As Gov. Bruce Rauner’s administration was winding down in 2018, a group of about two dozen prominent Illinois residents — Republicans and Democrats, wealthy, involved in government or civic life — joined up to begin laying plans to clean up the one-term governor’s mess.
Rauner, in his failed effort to break the Springfield political machine, mostly was broken by it instead. A two-year budget impasse led to nearly $17 billion of unpaid bills. The state’s credit rating fell to one notch above “junk” status. A standoff over funding the Chicago Public Schools had briefly left the system teetering on the brink of insolvency.
The civic leaders — convened by the late Laurence Msall, who as head of the Civic Federation served as the state’s longtime fiscal conscience — commissioned a fix-it report, by the Boston Consulting Group, which laid out a series of reforms. A main point of emphasis was the state’s woeful pension system, ranked among the weakest in the nation.
Illinois’ five pension plans for state employees remained poorly financed, even though state contributions to them were increasing sharply. From $5.8 billion in 2012, the payments were on a path to hit more than $10 billion this year, on their way to $19 billion by 2045.
When I asked Marin Gjaja, lead author of the report, about the competition between pensions and social services for state funds, he framed the answer in vivid language.
“Over time, if we aren’t aggressive, we’ll end up running the state of Illinois as a sort of grand retirement plan,” Gjaja said.
Four years since the civic leaders conducted their study — which was never made public — Chicago’s business elite are rallying around a new white paper: A report by the Civic Committee of Chicago this February put forward an ambitious plan to fix the state’s pension system.
Its keystone proposal: a temporary income tax increase that would raise $28.5 billion exclusively to pay down the state’s $140 billion in pension debt. By the Civic Committee’s math, taxpayers would save $35 billion over 22 years.
Another ambitious proposal, with an entirely different approach, came this June from the Center for Tax and Budget Accountability. The left-leaning research group updated its call to reamortize the state’s pension debt — stretching it out to reduce annual costs, but aiming for only 80% funding by 2045. That’s 10 percentage points lower than current state policy, a change that credit rating agencies would not like.
The reports come at an important inflection point for Illinois.
Gov. J.B. Pritzker over two years has committed $700 million for extra pension payments, in addition to the legally mandated, fast-rising contributions required by law. The extra payments have been a factor in the decisions by credit agencies to reward Illinois with eight credit upgrades since Pritzker took office.
Illinois has a little momentum. But with federal pandemic funds no longer flowing, and talk of a possible recession, the need for pension discipline is one of the most difficult and important issues facing the state. Demands on state funds are rising, with competition for spending on education, public health and safety.
Concerns about Illinois’ fiscal outlook prompted the Civic Committee in February to step forward with its plan.
Part One: Erasing Illinois’ $140B in Pension Debt
Part Two: Lessons from Other States’ Reforms
Part Four: The Politics at Play
The key proposal — the call for an income tax increase that would fund increased pension payments for a decade — is the most substantial new idea for fixing the state’s retirement systems to emerge in recent years.
The individual tax rate would add a 0.5% surcharge on top of the existing 4.95 tax rate for those 10 years; corporations would shoulder a 0.7% surcharge. The additional revenue would be dedicated exclusively toward pension payments — $2.3 billion in the first year, growing annually for a total of $28.5 billion over 10 years.
After that, the state’s payments would decrease each year, 2034 until 2053, when the state would achieve 100% funding of pensions. The state’s current plan calls for 90% funding by 2045, which hurts Illinois with credit rating agencies, investors and business interests.
The Civic Committee is an exclusive cohort of Chicago’s top business leaders, a 40-year-old offshoot of the staid Commercial Club, best known for sponsoring the landmark Plan for Chicago, led by architect Daniel Burnham, in 1909.
The committee has been a fiscal hawk, and at times a public scold, steadfastly insisting on austere spending, financial planning, adequate pension funding and other fiscal disciplines in Illinois government. The new report, which restates a controversial call for taxing retirement income in Illinois for people earning more than $100,000 a year, is designed to help earn a double-A rating from credit agencies.
The plan also seems designed to bring the Civic Committee more in line with the prevailing liberal politics of Illinois. One example: It abandons the group’s traditional call for an amendment to the state constitution that would eliminate language that forbids any reduction to an employee’s retirement benefits from the day they are hired. The Civic Committee had urged passage of such an amendment for nearly 20 years.
Derek Douglas, president of the group, acknowledged that calls for a pension amendment were unpopular in the Democrat-dominated legislature. “We want to work collaboratively with state leadership to achieve these overarching goals,” he said.
Douglas, Civic Committee staff members and volunteer board members have conducted a series of meetings with leaders in state government in order to build support for their proposals.
The plan presented by the Center for Tax and Budget Accountability seems to play toward voters’ natural wariness: Everybody wants to see Illinois achieve fiscal soundness, until it costs them something out of pocket.
The CTBA proposal is a low-hurt approach. It would build momentum toward a more solvent pension system through the sale of $6.7 billion in pension bonds over an initial seven years. Instead of targeting 90% funding by 2045, the new target would be lowered to 80%.
Proceeds from the bond sales would enable the state to make large up-front payments over that first seven years, and the multiplier effect of that investment is key to the group’s estimate that their plan would save $63 billion through 2045.
But bond sales would add hundreds of millions in interest costs to heavily-indebted Illinois. This reduces the cost-effectiveness of the CTBA’s approach and could be a negative for credit rating agencies, such as Moody’s and Standard & Poor’s, which already have raised concerns about Illinois’ high level of debt.
After the experience with Gov. Rod Blagojevich, who siphoned away about a third of $10 billion raised in pension bond sales in 2003 for purposes other than pension funding, taxpayers might be wary of the CTBA approach, too.
In essence, the CTBA plan is tantamount to refinancing a house, while adding a home equity loan in the form of the new pension bonds. It lowers the funding target to 80% and also extends repayment of the existing pension debt for an indeterminate period — tactics that would risk a downgrade from credit rating agencies.
Ralph Martire, executive director of the CTBA said he expected skepticism about the 80% goal. But the skeptics tend to overlook something he believes is more important, he said: The CTBA’s plan enhances the state’s ability to meet its obligations year by year.
“Right now, Illinois is in a unique situation of having a plan for funding our unfunded liability that we can’t meet,” Martire said. “We don’t have the revenue to get there.”
The steep climb to 90% funding under the state’s existing plan is creating a cash pinch. “It’s a debt service problem, and it’s the structure of our debt service that’s creating all the havoc in the state,” Martire said.
The Civic Committee and CTBA proposals are different approaches toward the same end — reducing the pension debt and, if their math is right, saving taxpayers billions over time.
The Civic Committee plan strikes me as more sound financially: 100% funding is a big deal. The plan also avoids the risks inherent with issuing bonds, and its aggressive moves in the early years would make an impact on credit-rating agencies, whose decisions about creditworthiness can have big financial consequences for the state.
Meanwhile, the CTBA’s pitch to reduce the state’s goal to 80% funding of its pension obligation goes against a trend among the states to aim for 100% funding, according to researchers I spoke to for these columns. And pension bonds are a regrettable tool: History shows that when governments borrow money to save money, the tactic often winds up backfiring on the borrower.
Still, both plans are worthy of discussion. The one outcome the state can’t afford is to have another set of white papers that make for good reading, but then collect dust in our digital archives.
David Greising is president of the Better Government Association.