When Gov. J.B. Pritzker delivered his first budget address in 2019, he laid out a muscular plan to fix an Illinois pension system that was the weakest of any U.S. state.
Bigger payments toward pensions, and cost cuts, would help rehab Illinois’ five state pension funds, he said. The need was urgent: Retirements for generations of state workers were on the line. And out-of-control pension payments, to the tune of a legally required $9.2 billion in his first budget, were eating up nearly a quarter of the state’s budget.
“This must not continue,” Pritzker declared.
The governor’s five-point plan included using “hundreds of millions” from a proposed graduated income tax, selling the Illinois Tollway and other assets, and raising $2 billion in a bond sale. Savings would come from buying out retiree pensions and extending the timeline for retiring $140 billion in pension debt.
It sounded ambitious. It was ambitious. And it proved even more difficult to enact than it sounded.
Voters rejected the constitutional amendment needed to adopt a graduated income tax, marking Pritzker’s biggest political setback as governor. The asset and pension bond sales proved to be nonstarters. Initial savings from pension buyouts came in at a sliver of projections. And the state’s long-standing pension timeline — targeting 90% funding by 2045 — remains unchanged, with costs rising every year.
Part Two: Lessons from Other States
Part Three: The Plans to Tackle Illinois’ Pension Debt
Part Four: The Politics at Play
Part Five: The Path to Solving Illinois’ Pension Crisis
So it often goes in Illinois: Well-intended efforts to fix the state’s pension problems somehow run aground. Even so, Pritzker and others in state government have not given up. And civic groups are stepping into the breach, introducing ideas that could lead to a permanent fix for a pension problem that has dogged the state for more than a generation.
How those twin efforts pan out will have implications for Illinois’ finances, and the quality of life in this state, for years to come.
There is no guarantee that either of the plans promoted by Chicago civic organizations will take effect. Work is underway, in private meetings, to get them adopted by state government. But it will require reaching consensus, and a concerted effort to help the public understand the potential benefits of pension reform, before good intentions can yield material results.
Truth in numbers
While that all happens, smaller steps will need to suffice. The governor poured $700 million of federal pandemic relief money into the state’s pension funds over the last two years, saving taxpayers an estimated $2.4 billion by 2045, according to Pritzker. Another $2 billion went toward rebuilding a “rainy day” fund that his predecessor Gov. Bruce Rauner had drained to nearly zero.
But the federal windfalls won’t be permanent: The COVID-19 spigot is now shut off. And after two years of unexpectedly large state tax revenues due to a strong economy, concerns about a looming recession are in the air.
At the same time, the state’s operating costs are on the rise. Illinois’ $50.4 billion budget this year is up 26% from Pritzker’s first budget, passed in 2019.
One of the biggest factors behind that increase: pensions, of course.
A state law obligates Illinois to increase pension contributions by stairstep amounts each year — climbing from $6.9 billion in 2015 to $18.2 billion in 2045. And even after all that, the system still would be only 90% funded that year — below the 100% that actuaries recommend.
In the fiscal year that ended June 30, pension payments and related debt costs accounted for 25% of the state’s general funds spending. And even at that high level, the rising cost of paying generous retirement benefits and running the Illinois’ pension system will still outpace the billions that taxpayers are pouring into it.
Such spending takes money away from schools, hospitals, police, environmental protection and other services people need from their state.
Into the breach
Problems like these are what prompted the Civic Committee of the Commercial Club of Chicago in February to step forward with a new plan designed to fully fund the state’s pension system within 30 years.
The Commercial Club is famous in Chicago history for sponsoring the 1909 Plan of Chicago that called for protecting the Chicago lakefront from development. Its Civic Committee, formed in the 1980s to combat the effects of a deep recession, made its first big push for pension reform in 2006.
The Civic Committee’s new plan has turned heads because of its ambitious and innovative approach to solving the state’s pension problems. The group proposes to front-load a big jump in pension payments for 10 years — $2.3 billion the first year, and $28.5 billion overall. Its plan to reach 100% funding by 2053 could save taxpayers $35 billion by 2045, the group claims.
But here’s the catch: The money for those lump-sum payments would come from raising income taxes: adding a .5% surcharge to what individuals pay and hiking taxes on companies, too, with a .7% surcharge. The tax surcharge would be segregated by law, into what the group calls a “lockbox,” and could be spent only on pensions.
The plan had the earmarks of just another white paper from another downtown do-gooder group until February. That’s when Pritzker appeared before the Commercial Club, and in a meeting that was closed to the public, in off-the-cuff remarks, the governor said he was open to considering the Civic Committee’s ideas.
“The governor said he could see some things happening, and there are other aspects that maybe are nonstarters,” recalled Derek Douglas, president of the group. “I took that as a willingness to engage with us on the issue of moving some of these ideas forward.”
Energized by Pritzker’s remarks, the group’s leaders launched a round of shuttle diplomacy, meeting with Pritzker and his deputy governor for financial affairs Andy Manar, a former state senator; with all four legislative leaders, and with leaders of several large unions too.
There are stark differences between the liberal Pritzker and the conservative-minded business group. The Civic Committee opposed Pritzker’s graduated income tax proposal, so the idea of a different tax increase to pay for pensions is a reach.
“Even if the governor opposes the idea, they should be commended for bringing it to the table,” Manar said. Pritzker is waiting to see if the group can earn support from lawmakers, unions and other stakeholders, Manar said.
With the flurry of Civic Committee outreach underway, the liberal-leaning Center for Tax and Budget Accountability stepped into the mix in June, refreshing a plan it first introduced in 2018. The key feature is a push to reamortize the state’s pension debt — sort of like refinancing a home mortgage — stretching out the payments indefinitely.
The CTBA plan recalibrates the near-term objectives for refunding the pensions system. While current state law calls for Illinois’ pension plan to have funds on hand to cover 90% of their obligations by 2045, the CTBA would set the target at 80% — a significantly weaker metric. There is no effort to get to 100% funding, as the Civic Committee proposes.
The 3% challenge
Two viable but competing plans are on the table. A scramble is underway to earn support from taxpayers, labor and business groups, leaders in the legislature and rank-and-file lawmakers, both Republicans and Democrats.
We all have a stake in this flurry of activity. Even though the state’s annual pension payments are climbing their steep curve, Illinois still cannot keep pace with the system’s growing costs.
An extraordinarily generous state retirement package promises 3% compounded growth in annual retirement checks to all retirees and current workers hired before 2011. Those hired afterward have less generous benefits. And a controversial codicil in the state constitution prohibits any changes that might “diminish or impair” those benefits.
The Civic Committee and others — including me — have argued in the past for a constitutional amendment that might enable some renegotiation of retirement benefits. The state has other obligations to residents that sometimes might trump commitments it made to its retired workers, the thinking goes. But Pritzker opposes an amendment, and he says he couldn’t pass one even if he tried.
I have come to believe pension reform can be accomplished without a constitutional amendment. And one of the most interesting features of the Civic Committee plan is that this stalwart of the Chicago business community has also stopped calling for a pension amendment.
Perhaps that’s a starting point from which the Civic Committee, the governor’s office, legislative leaders and other stakeholders can find common ground. Perhaps, against all odds, it’s a new day in Illinois. Change might be afoot, with huge implications for the financial health of our state.
In columns over the next few days, we will dig into the story of how Illinois got this way; we’ll explore how other states have addressed their pension problems, with lessons for Illinois; we’ll examine the proposals to fix this state’s pensions, and look at the pressures and possibilities that Pritzker faces.
Ultimately, whatever ideas emerge will need the support of the general public — the people reading this column, the people who pay the state’s bills, the people who vote lawmakers into office — and can vote them out if they don’t do their jobs.
David Greising is president of the Better Government Association.
