When something is the worst in the nation, it seems self-evident that responsible people would feel an urgent need to fix it. That has not been the case with Illinois’ pension system, and it’s time to throw off that lack of urgency and get started on the work at hand.
Gov. J.B. Pritzker can say he has acted: He has committed $700 million in “pension stabilization” payments over the last three years, in addition to legally mandated payments. He calculates this will save taxpayers $2.4 billion over time.
But that $2.4 billion in savings is overshadowed by a pension debt of $140 billion — which keeps growing, because the state-mandated payments do not keep pace with the growth of obligations to public employees and retirees.
At least Pritzker has tried. House Speaker Emanuel “Chris” Welch and Senate President Don Harmon have kept a studied silence on the matter. We are told work is happening in the legislature, but no reform proposals of substance have emerged.
Pension costs, including interest on debt, are eating up 25% of the state budget and growing. Dozens of states are shoring up their pensions, creating further separation from worst-in-the-nation Illinois. Continued inaction is not an option.
At this point, the strongest ideas are coming from the private sector.
Read Part One in This Series: Erasing Illinois’ $140B in Pension Debt
Part Two: Lessons from Other States’ Reforms
The Civic Committee, a group of Chicago business leaders, has a plan that would raise taxes over 10 years, amounting to $28.5 billion, cutting into the pension debt and flattening the growth of payments over time. The left-leaning Center for Tax and Budget Accountability would reamortize the pension debt, selling $6.7 billion in bonds to fund large upfront pension contributions over seven years.
It is encouraging that Pritzker’s staff has held several meetings with the Civic Committee to explore ways forward. It remains unclear if the leaders, or others in the General Assembly, have done more than take initial courtesy calls from the Civic Committee or anyone else.
How can this process move forward? The path can be broken into concrete steps.
Answer ‘Why Now?’
Timing is always a factor when seeking structural reforms.
Crisis conditions helped lead Arizona and Rhode Island toward substantive pension fixes.
But in Illinois, we’ve seen the opposite: In response to fiscal crises, Illinois lawmakers have deployed tactics such as pension bonds and pension holidays, both of which made matters worse for the state’s pension system.
It would be prudent to tackle the issue now, while the economy is strong and the state budget relatively flush. The lack of pressure creates space for levelheaded thinking and well-studied action that could be keys to long-term success.
Besides, after several years during which inflation on average grew faster than the 3% rate in Illinois pension plans, representatives of Illinois’ retirees may be more willing to negotiate now than they have been during times when the growth of their pension benefits outpaced inflation.
Part Three in This Series: Solutions to Illinois’ Pension Debt
Part Four: The Politics at Play
Identify Equity Benefits
In 2021, the Legislative Black Caucus zeroed in on concerns about public safety, education, economic equity and public health to achieve major reforms. Each of these public needs would benefit from the savings accrued through pension reform, providing backers of pension reform with prospective allies in pursuit of their goals.
For example, emphasizing how pension reform could yield more spending on schools, plus more security for retired teachers, might attract the support of teachers and parents.
Fixing Illinois’ pensions might also help eliminate a problem of generational inequity.
Under current law, one generation pays the bills and the next generation reaps the benefits. State contributions climb, year by year, from more than $10 billion this year to more than $18 billion in 2045. Then payments drop to a projected $8 billion in 2046 and stay low for years.
“You raise contributions up to the sky for 30 years and then all of a sudden they plummet to the ground,” notes Josh McGee, a University of Arkansas economist who specializes in pensions. “Taxpayers in the past and taxpayers in the future are kind of getting off the hook. I don’t know if that’s right.”
In addition, the Civic Federation earlier this year found that nearly 2% of the salary for Tier II workers in fiscal 2020 went to subsidize benefits for Tier I retirees. This is a fairness issue that a comprehensive pension reform plan possibly could address, too.
Blend Ideas to Get a ‘Yes’
There is no single correct answer to solving Illinois’ pension challenges. There may be ways to blend the best attributes of several approaches to achieve optimal benefit.
The Civic Committee — which proposes segregating revenue from the tax hike it proposes into what it calls a “lockbox” devoted solely to pensions — offers a number of additional options. Some are promising, and some polarizing. For example, its proposal to tax retirement benefits would touch a third rail in Illinois politics.
There are other amortization ideas available beyond the CTBA’s proposal. Policymakers should look at those, too.
And any fast-growing new revenue sources — such as cannabis sales and sports gambling — should be considered candidates for pension investment.
Seek Immediate Impact
Ideas that front-load payments over the first few years offer particular promise. Their benefits accumulate over the years, much as paying extra on a monthly mortgage can save homeowners a disproportionate amount of money over time.
Large upfront payments also would have an important added benefit of changing the national narrative about Illinois’ failing pension systems.
Brian Septon, a nationally known pension expert with the Terry Group who advised on developing the Civic Committee plan, talks about achieving an exit velocity from the bottom tier of pension basket cases — New Jersey and Kentucky are other examples.
“The question is, is there a way to create escape velocity, getting Illinois into the 40s, into the 30s as it relates to the state rankings?” Septon said in an interview.
An escape from the cellar would help improve Illinois’ credit rating, which would reduce the state’s borrowing costs. It also would strengthen Illinois’ appeal as a target for business investment and job creation.
Get the Math Right
When lawmakers in 1994 passed the law that mandated ever-increasing pension payments beginning in 2012, they used faulty forecasts. This left today’s taxpayers facing fast-rising costs that still don’t eliminate the state’s pension debt.
Then-Illinois House Speaker Michael Madigan in 2010 rushed a pension reform plan known as Tier II through the legislature without an actuarial study. Today, the state may owe billions of dollars because pension benefits for Tier II retirees have not grown as fast as Social Security checks. That violates a federal law.
This time, the state needs to get any fixes right. No good solution can be built on bad data.
Hire a Pension Czar
Pritzker could use a reboot on pension reform, and outside help could be key to success. Efforts to form blue ribbon commissions have fallen short.
An alternative model: Appoint a “pension czar,” someone responsible for developing a plan, then building political support, under a tight deadline for getting the work done.
Andy Manar, the state’s deputy governor for budget and economy, said any policy formation will happen as part of a political process. “Any change in public policy, it’s going to have to earn broad support,” Manar said. “It will take political leadership to make it happen.”
A czar might perform shuttle diplomacy with key parties, with a singular focus that no high-level administration official can offer. Such a person should have a proven record working in a bipartisan fashion, be able to negotiate equitable outcome, taking into account the interests of government, business, taxpayers and labor, and have a sophisticated understanding of pension economics.
Appointment of a pensions czar would signal Pritzker’s commitment to reform, while depoliticizing the talks in ways that might increase chances of finding a solution with broad-based support.
Address Risks, Rewards
Ultimately, Pritzker will need to step up.
There is no substitute for the profile and power of his office, not to mention Pritzker’s ability to muster the leadership exhibited in fighting the COVID-19 pandemic, the resolve he shows on issues like gun control and reproductive rights, and the bottom-line savvy he developed during a career in business before entering politics.
The governor may be reluctant to raise taxes, as the Civic Committee proposes. But Jim Edgar campaigned on a platform that called for making permanent a then-temporary tax increase and got elected governor. Gov. Pat Quinn raised taxes and still won his primary in 2014.
Politicians who make the case for added revenue can bring voters with them. Pritzker rightly is insisting, in private, on a plan that could earn votes from Democrats and Republicans, and he could lean on the Civic Committee to use its conservative credentials to develop support among Republican lawmakers.
Pritzker, meanwhile, can leverage his strong standing with unions to bring them to the negotiating table. He just signed a generous four-year deal with Council 31 of the American Federation of State, County and Municipal Employees, the state’s largest public employee union. His administration would be entering discussions on a high note.
Pritzker could use that goodwill to negotiate a Tier III category of pension benefits for new state employees — perhaps modeled after the hybrid plans adopted by dozens of states since Illinois’ Tier II plan was adopted in 2010. Pensions for current employees would not be affected, and all would share in the benefits of a more financially solvent state pension system.
The benefits of pension reform over time — in the form of lower costs for taxpayers and more secure retirements for workers — outweigh any upfront monetary or political cost. Surely a politician with Pritzker’s persuasive powers can make that argument.
Pritzker has earned national attention for his focus on reproductive rights and gun control. Fixing the nation’s worst-funded pension system would be a notable achievement, one that might endow Pritzker with a reputation as a skilled manager of spending and budgets — desirable attributes in national politics.
Illinois’ budget is relatively strong. The policy benefits and political incentives of pension reform are great. Opportunities like this can be fleeting. Pritzker should seize his chance — and do lasting good for the people of Illinois.
David Greising is president of the Better Government Association.