Dear Friends,
If you’ve been following media reports about the state budget, you’ve probably heard a lot about state employee pensions. You’re probably going to hear even more this spring. Employee pensions are a complicated, emotional topic, so there will probably be a lot of facts, rumors, and accusations in the press. I want to take this opportunity to explain—in detail—why you should care about employee pensions and why the issue is so complicated.
What are pensions?
Pensions are a kind of retirement fund. Illinois has a defined benefit pension system. When workers retire, they receive a fixed pay check—whether they live two years or twenty. Both workers and the state pay into Illinois’ pension funds. The workers pay a fixed percentage of their income. The state pays the rest of the money needed to pay for the workers’ retirements. This amount is calculated based on anticipated retirement dates, life expectancy, the state’s expected return on its investments, and a variety of other factors.
Who can collect pensions?
The people who can collect Illinois state pensions are the teachers who work in our schools, the professors at Illinois’ public universities, the Department of Transportation employees who maintain our highways, the Illinois State Police officers who protect our communities, the Department of Agriculture employees who inspect our food to make sure it’s safe, the DCFS employees who protect abandoned and abused children, and more. For many of these people, their pension will be their only retirement income in that they don’t qualify for Social Security.
What is the problem?
The simple answer is that the state’s pension systems are not funded at sufficient levels. That does not mean that the state is going to run out of money to pay retirees tomorrow. The literal truth is that we would not have enough to pay only if every employee retired today. A recent report says that we have about 38.3% of the money we’d need if every employee retired today. The goal recommended by the federal government is 80%. Illinois has determined that its goal is 90%, which needs to be revisited.
To get to a fuller funding level we have to pay not just what we owe for this year, but some of the money we owe to make up the difference between what we do have and what we should have. In fact, we have to pay so much that it’s forcing us to cut spending in important areas like education, human services, and public safety.
Why is there a problem?
The primary reason there is a problem is that the governors and legislators of both parties have been skipping or shorting the state’s share of pension payments for decades. We have so much pension debt now because we’re not just missing the money that should have been contributed 10, 20, 50 years ago, we’re missing all of the interest that money should have earned.
Of course, we’re not in debt only because of skipped state payments. Like many people, we lost money when the market crashed during the recent Great Recession. Changing retirement rules increased pension costs. Other factors contributed, too, but the biggest single reason is the state’s skipped and shorted pension contributions. It’s not a new problem either. A report from the 1950s warned that inadequate pension contributions threatened the existence of the Teachers Retirement System, which, at the time, was only 23% funded.
To try to address the problem, the delegates to the 1970 Illinois Constitutional Convention wrote a clause establishing that “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” They hoped that this constitutional guarantee would result in full pension payments. Unfortunately, it did not.
In 1994, Governor Jim Edgar and the legislature once again tried to address the problem—at least on paper. They passed a law requiring the pension systems to be 90% funded by 2045. Unfortunately, they decided to increase the state’s pension payments on a “ramp” schedule. In the early years, the state was actually allowed to continue underfunding the pension systems. They weren’t even required to pay the “normal cost” (the amount needed for the current year), let alone start addressing the debt. It has only been in the past few years that we have really started to address our pension debt. Of course, these higher payments have come at the worst possible time, when state revenues were down and demand for state services was up. We’re still paying for the fact that the Edgar administration kicked the can down the road during the boom years of the 1990s to avoid making tough decisions and spending cuts at a time when the state could have better afforded it.
What has been done to address the problem recently?
For the past several years, we have made the state’s full pension payment, though we had to borrow to do it in 2009 and 2010. Last year we made the full payment without borrowing, and I believe that we intend to do the same thing this year.
In 2009, we also passed a law significantly reforming pension rules for newly hired employees. We kept the defined benefit system, but we raised the retirement age to 67, reduced cost of living adjustments, capped the highest pensionable salary, and more. These changes will ultimately save the state hundreds of billions of dollars over the next several decades.
What are some possible solutions?
This year, our pension payment is expected to eat up nearly 16% of our discretionary spending budget, crowding out other spending on vital areas of state government. The governor and legislative leaders have called for changes to the pension system to cut costs. This discussion is complicated by the fact that many legal experts believe that the Illinois Constitution does not allow us to reduce current employees’ pension benefits. Though there are some lawyers who believe otherwise, there is no question that any attempt to reduce current employees’ pension benefits would result in an expensive, time-consuming court case that the state would quite possibly lose.
There are a few ideas on the table. One is try to reduce benefits for current employees. I do not support this option. I believe it is unfair and will be ruled unconstitutional. The second is to shift some of the costs of pensions to local school districts. This idea is a property tax increase in disguise. It will force our local school districts to either raise property taxes or fire teachers. A third option would be to reduce our funding goal from 90% to 80% (or lower) or to extend the payment schedule. Given that the federal government recommends an 80% funding level, I think this is a real possibility. A fourth option would be to further reduce benefits for newly hired employees.
I have also been asked about the possibility of putting state workers in 401Ks; however, this idea is complicated by some real unanswered questions. The biggest question is how much it will cost. If we switch to 401Ks, we’ll have to pay into social security for all workers on top of the state’s pension contribution. We also lose the balancing effect of our current plan. Under the current system, all workers pay in the same amount as the other employees in their pension plan, but some live longer than others. Some have survivors; some don’t. The system accounts for those differences. Under a 401K, that’s not really possible. We also have to consider the fact that sometimes seniors on 401Ks outlive their savings. That doesn’t affect businesses’ bottom lines, but it does the state’s because poor elderly people receive assistance from state-funded programs like Medicaid.
Ultimately, the only way we will find a solution to this problem is for everyone who has a stake in this issue to sit down and try to find a solution. We need to bring together legislators from both sides of the aisle and every corner of the state with teachers, professors, employee unions, and pension experts. We can only solve a problem this big by working together.
