Illinois faces a defining fiscal challenge: a staggering $144 billion in unfunded liabilities across its five state pension systems. This immense burden strains state resources; crowds out critical investments in education, public safety and infrastructure; and undermines economic confidence.
Meaningful pension reform isn’t just desirable; it’s essential for Illinois’ future solvency and prosperity. And a “fix” to one key pension issue — the need to address some evident shortcomings in the state’s Tier 2 pensions — could yet happen before the legislature adjourns on May 31.
The Civic Committee, Civic Federation and Better Government Association have consistently advocated for comprehensive solutions to address this major, intractable issue. Today, we urge the legislature to take a careful and fiscally responsible approach to a specific aspect of the system that demands attention: the growing concern that Tier 2 pensions will eventually fall short of federal “safe harbor” rules that ensure public pension benefits are deemed equivalent to those paid to Social Security recipients.
Tier 2 refers to the benefit structure offered to people who started working for the state on or after Jan. 1, 2011. The cost-saving new tier raised the retirement age, capped pensionable salaries, lengthened the number of years of salary used to calculate benefits and reduced post-retirement benefit increases. These changes significantly improved the trajectory of Illinois’ pension systems, but they also put Tier 2 pensions at future risk of violating safe harbor rules.
Gov. JB Pritzker’s budget proposal currently under consideration in Springfield includes a plan to address this risk. Specifically, his plan calls for a $78 million set-aside to address potential Tier 2 compliance costs. This measured approach does what responsible fiscal management requires: It acknowledges the Tier 2 risk, sets aside funds and stops short of overcommitting before more is known. That is the right approach.
Similarly, any permanent changes to Tier 2 should only proceed based on clear, actuarially sound analysis. A well-justified fix is appropriate and necessary but only when federal requirements are in jeopardy, and only to the extent required to meet those legal obligations. Once a pension benefit is promised in Illinois, the state constitution prevents it from ever being reduced or revoked.
We strongly caution against any effort to turn this Tier 2 fix into an opportunity to add enhancements — so-called “sweeteners” — that would deepen Illinois’ already-substantial pension challenges. Lawmakers should resist that temptation. A responsible Tier 2 fix is one of 10 principles of pension reform our organizations published last fall to guide fair and sustainable pension policy.
Illinois desperately needs progress on pensions; this measure is an essential building block for the larger solution ahead. What the state does not need, and cannot afford, is any form of pension “reform” that makes matters worse. A Tier 2 fix should be no more than is needed, when it is needed, as determined by reliable, public-facing estimates of timing and cost.
At present, the analysis showing exactly when a Tier 2 fix is required simply is not available. No state official, agency or consultant has put out a comprehensive estimate of how many employees or retirees might be affected and when. Such data is needed in order for policymakers, and the public, to understand both the scale of the problem and the timeline by which it must be addressed.
Likewise, there is no complete estimate for some of the more ambitious proposals put forward by those arguing to “undo Tier 2” by essentially replacing those pensions with the higher level of benefits that put Illinois’ pension systems into such fiscal trouble in the first place. For example, cost estimates for a bill backed by a coalition of unions do not include cost projections for local plans, which would also be covered by the bill. Implementing pension changes without knowing the true cost is one of the original sins of past pension reforms — a grave mistake state lawmakers must not repeat this time.
The magnitude of potential costs for making changes to Tier 2 benefits underscores the importance of being cautious. According to a report by the Commission on Government Forecasting and Accountability, implementing the bill would increase the state’s pension liabilities by roughly $60 billion and would increase required contributions to the pensions by $30 billion through 2045.
This is hardly the first time these data deficiencies have been brought to light: The Tribune Editorial Board made a similar argument in February, and other civic leaders have said as much, too. Now is the time for policymakers and the public to focus on gathering the essential data that can help draw the map toward responsible pension reform.
Only then will we know if Pritzker’s proposed $78 million set-aside is the appropriate target number, one that will address Tier 2’s shortcomings and set the stage for tackling even greater pension challenges still ahead.
Derek Douglas is president of the Civic Committee and 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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