If Illinois lawmakers do not address the state’s growing pension crisis, essential investments in education, health care, and human services will continue to be cut, according to a recent report (PDF) from the Fiscal Policy Center at Voices For Illinois Children.
“All Illinois residents—including the youngest among us — are paying the price for Illinois’ decades-long failure to make adequate contributions to the state-funded pension plans,” the report, titled “Pension Funding Crisis Worsens” (PDF) reads. “The General Assembly is well aware of the harmful effects of rising pension costs on the rest of the budget. However, progress toward a solution has stalled — making the situation worse.”
With $97 billion in unfunded liabilities — more than $20,000 for every household in the state — Illinois’ five pension funds serving teachers, state employees, university employees, judges, and legislators, are in desperate shape. Attributed to inadequate contributions by the state government, the pension systems are only 39 percent funded, when 80 percent is considered healthy.
Despite a $166 million increase in state revenue, fiscal year (FY) 2013 saw a $966 million increase in mandated pension contributions from the General Funds, according to the report. The contributions are projected to again increase more than $900 million for FY 2014 and total pension costs are projected to increase by over $1 billion. But state revenues are projected to increase by only $600 million.
With Illinois being the home of the nation’s worst credit rating among the states, increasing pension debt threatens to consume funding for education, health care, public safety and other human services.
“Each year pension costs are increasing more than revenue is increasing ... It really is important the General Assembly and Governor Quinn address our pension crisis. You really can’t solve the state’s fiscal crisis without addressing this critical issue," said David Lloyd, policy analyst for the Fiscal Policy Center at Voices for Illinois Children and co-author of the report.
Lloyd said the biggest problem on the horizon is the impending expiration of the state's income tax, which largely funded the state’s pension payments. He proposed raising sales tax, or a pension obligation bond sale. State Rep. Lou Lang (D-Skokie) introduced a proposal last week that would make the 2011 state income tax increase, which raised the state’s individual tax rate from 3 percent of income to 5 percent, permanent with the receipts dedicated to pension payments.
“Pension overhaul is going to be really difficult, politicians don’t want to raise taxes, so instead they’ve chosen to do nothing,” said Lloyd, who added that public employees are not at fault for Illinois’ pension crisis. “The result is that we’re cutting important investments in our state’s future and will continue to cut programs and initiatives that will have a negative effect on all Ilinoisans, especially our children.”
One pension reform plan, proposed by Senate President John Cullerton (D-Chicago), would increase employee contributions by 2 percent. The proposal, SB 1, calls for a reduction in cost of living adjustments and requires workers to opt for either bigger contributions or guaranteed health benefits upon retirement. The plan is unpopular with labor unions and their advocates.
One expert said legislators need to reamortize the pension system to solve Illinois' fiscal crisis.
“Because of the state’s fiscal position, increasing Illinois’ pension contributions by $3 billion by next fiscal year isn’t really possible — fixing the pension means increasing revenue,” said Amanda Kass, research and policy specialty for pensions and local government for the Center for Tax and Budget Accountability. “Nobody really wants to touch the revenue side and public sentiment is largely against adjusting public retirement systems.”
Kass estimated that $2 billion to $3 billion would be raised if Illinois expanded its sales tax base to tax services, including business to business.
She said most of the current legislation doesn’t address the fundamental problem, which is the structure of the Illinois pension ramp, a repayment schedule established in 1995 to get the pension systems 90 percent funded by 2045. Instead, she said, a lot of the legislation changes benefits for retirees and “taking away those benefits will give Illinois some money, but won’t solve the problem long-term.”
“The state borrowed from the pension system because it has a structural deficit,” she said. “Rather than addressing that structural deficit, it just borrowed. Now the structural deficit is still not being addressed and pension contributions are significantly higher, so the average taxpayer is seeing services being significantly cut across the board.”
“Everything from higher education to human services are being cut significantly,” she said.
The We Are One Coalition of unions and some labor advocates support Senate Bill 2404, which is sponsored by State Sens. Linda Holmes (D-Aurora), Pamela Althoff (R-McHenry) and Melinda Bush (D-Grayslake). The bill calls for guaranteed funding of the pension system by the state, would create a Pension Stabilization Fund that would help pay down the underfunded system with monies already in the state budget, and require that public workers add an additional 2 percent of their salary to the pension fund to help pay down the debt. The increase, which would add $3 billion to the fund over the next 10 years, which would be phased in over two years.