Breaking Down Illinois' Pension Crisis

Illinois’ pension problems are big—far bigger than the $100 billion funding gap the legislature said it tackled earlier this week with a new set of reforms. The funding gap is actually double that—well over $200 billion—when calculated on a fair-market basis. Illinois is committed to fully funding the actuarial liability (and some are encouraging the system to sue the state should the government not pay it). This is one of the reasons the state is in such a hole—they are well behind on payments, and those payments are calculated based on the overly optimistic expectation that they will earn 8 percent a year on investments.

Illinois’ pension problems are big—far bigger than the $100 billion funding gap the legislature said it tackled earlier this week with a new set of reforms. The funding gap is actually double that—well over $200 billion—when calculated on a fair-market basis.

Illinois is committed to fully funding the actuarial liability (and some are encouraging the system to sue the state should the government not pay it). This is one of the reasons the state is in such a hole—they are well behind on payments, and those payments are calculated based on the overly optimistic expectation that they will earn 8 percent a year on investments.

The new law proposes to save $160 billion over 30 years with the following reforms:

a)    Curtail cost of living adjustments for retirees on a sliding scale.

b)   Offer a 401(k) option for employees.

c)    Increase the retirement age for younger workers, while decreasing their contributions by 1 percent (thus increasing take home pay).

d)   Guarantee the state makes its annual payment.

The plan is receiving “sniper fire from all sides,” as one lawmaker put it. Labor unions don’t like it and are certain to take the state to court, arguing that Illinois’ constitution prevents the impairment of benefits. Some legislators also don’t like it. They would prefer to see more significant structural reforms and are worried about the very large annual payments that will affect spending in other areas of the budget.

The fact is, the Illinois constitution does guarantee benefits, in strong terms, and that puts the state on the hook. Indeed, the payments, which the state grew accustomed to skipping or bonding, are going to be very painful. Yesterday’s reforms are an attempt at “shared sacrifice,” though given the actual size of the liability, legislators are overestimating the proposal’s fiscal effects.

If the proposed measures hold up to a court challenge, what will the effects be on employees?

The Center for Tax and Budget Accountability calculated three scenarios:

Employee 1: Retired teacher, 30 years of service:
Initial annual benefit: $67,000
annual pension benefit after 20 years of retirement, $120,680 a year under the current pension system; $91,000 under the proposed changes.
Cumulative 20-year decrease: $282,632.

Employee 2: Retired Department of Children and Family Services caseworker, 20 years of service:
Initial annual benefit: $50,000
annual pension benefit after 20 years of retirement, $90,306 under current system; $63,000 under proposed changes.
Cumulative 20-year decrease: $261,215.

Employee 3: Central Management Services data processor, age 43, planning to retire in 15 years with 30 years of service:
Initial annual benefit: $72,000
annual pension benefit after 20 years of retirement, $130,000 under current system; $85,400 under proposed changes.
Cumulative 20-year decrease: $441,700.

And that's just starting to solve the problem. The question legislators should be asking is: How do we stop the bleeding and finance the massive liability we’ve accumulated?