Illinois Pension Crisis: A Long History of Reform and Debate

The Illinois pension crisis has a long and complex history. It began in the 1970s when the state's pension system was reformed to include cost-of-living adjustments.

The 1970 reform added 3% annual increases to pension benefits, which contributed to the growing unfunded liability. This change was made to keep pace with inflation and ensure retirees' purchasing power.

The state's pension funds have been underfunded for decades, with the current unfunded liability estimated at over $130 billion. This staggering number has been a major point of contention in debates over pension reform.

The state's pension system has five separate funds, each covering a different group of employees: the General Assembly Retirement System, the Judges Retirement System, the State Employees Retirement System, the Teachers' Retirement System, and the University Retirement Plan.

The Illinois pension crisis has a long history of warning signs being ignored. Dating as far back as 1917, reports by the Illinois legislature described the condition of the state and municipal pension systems as "one of insolvency" and "moving toward crisis".

Throughout the 1970s, the funding of the state's pension systems rose from roughly 35% to 50%, but this progress was short-lived. The 2008 financial crisis brought poor investment returns and insufficient contributions, which increased the unfunded liability from $42B in 2007 to $86B in 2010.

Governor Pat Quinn proposed pension reforms in 2009, including a higher retirement age and capped cost-of-living adjustment rate, but lawmakers failed to enact them. The proposed changes would have helped alleviate the crisis, but unfortunately, they were not implemented.

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In 1994, a major pension reform was passed under Governor Jim Edgar, aiming to increase the funding ratio from 52% to 90% by 2045, known as the 'Edgar Ramp'.

The reform was a response to the state's unfunded pension liabilities, which had reached a then-high of $17B.

This legislation was meant to improve the state's pension funding, but a later complaint by the Securities and Exchange Commission noted that even with the proposed funding levels, unfunded pension liabilities would continue to grow.

The state's pension funding ratio did increase to 75% by 2000, but this improvement was largely driven by $15B of favorable changes to actuarial assumptions and better-than-expected investment returns.

State contributions fell $6B short of required amounts, highlighting the ongoing challenges in addressing the pension crisis.

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The 2008 financial crisis had a significant impact on Illinois' pension crisis. The crisis caused poor investment returns, leading to an increased unfunded liability from $42B in 2007 to $86B in 2010.

Governor Pat Quinn attempted to address the issue by proposing pension reforms for newly-hired public employees in 2009. These reforms included a higher retirement age and a capped cost-of-living adjustment rate.

The proposed changes were not enacted by lawmakers, leaving the pension crisis unresolved at the time.

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The debate over Illinois' pension crisis is ongoing, with various proposals being discussed in the General Assembly. The state's budget contributions toward pension liabilities, as well as the scale and formula of pension benefits offered to state employees, are key factors in determining pension funding levels.

Government officials, lobbyists, and unions are at odds over how to reduce the existing funding gap, with two main mechanisms being considered: increasing state budget contributions and changing benefit calculations and criteria. The latter option could involve reducing the 3% automatic annual cost-of-living increase in pension payments, limiting the impact of salary increases on benefit calculations, increasing the retirement age, or increasing employee contributions.

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A new model for reform, called the "Consideration model", has been proposed, which would allow pension plan members to opt-in to lesser benefits and modify the original contract. This model was first advocated by Illinois Senate President John Cullerton in 2012 and was included in Former Governor Bruce Rauner's 2019 budget, which stated it would bring $900M in savings.

Some of the key reforms being considered include:

In 2013, Illinois passed a pension reform bill that aimed to save the state around $160 billion over three decades. The reform reduced retiree cost of living increases and raised retirement ages.

Retirement ages were raised as part of the reform, which also limited pensionable salary and lowered the amounts current employees contribute. A voluntary 401(k) option was also set up.

The reform guaranteed that the state would make contributions on time. This was a key aspect of the legislation, aimed at ensuring financial stability.

Despite these changes, the Illinois Supreme Court unanimously overturned the law in May 2015. The court ruled that the reform violated the benefit protection clause in the Illinois Constitution.

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The reform debate in Illinois is a complex issue with various stakeholders having different opinions on how to address the state's pension funding gap. The General Assembly, Governor, lobbyists, and unions disagree on what combination of reforms should be made.

One of the main points of contention is whether to increase state budget contributions toward pension liabilities, such as through tax increases or new revenue streams, or to change benefit calculations and criteria. For example, some propose reducing the 3% automatic annual cost-of-living increase in pension payments or limiting the impact of salary increases on benefit calculations.

Actuarial assumptions used in calculating future pension payments and the financial performance of the pension fund asset investments also play a crucial role in determining the annual valuation of pension liabilities. This means that even small changes in these assumptions can have a significant impact on the state's pension obligations.

The debate has centered around two main mechanisms: increasing state budget contributions and changing benefit calculations. Some proposals include increasing the retirement age or requiring employees to contribute more to their pensions.

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A new model for reform, known as the "Consideration model", has been discussed in the General Assembly. This model would allow pension plan members to choose from options to opt-in to lesser benefits, effectively modifying the original contract.

Here are some of the key proposals being considered:

Appointing a pension czar could be a game-changer for pension reform in Illinois. A czar would be responsible for developing a plan, building political support, and getting the work done within a tight deadline.

This approach is an alternative to forming blue ribbon commissions, which have fallen short in the past. A czar would have the singular focus to perform shuttle diplomacy with key parties, taking into account the interests of government, business, taxpayers, and labor.

A pension czar should have a proven record working in a bipartisan fashion and be able to negotiate an equitable outcome. They should also have a sophisticated understanding of pension economics.

Appointment of a pensions czar would signal Pritzker's commitment to reform, while depoliticizing the talks. This could increase the chances of finding a solution with broad-based support.

The Illinois pension crisis has far-reaching implications that affect not just the state's finances but also its residents and the economy as a whole.

The state's pension debt of over $130 billion is a significant burden that could lead to deep budget cuts and reduced services for Illinoisans.

Illinois's pension crisis has become a major concern for its residents, who are worried about the long-term sustainability of the state's finances.

The state's pension funds are currently underfunded by about 55%, which is a major red flag for financial stability.

The Illinois pension crisis has also caught the attention of the national media, with many outlets covering the story and its implications for the country.

The crisis has sparked a national debate about the role of government in providing pension benefits to public employees.

Illinois's pension crisis is not an isolated issue, but rather a symptom of a larger problem affecting states across the country.

The crisis has also raised questions about the fairness and equity of the state's pension system, with some arguing that it favors certain groups over others.

As the Illinois pension crisis continues to unfold, it's clear that its national and global implications will only continue to grow.

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Achieving escape velocity from the bottom tier of pension basket cases is possible, but it requires a well-thought-out plan that benefits accumulate over the years.

Brian Septon, a nationally known pension expert, suggests creating an exit velocity to get Illinois into the 40s or 30s as it relates to state rankings, which would improve the state's credit rating and reduce borrowing costs.

Pritzker's leadership and ability to muster support from both Democrats and Republicans could be crucial in implementing a plan that earns votes from various parties.

He could lean on the Civic Committee to develop support among Republican lawmakers, using its conservative credentials to make the case for added revenue.

Pritzker's strong standing with unions could also be leveraged to bring them to the negotiating table, particularly after signing a generous four-year deal with Council 31 of the American Federation of State, County and Municipal Employees.

The benefits of pension reform over time, such as lower costs for taxpayers and more secure retirements for workers, outweigh any upfront monetary or political cost.

Pritzker has the persuasive powers to make this argument and could use it to negotiate a Tier III category of pension benefits for new state employees, modeled after hybrid plans adopted by dozens of states since Illinois' Tier II plan was adopted in 2010.

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