statement, “AFT members in Illinois contribute more than nine percent from each paycheck, and 80 percent of them don’t receive Social Security. This bill will rob working people of the life savings. It is unconstitutional, and so won’t save a dime. Don’t be fooled by anyone who calls this a solution. All they have done is sent this fight for justice to the courts.”

But Gov. Quinn declared in a statement, “This landmark legislation is a bipartisan solution that squarely addresses the most difficult fiscal issue Illinois has ever confronted. This bill will ensure retirement security for those who have faithfully contributed to the pension systems, end the squeeze on on critical education and healthcare services, and support economic growth.”

Failed Reforms

Matthew Glans, a senior policy analyst at The Heartland Institute, which publishes Budget & Tax News, has a decidedly different opinion: “Illinois has been here before and enacted plans designed to fully fund the state’s pension plan over an absurdly long time period. These reforms failed because Illinois legislators have never followed through on their side of the bargain and paid for the pension plans as promised. It was too easy to push the obligation aside. How is this likely to change?” he said.

“Small-scale pension fixes do little to solve the systemic issues created by Illinois’ flawed pension system," Glans added. "Instead of relying on the state to fund their retirement, a situation that has proven to be flawed, the state workers should support a defined-contribution plan that places their retirement income under their own control. These plans, which are used extensively in the private sector, would allow the state to lower its pension costs while giving employees control over their retirement plans.”

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)