SPRINGFIELD — The budget impasse plaguing Illinois has disrupted the flow of money to public universities and community colleges, social service providers and even state agencies. But it keeps flowing into the state’s underfunded pension systems.
State law requires payments into the pension funds for teachers, university employees, state workers, lawmakers and judges regardless of whether there’s a budget.
The state paid $7.6 billion into the five systems last fiscal year and is expected to pay $7.9 billion for the current fiscal year that ends June 30.
Despite the payments, the systems’ unfunded liabilities keep rising, growing from $111 billion in fiscal year 2015 to nearly $130 billion last year, according to the General Assembly’s Commission on Government Forecasting and Accountability.
Taken together, the systems are now less than 38 percent funded.
JP Aubry, associate director of state and local research at Boston College’s Center for Retirement Research, said Illinois’ pension woes are the result of a long history of shorting payments to the systems.
“It’s not to say that the costs today aren’t extremely burdensome,” Aubry said. “They just didn’t need to be.”
While some blame benefit increases — like a 1990 law that created compounding cost-of-living raises for retirees — Aubry said his center’s research suggests the state’s “benefits are on par with other states.”
The Illinois comptroller’s office reached the same conclusion in a 2011 report.
Illinois passed a law in 1994 that requires annual payments toward a target of 90 percent funding for all five systems by 2045. But the law kept payments low for the first 15 years before ramping them up, essentially leaving it to future leaders to figure out how to pay the bill.
During the tenure of disgraced former Democratic Gov. Rod Blagojevich, the state borrowed money to pay down unfunded liabilities and subsequently shorted later payments.
The economic downturn that followed the 2008 financial crisis wreaked havoc on the funds’ investments and subsequently led the systems to lower their assumed rates of return, both of which have contributed to the growth in unfunded liabilities.
In recent years, the state has contributed the amount required by law, but it is lower than what actuaries say the state should be paying.
Reining in costs
The state approved two major changes early this decade aimed at reining in pension costs.
The first enacted less generous retirement benefits for new workers after Jan. 1, 2011, a change that is expected to bring down costs in later decades as so-called “Tier II” workers replace older “Tier I” workers.
But critics are raising questions about whether newer employees, who pay the same share of their paychecks into the pension plans, but will receive significantly lower benefits in retirement, are being unfairly forced to subsidize more generous benefits for older workers.
The next attempt at reform, approved in the General Assembly and signed by then-Gov. Pat Quinn in December 2013, went further, raising the retirement age and ending compounding 3 percent cost-of-living raises for retirees.
But the state Supreme Court rejected the law in May 2015; the seven justices unanimously rued it violated the Illinois Constitution, which says that pension benefits for existing workers “shall not be diminished or impaired.”
Since then, pension reform has taken a backseat to the larger budget standoff.
Still, the Senate’s current wide-ranging proposal to end the impasse includes a pension reform plan long backed by Senate President John Cullerton, D-Chicago.
The proposal, which would apply to public school teachers, state university employees and members of the General Assembly, would give Tier I employees a choice between counting future raises toward their pensions, or receiving compounding cost-of-living raises in retirement.
The pension plan for employees at state agencies isn’t included because of an ongoing contract feud between Gov. Bruce Rauner’s administration and the American Federation of State, County and Municipal Employees Council 31.
Supporters argue the Senate plan, which they say could save up to $1 billion annually, would pass constitutional muster because workers would be given a choice. Those who choose to count raises toward their pensions and forgo the compounding raises in retirement also would receive lump-sum refunds worth 10 percent of their previous pension contributions and a 10 percent reduction in future payments.
Chicago attorney John Fitzgerald, who represented retired teachers who sued to overturn the 2013 law, said the Senate plan would force workers to make a choice that cuts their benefits.
“Keeping what they currently have is not on the menu, and the only two items on the menu reduce people’s pension benefits,” Fitzgerald said. “And that, in my view, is unconstitutional for the same reasons why (the previous law) was unconstitutional.”