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Public Pension Funds and the State Budget

Policymakers face a pension situation that requires urgent action. The State of Illinois’ decades-long history of underfunding the five state retirement systems has resulted in an unfunded liability of more than $83 billion. In recent years, annual required pension contributions have increased dramatically in accordance with the statutorily mandated funding plan enacted in 1995. These increases are crowding out essential investments in education, health care, and human services.

by David Lloyd and Larry Joseph

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The rise in required contributions between FY 2012 and FY 2013 alone is nearly $1 billion. By FY 2015, the annual pension contribution is projected to reach nearly $6 billion, a 42 percent increase over FY 2012. The state must also pay more than $1.5 billion each year for pension-related debt service resulting from periodic borrowing to cover mandated contributions. In FY 2008, total pension costs, including regular state contributions and pension-related debt service, took up only 8 percent of General Funds revenue from state sources, but by FY 2012 these costs had grown to almost 20 percent of state revenue. By FY 2015, pension costs are projected to take up one-fourth of the state’s resources.

Policymakers are certainly aware of the problem of escalating pension costs. However, various financial, legal, and political complexities have made it difficult to achieve consensus on the pension issue. Current members of the retirement system also are protected—at least to some degree—by the State Constitution, which puts limits on changes to pension benefits.

Governor Pat Quinn has proposed a “pension stabilization” plan that would give current employees who participate in the retirement systems two options. An employee could choose to keep current pension benefits but give up state subsidies for health care in retirement (which are not subject to the same constitutional guarantee) and not have future pay increases figure into pension calculations. Alternatively, an employee could keep the health care subsidy but accept substantially lower cost-of-living increases in retirement, increased employee pension contributions, and a retirement age that would gradually increase to age 67.

The continued growth in pension costs is unsustainable and must be urgently addressed. Legislators should keep in mind the following policy principles when considering possible options:

Address both short-term and long-term funding issues: A solution to the pension funding problem must address the long-term unfunded liability as well as the immediate effects on the state budget. Pension costs are already scheduled to increase dramatically over the next few years. When considering proposed reforms, policymakers need independent analysis of both the short-term and long-term financial impact.

Avoid a “one-size-fits-all” approach: The five state-funded retirement systems are often lumped together. In searching for solutions, policymakers need to look at both the totality of the problem and its individual components. Different solutions might be appropriate for the different retirement systems.

Maintain adequate compensation for public employees: A pension restructuring plan should maintain adequate and secure retirement for public employees. A viable solution should also consider how changes to benefits would impact the ability to recruit and retain qualified public employees. Retirement benefits must be considered in the context of overall compensation. If compensation is inadequate, it may become more difficult to attract qualified employees to carry out important public services.

Find a balanced solution: In discussing possible changes, policymakers need to arrive at a balanced solution that takes into account the interests of all relevant stakeholders. Pointing fingers or trying to enact changes without bringing everyone to the table is likely to be counterproductive. Policymakers and stakeholders must have a constructive dialogue and find balanced solutions to the state’s fiscal challenges. A balanced solution should reflect shared sacrifice among taxpayers, public employees, recipients of public services, and other stakeholders.

Illinois is still in the middle of a prolonged fiscal crisis. Policymakers must make difficult decisions about the allocation of limited resources. Essential investments in education, health care, and human services have already been cut. Without changes—either by limiting pension cost increases or increasing revenue—deeper cuts are inevitable. We cannot afford to have pension costs consume a growing share of our state’s resources, leaving less to invest in our collective future. Illinois’ pension-funding crisis was not created overnight, and unfortunately it cannot be solved overnight. However, policymakers need to take significant and credible steps to address the crisis now. Further delay will only make the crisis worse and necessitate even deeper budget cuts. 

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