Illinois has the absolute worst funded state pension system in the country — a shortfall of at least $200 billion according to Illinois Opportunity.org, but is “officially” pegged at $100 billion.
It got so bad that from 2005-2009, the state felt compelled to lie to municipal bond brokers about the severity of the shortfall. The SEC socked the state with a fraud charge which they were allowed to settle without admitting guilt or paying a fine.
Eventually, all the lying, the accounting tricks, and the excuses couldn’t hide the crisis and two years ago, Illinois lawmakers resolved to reform the system and put it back on firm financial footing.
They thought they had a deal earlier this year, but the state Senate shot down a measure that public employee unions fiercely opposed.
Now, lawmakers reached an accord earlier this week that most analysts say falls far short of reform and won’t solve the basic problem of how public pensions are defined.
Under the plan being debated in Illinois, the state would be required to make additional payments into the pension system until it is fully funded, no later than the end of 2044. Workers who are 45 or younger would need to retire later — working as much as five years longer, depending on their age. And cost-of-living increases would apply only toward a portion of a person’s pension in many cases, under a formula based on how long they held their job.
While top legislative leaders of both parties here say they are working to win enough votes to pass an overhaul many fiscal experts call necessary, if painful, labor leaders denounced the plan as “catastrophic,” and written behind closed doors without public comment. They said they intended to lobby lawmakers against it at every opportunity before a vote during a special session scheduled for Tuesday.
“This is a grotesque taking of employees’ retirement security that seems both patently illegal and unfair,” said Daniel J. Montgomery, the president of the Illinois Federation of Teachers. “It’s a sharp jab in the eye — and the heart — of public employees. There’s a lot of anger out there.”
For years, the state has wrestled with an overwhelming pension problem. The system is underfunded by $100 billion, helping to make Illinois the state with the worst credit rating in the nation. That has meant, according to a recent report, that about 20 cents of every taxpayer dollar must be dedicated to pensions, money that could go to other state needs.
Still, answers have been hard to come by. Democratic leaders in the legislature have long disagreed about how to solve the problem without infuriating labor unions and how to navigate the Illinois Constitution, which prohibits pension benefits from being “diminished or impaired.”
Ted Dabrowsky of the Illinois Policy Institute has a few reasons why the plan won’t work:
At best, Madigan’s bill reduces the state’s unfunded liability to 2011 levels – levels that had already thrown Illinois into crisis and that Democrat leadership used as justification for its 2011 tax hike. That’s hardly reform, and the remaining $80 billion pension shortfall will continue to cripple Illinois going forward.
The bill doesn’t means-test COLAs. Reforming cost-of-living adjustments, or COLAs, is the single-largest lever for bringing down the state’s $100 billion unfunded liability. A full suspension of COLAs until the pension systems are healthy again can cut Illinois’ pension shortfall by nearly a third.
But Madigan’s bill continues to provide an automatic 3 percent COLA to all retirees, regardless of need. His bill bases COLAs on the number of years worked by a retiree, multiplied by a $1,000. A retiree who worked 25 years, for example, will receive a COLA on $25,000.
That means COLAs will continue to be paid to tens of thousands of retirees with five-figure and six-figure yearly pensions, some as high as $500,000. That’s hardly fair to a 29-year-old teacher who sees little chance of receiving a pension check in the future.
The bill continues to allow state workers to retire in their late 50s with full benefits. Madigan’s bill increases the retirement age for workers who are younger than 45. For each year a worker is younger than 45, his retirement age increases by four months. No information as to the maximum age of retirement has been released.
But Madigan’s bill still allows today’s 40-year-old state workers to retire in their late 50s with full benefits. That means private sector workers, still stung by a weak job market, declining earnings and low home values, will have to work longer to support state retirees who retire early.
Illinois needs to adopt a plan like the one adopted by Rhode Island, which moves workers to the retirement age required by Social Security. Their plan protects those workers near retirement, yet aligns public sector retirements with those in the private sector
The bill reduces state worker contributions, putting an even larger burden on taxpayers. The previous version of the Cross/Madigan bill required workers to increase their contributions by 2 percent of their pay. Even the recent Chicago Park District pension bill increased worker contributions by 2 percent. This version of the bill, however, cuts worker contributions by 1 percent of their pay. That’s a 3 percent swing in the wrong direction.
Pension contributions are already way out of sync with benefit payouts. This will only make the situation worse and increase the burden on taxpayers.
The fundamental problem is that Illinois and most other states continue to utilize a defined benefit plan rather than a defined contribution plan that most private sector companies use. A defined benefit plan puts the taxpayers on the hook for any shortfalls, as Illinois residents are going to find out eventually.
The problem has spiraled out of control in Illinois and Democrats are reluctantly coming to the conclusion that they are going to have to ignore the unions and do what’s best for the state. While inadequate, if this is the best that the politicians can do, it should certainly be passed with the hope that future lawmakers will be able to put more than a band aid on a gaping wound.