A new day in Illinois’ fiscal future may be on the horizon. Responsible stewardship of the state’s budget over the past few years and the elimination of the state’s unpaid bill backlog have put Illinois in its best fiscal position in years. And now, credible proposals to address Illinois’ pensions, coming from across the state’s political landscape, are under discussion in Springfield.
We cannot overstate the importance of enacting legislation to address the state’s legacy pension obligations. If we do it right, we can strengthen our fiscal stability, enhance our economic competitiveness and save money that can be used to fund critical state priorities such as education and infrastructure.
As our three organizations — the Better Government Association, the Civic Committee and the Civic Federation — have noted time and again, pensions remain a significant obstacle to Illinois’ fiscal and economic health. The five state pension systems have a combined unfunded liability of $141 billion, while local pension funds add another $70 billion in unfunded liabilities to the taxpayers’ tab.
Despite these eye-popping figures, action to address our pension challenges has been elusive. But with the recent introduction of pension proposals by the Civic Committee, Gov. JB Pritzker and the Center for Tax and Budget Accountability, we may soon see meaningful action to solve our state’s largest financial challenge.
In the spirit of helping set a responsible course toward pension reform, we have worked together to draft 10 principles of pension reform. These principles — developed through a lens of achieving government efficiency and accountability and fair treatment for state employees and taxpayers; maintaining our state’s fiscal strength; and supporting economic growth — can help policymakers draft and implement a reform that will benefit our state for generations to come.
Responsible pension legislation should:
- Achieve and maintain 100% funding. Place the Illinois retirement systems on a path to 100% actuarially determined funding by 2055 or sooner, ensuring the long-term stability of the system and its ability to meet future obligations.
- Improve Illinois’ credit rating. Prioritize actions that lead to an upgrade to an AA credit rating for the state of Illinois within a five-year time frame, restoring investor confidence and reducing borrowing costs for the state.
- Maximize long-term savings. Prioritize accelerated pension funding that results in substantial long-term savings compared with the projected costs of inaction, which would free up money to go to important public services. These measures should ensure the most fiscally responsible approach to addressing pension liabilities, with a bias toward immediate implementation.
- Ensure and protect dedicated funding. Require that any new revenues raised specifically for pension reform are directed to a legally defined and protected “lockbox.” This would prevent the diversion of funds to other purposes and ensure transparency and accountability with strict enforcement mechanisms. Any future pension benefit increase must be funded annually from a separate, dedicated revenue source.
- Eliminate the pension funding cliff. Provide for a gradual reduction of pension funding over a long-term period to achieve 100% funding levels by 2055 or sooner without having a pension funding cliff, such as the one that exists in 2046 under current law.
- Responsibly address the Tier 2 salary cap issue. Implement a fiscally responsible solution to ensure changes to the Tier 2 benefit plan are limited to measures needed to meet Internal Revenue Service safe harbor requirements while preserving the overall structure of the Tier 2 plan.
- Prioritize intergenerational equity. Fairly distribute the costs and benefits of any reforms across current retirees, active employees and future generations, avoiding disproportionate burdens on any single group while safeguarding existing retirement benefits.
- Promote transparency and predictability. Employ realistic actuarial assumptions based on nationally recognized standards during consideration and implementation of any pension law. Ensure transparent annual reporting of pension liabilities and funding progress.
- Policy proposals should focus on pension solutions. The legislative process requires the consideration of various points of view and negotiation. Given the importance of solving the state’s pension issues, policy proposals unrelated to pensions should be kept to a minimum and align with these principles.
- Promote economic growth and jobs. Implementation of pension policies should create a more attractive environment for job creation and the economic welfare of the people of Illinois.
These principles are particularly important given the additional focus on the “safe harbor” problem, a technical but consequential issue with the state’s Tier 2 pensions. “Safe harbor” refers to the IRS’ test for determining whether public pension plans comply with a federal requirement that pension plans for people not eligible for Social Security provide benefits deemed equivalent to Social Security. In Illinois, most employees who qualify for pensions under one of the state retirement systems are not eligible to collect Social Security. Illinois’ Tier 2 pension law, which reduced benefits for state employees hired after Jan. 1, 2011, as a means of reining in mounting pension costs, changed the way benefits are calculated and put pension plans at risk of eventually failing the safe harbor test.
The state will need to pass legislation soon to ensure public pensions continue to pass the safe harbor test and remain compliant with federal regulations. Some would use the safe harbor issue as an opportunity to “undo Tier 2,” which could add more than $82 billion to our pension liabilities through 2045. We are pragmatic and understand that compromise between stakeholders may be necessary about what constitutes a Tier 2 “fix,” but a responsible, comprehensive and fiscally sound plan should be the shared goal of all participants in the reform process. Simply put, Illinois cannot afford a fix that needlessly exacerbates our already substantial fiscal challenges.
History warns us that even the best intentions can go awry when pension reform is in the works. By following these 10 principles for pension reform, policymakers would mitigate the risk of harm and increase the likelihood of adopting reforms that would position the state of Illinois as the growing and economically vibrant state it should be.
Derek Douglas is president of the Civic Committee of the Commercial Club of Chicago. Joe Ferguson is president of the Civic Federation. David Greising is president of the Better Government Association.
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