Illinois Tier 2 Pension Bill Would Add $53 Billion in Costs While Lowering Retirement Age

Illinois lawmakers have advanced a bill that would dramatically increase pension benefits for public workers while adding tens of billions in costs to state taxpayers.

Senate Bill 1937, passed out of the House Executive Committee on an 8-4 vote, would overhaul the Tier 2 pension system for state and local workers hired on or after Jan. 1, 2011. The changes would lower the retirement age from 67 to 65 with 20 years of service, or 62 if pension benefits are fully maxed out.

The bill would also reduce early retirement penalties, allowing pensioners to retire as early as 57 with reduced benefits. It would change cost-of-living adjustments and raise the salary cap that limits a person's maximum retirement benefit.

According to an actuarial analysis from the Commission on Government Forecasting and Accountability, the benefit enhancements would add about $5 billion through 2045, not adjusted for inflation. To bring pension funds to 100% funding by 2049, the total cost would be $13.9 billion, not including inflation.

The bill would dedicate a portion of money previously used for pension obligation bonds to pay for the enhanced benefits. However, critics argue local governments would also face increased pension costs that could force higher property taxes.

Illinoisans already pay the highest property taxes in the nation. And this is exactly how Illinois state and local governments got into its pension crisis in the first place: promising new benefits with no plan to pay for them.

"We've been at this for a couple of years," Pat Devaney, secretary-treasurer of the Illinois AFL-CIO, said during an interview after the committee vote. "Over 50% of our members statewide that are in the pension plans are Tier 2. They are realizing what an insufficient deal that is in terms of retirement security and demanding that changes are made."

Devaney is also a leader of a coalition of labor unions that have been pushing for changes to the Tier 2 system called We Are One Illinois.

Democratic Reps. Stephanie Kifowit, D-Oswego, and Jay Hoffman are lead sponsors of the bill. Kifowit testified before the committee that the proposed changes address concerns about the Tier 2 system potentially violating federal Safe Harbor requirements.

"If the state fails Safe Harbor, then we would have to enroll everybody into Social Security. So that would more than double what we're paying right now," Kifowit said. "Almost half our budget would have to go to pensions and Social Security. So the cost of doing nothing is extreme."

The state's current pension funding plan has accumulated an additional $59 billion worth of pension debt since its inception because of its failure to properly fund the retirement benefits it promises. Making matters even worse, another $66 billion in pension debt has been added over the course of the funding ramp as a result of benefit increases, poor investment returns, and changes to demographics.

Now lawmakers are considering adding an additional $53 billion to that figure.

The state already has $144 billion in pension debt and a funded ratio of 46%. By adding billions in new benefits while extending the ramp and backloading pension payments, Illinois' unfunded pension liabilities will likely increase far beyond what is currently projected.

At a news conference, Gov. JB Pritzker expressed concerns about the bill. "Remember, I'm not going to sign anything that is credit negative for the state," Pritzker said. "We are making a lot of progress in the state. Many of you know we just got our 10th credit upgrade. It's more credit upgrades than any state has received any time in the last 25 years. And so we've received them in the last five years. And so whatever we end up doing needs to make sure it isn't taking us backward."

Local governments will be forced to fund these new benefits with no funding from the state. The bill explicitly states: "no reimbursement by the State is required for the implementation of any mandate created by this amendatory Act of the 104th General Assembly."

However, no actuarial analysis has been conducted to determine what the cost of these benefit increases would be for local pension systems. These pension systems already have approximately $74 billion worth of unfunded liabilities. A sample from four local pension systems showed that the changes from the bill would increase the required local pension contributions by roughly 45% over the next 30 years.

The changes for local governments would likely be financed through higher property taxes, which are their largest source of revenue. Illinois' property taxes are already the highest in the nation.

The bill would still need to pass a full vote on the floor of the General Assembly and be signed by the governor in order to become law. With the Illinois General Assembly wrapping up their last scheduled legislative day in the early hours of October 31st, it is unlikely that the bill will move further before lawmakers return for their spring session next year.

The push for sweeping benefit increases for Tier 2 pensions will continue into the upcoming legislative session scheduled to begin in January. Lawmakers must reject increases to Tier 2 pension benefits, particularly because safe harbor concerns have already been addressed in last year's budget bills.

The state should conduct a thorough actuarial analysis, including individual testing and a legal risk assessment. Lawmakers owe it to taxpayers and workers to understand the facts before acting. If a problem is found, target solutions at the individual level. That's more fiscally responsible than boosting benefits across the board.