The glacial march to addressing Illinois’ state pensions and stabilizing state finances took a meaningful step forward with the latest budget proposal from Gov. J.B. Pritzker. We particularly note the governor’s proposal to adjust Tier 2 pension benefits to comply with federal law without adding unnecessary benefit sweeteners.
Given the state’s $142 billion in unfunded pension liability, a large enough share of our state’s economic output to rank us last among all states, we urge the legislature to follow the governor’s lead rather than advancing a more expensive alternative for fixing Tier 2.
A little background is in order. Most state employees who qualify for pensions are not eligible to collect Social Security, but by law, their pension plans must provide a benefit deemed equivalent to Social Security. Under the IRS’ “safe harbor” test, Illinois’ pension plans eventually will fail to meet the federal standard.
In 2010, the state passed the Tier 2 law that reduced benefits for state employees hired after Jan. 1, 2011, as a means of reining in mounting pension costs. The problem is that the way benefits are calculated under Tier 2 puts pension plans at risk of eventually failing the safe harbor test.
In the rollout of the proposed fiscal 2025 budget in February, Pritzker proposed a review and “if necessary” an adjustment to fix the Tier 2 safe-harbor problem. He was right to do so because a fix would ensure the state’s pension plans remain compliant with federal regulations.
The Civic Committee and the Civic Federation called for a similar, simple fix as recently as last summer when Cook County Board President Toni Preckwinkle successfully advocated for one for Cook County pensions. The Better Government Association is joining now in a joint call for similar restraint with the state pension plans.
We have data that helps support Pritzker’s prudent stand. Actuarial research commissioned by our three organizations found that changing the Tier 2 pay cap to match the Social Security wage base for the three largest state pension plans would add about $12 billion to the state’s 2045 pension liability and require about $7 billion in additional state pension contributions through 2045.
That may sound like a lot for a state already facing $142 billion in unfunded pension liabilities. It is. But it is considerably less than alternative proposals under consideration by the legislature. Some Springfield lawmakers would go so far as to bring Tier 2 benefits entirely up to the level of Tier 1 — at a cost to taxpayers that we estimate at $82 billion through 2045.
The pressure grew last week for Pritzker and the legislature to take the more costly route. Public employee unions organized a weeklong pressure campaign under the slogan “Undo Tier 2.”
Pritzker wisely is standing his ground. In remarks Thursday night, he warned that the costs of even the simplest Tier 2 repair are not yet known. And he parried growing pressure for a fix and some sort of “sweetener,” or expanded benefits.
We commend Pritzker for protecting the taxpayers while also acknowledging the state’s obligation to do right by retirees. We encourage him to hold this high ground, buttressed by the fiscally responsible track record he has fashioned throughout his tenure in office.
The fiscal blow from extending Tier 1 benefits to all current Tier 2 employees would be enormous and immediate. For fiscal year 2026, the pension contribution would be about $700 million higher than under current law. And it would grow substantially year by year. By fiscal 2045, the required annual contribution would be roughly $4 billion higher than under current plans. It also would require higher local pension contributions, triggering higher local property taxes in communities across the state.
In short, any “sweetener” beyond the minimum could reverse years of effort in Illinois to get our public pension plans on a sound financial footing that is fair to taxpayers and assures state workers of a secure retirement.
Since taking office in 2019, Pritzker has acted responsibly to begin stabilizing state finances. True, he has signed off on a few regrettable pension sweeteners in that time. But overall, Pritzker and the General Assembly have boosted pension contributions above legally required minimums while also replenishing a rainy day fund that had declined to nearly zero under Gov. Bruce Rauner’s administration.
All three rating agencies have taken notice, awarding Illinois credit rating increases to the A-minus or equivalent level. An Illinois credit rating that teetered just one step above “junk” status has risen to a more respectable level, albeit still last among all states.
It’s conceivable that, with a comprehensive approach to pension and fiscal reform, Illinois could achieve the same AA ratings or higher that around 40 other states currently enjoy. An AA credit rating should be a key goal of any fiscal plan for Illinois. Lower borrowing costs alone would save taxpayers billions of dollars over time.
In addition, fully addressing pensions by funding them faster than current law requires could save Illinois taxpayers tens of billions more. The savings could go toward education, health and public safety. And reduced uncertainty about Illinois’ finances would spur economic growth and allow our state’s myriad assets to shine through.
It can be tempting to write off Illinois’ pension challenges as mind-numbing fiscal issues. But history shows that vigilance is necessary when Springfield lawmakers start talking about pension reforms. If lawmakers make matters worse — as an exorbitant Tier 2 “fix” certainly would do — it would be an expensive step backward that our state cannot afford.
Pritzker’s proposed limited approach to the safe harbor issue is spot-on. Before passing Tier 2 legislation, let’s determine precisely what it will take to comply with the safe harbor law — and stop there. Anything beyond that would represent a reversal of recent, responsible pension policies and a return to the irresponsible behavior that has created such a costly mess for the taxpayers of Illinois.
Derek Douglas is president of the Civic Committee and the Commercial Club of Chicago, Joe Ferguson is president of the Civic Federation and David Greising is president and CEO of the Better Government Association.
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