Senator Robert Martwick is proposing legislation to fix IL Tier 2 pensions law, which may be depriving workers of their retirement benefits.
Chicago finance officials say pending legislation to boost police pension benefits could burden the city's police pension fund with up to $3 billion in new liabilities.(Scott Olson/Getty Images)

An influential state legislator is digging up what he calls a fiscal time bomb his predecessors buried more than a decade ago, arguing the General Assembly can’t wait any longer to defuse it. But experts and city officials are warning of collateral damage if he doesn’t slow down.

State Sen. Robert Martwick (D-Chicago) is proposing legislation he says would “fix” a 2010 law that aimed to stem Illinois’ pension crisis by cutting back retirement benefits for future public employees. Researchers have since warned that the measure likely went too far, potentially depriving workers of benefits they’re entitled to under federal law.

Chicago leaders and other local governments are blasting the bills for their promise to burden taxpayers with hundreds of millions more dollars in pension obligations. And at least one fiscal watchdog says the proposals risk repeating the previous law’s sin of taking action before studying the consequences. 

Martwick, who chairs the Senate Special Committee on Pensions, says the move can’t wait.

“I’m not an actuary — I can’t show you a spreadsheet,” the senator said. “But the commonly held belief in the pension world is that the fix, while costing money, is exponentially less expensive than not doing the fix.”

What are ‘Tier 2’ pensions?

After the 2009 recession exposed the anemic state of pension funds across Illinois, state legislators grappled with their options to compensate for decades of generous retirement payouts and insufficient funding to back them. The state Constitution forbids cutting promised pension benefits for existing employees — as the Illinois Supreme Court affirmed in 2015 — so lawmakers tried the next-best option: cut benefits for future workers.

The 2010 law dramatically narrowed retirement benefits for public workers who would come on the job after Jan. 1, 2011. Instead of reaping compounded interest on their pension payouts every year from retirement until death, as older workers had, pensioners in the new “tier” would only see nominal annual bumps. It also placed a cap on how high benefits could reach and lowered the standard for how annual payouts are calculated.

The result was a significantly smaller cost outlay for governments once “Tier 2” pensioners start to fully vest their pensions and retire. That hope is why many actuarial projections show Chicago and Illinois starting to make real progress toward shoring up their pension funds starting about 2030.

What was the problem with Tier 2?

Even as they crafted the pension rollback legislation in 2010, lawmakers heard warnings that the Tier 2 calculus could someday invite costly legal challenges. If pension payments are too small, public workers could sue their employers on the back of a federal rule that pension payments must exceed the income that workers would otherwise earn from Social Security payments.

Governments would have had no problem in 2010 clearing the so-called federal “safe harbor” threshold with the smaller payouts. But Social Security benefits have since grown with inflation. Tier 2 benefits, less so.

“Nobody did any evaluation to see if the Tier 2 benefit was going to cut so significantly that it would violate” the federal rule, according to Amanda Kass, an assistant professor at the DePaul School of Public Service who studies pensions. “It was done through political negotiations without any real analysis.”

There’s little precedent for a pension falling short of the “safe harbor,” but Martwick warned of dire consequences. Each shortchanged pensioner could bring their own separate lawsuit against their former employer, and if they win, a judge may order the local government to furnish annual payouts matching the Social Security, he said.

“That would be prohibitively more expensive” to governments than making scheduled payments into funds that will later have to pay out pension benefits, Martwick said.

Martwick and his allies also say the sharp cutback in benefits in 2010 deserves some blame for state and local governments’ post-pandemic struggles to recruit new teachers, police officers and other public workers. It was another blind spot for the legislators who wrote the 2010 law, according to Kass, who is herself a Tier 2 pensioner after having spent four years working at the University of Illinois at Chicago.

“The social contract of working in the public sector has historically been that your salary is going to be less, but you’ll have more job security and a more secure retirement,” Kass said. “Cutting the benefits so significantly negates that contract.”

Legislators are now taking a second look at retirement benefits as they strain to attract new applicants to public service jobs. Martwick pointed to data kept by the Illinois State Board of Education showing more than 5,300 unfilled teaching positions across the state.

“You have a 22-year-old teacher who’s full of energy and vitality, and then five years later they’ll look forward and say, ‘Jesus, I have to work another 40 years to get a retirement benefit that’s roughly equal to Social Security,’” Martwick said. “They’ll say, ‘…I may as well go tend bar on a cruise ship.’”

What’s the proposed solution?

Lawmakers took a major step in 2019 to backtrack on their earlier cuts to Tier 2 pension benefits. A law spearheaded by Gov. JB Pritzker to consolidate hundreds of downstate pension funds included a provision that raised the salary cap for suburban and downstate police and fire department pension payouts and gave them more room to catch up with inflation.

Martwick, who supported that effort, said state leaders carved Chicago out of the benefit boosts as a courtesy to then-newly elected Mayor Lori Lightfoot in the hope that she would take on the issue herself.

“Four years later, we said, ‘[Chicago police and firefighters] were promised this fix, they should get it, so let’s do it,’” Martwick said.

The Northwest Side senator shepherded a pair of bills through the Senate in March that would expand the same provisions to include firefighters in the city, and he introduced additional legislation bestowing a similar benefit on Chicago police officers. The bills are now pending in the House, where they’re sponsored by Rep. Stephanie Kifowit (D-Oswego), chair of the House Personnel & Pensions Committee.

Also this year, Cook County Board President Toni Preckwinkle came to Martwick with a separate bill that would similarly expand benefits for Cook County employees. The bill would also codify the county’s accelerated pension payment schedule into state law and give Preckwinkle an additional pick on the county pension fund’s board of directors.

Ted Nelson, a spokesman for the Cook County Bureau of Finance, wrote in a statement Tuesday that it “sometimes gets lost in this conversation” that lifelong pensioners don’t pay into Social Security and won’t receive its benefits.

“This legislation is an effort to make sure they are not receiving less than what they would get under Social Security,” Nelson said. “Tying the Tier 2 cap to the Social Security Wage Base addresses this risk now before it can become problematic, reduces the potential for future unfunded liabilities and aligns the County with federal requirements.”

County finance officials estimate it will cost them approximately an extra $3 million per year in contributions to cover the broader pension benefits.

“This is an amount that we are comfortable paying,” Nelson said. “We believe addressing this issue is good public policy, can assist in recruitment and retention for impacted employees and ignoring the problem so it can get bigger and costlier down the line is something we would like to avoid.”

Who’s opposed?

Representatives of the Illinois Municipal League and the City of Chicago registered opposition to the bills before they advanced out of a House committee last month.

Jennie Huang Bennett, who is serving out her final days as Chicago’s chief financial officer before Lightfoot leaves office next week, warned the proposed bills could add up to $3 billion in new liabilities each for the city’s police and fire pension funds — more than enough to cancel out the promised revenue from a planned Chicago casino.

Each would be enough to tack on an additional $55 million to the city’s annual pension contributions, she said, calling Martwick’s bills an “unfunded mandate” foisted upon city taxpayers.

“It’s an enormous sum of money to find in the Corporate Fund that we use for other essential services,” Bennett said. “Alternatively, you’d have to find new revenues, which have historically come from property taxes.”

Lightfoot and her team were similarly sour on a 2021 effort by Martwick to codify higher benefits for Chicago firefighters, also landing city taxpayers with the price tag. Pritzker signed the bill into law over the mayor’s objection.

A spokesman for Mayor-elect Brandon Johnson said Johnson is focused on the transition and has not reached a position on the pension bills. Sen. Cristina Pacione-Zayas (D-Chicago), who is set to become Johnson’s deputy chief of staff, is listed as a co-sponsor on the bills.

Martwick maintains that every additional dollar cities are forced to pay into their pension funds will save taxpayers in the long run.

“Pensions are all about making sure that you fund them properly at the front so you can afford them on the back end,” Martwick said. ‘Every dollar you don’t put it on the front end costs you … thousands of dollars on the back end.”

Other critics, like leaders of the nonpartisan budget watchdog The Civic Federation, say Martwick and his allies risk repeating their predecessors’ mistakes by plowing forward with a “fix” without taking time to study how the new benefit formula would hold up over time.

“Benefit enhancements are likely necessary to meet Safe Harbor requirements, but the solution should be thoroughly vetted, actuarially sound and the most cost effective of all possible options,” an April 28 Civic Federation blog post reads. “The Illinois General Assembly must ensure that the financial impact of any proposed Tier 2 changes is fully evaluated by pension actuaries and publicly disclosed before any action is taken. Until a complete analysis is done, there should be no urgency to pass these supposed Safe Harbor ‘fixes.’”

Bennett, for her part, believes lawmakers are underselling the retirement benefits they’ve written into the legislation. She noted that the police and fire bills make no mention of social security, instead tying payout calculations to income in a way that risks vastly exceeding the “safe harbor” threshold and erasing much of the initial savings promised by Tier 2 pensions.

“It’s being marketed as a ‘fix,’ but this is not a fix,” Bennett said. “This is a pension sweetener, pure and simple.”

Martwick responded that it can be “quite expensive” to run actuarial studies of every proposal. But he said he trusts the formula JB Pritzker’s administration reached to rejigger police and fire pensions in 2019, as well as the analysis by Preckwinkle’s finance team of an appropriate formula for county pensioners.

Legislators will seek out further analysis as they explore “fixes” for other Tier 2 pensioners, like teachers and department staffers, all across the state, Martwick said.

“I would posit that they all need to get done,” he said.

Alex Nitkin is a solutions reporter conducting investigations on efforts to fix broken systems in Chicago, Cook County and Illinois government. Before joining Illinois Answers, he worked as a reporter and editor for The Daily Line covering Cook County and Chicago government. He previously worked at The Real Deal Chicago, where he covered local real estate news, and DNAinfo Chicago, where he worked as a breaking news reporter and then as a neighborhood reporter covering the city's Northwest Side. A New York City native who grew up in Connecticut, Alex graduated Northwestern University’s Medill School of Journalism with a bachelor’s degree.