A bill that would increase Tier 2 pension benefits was passed out of Illinois House Executive Committee on Oct 30.
Members of the Illinois House Executive Committee advanced a major pension benefit increase out of committee on Oct. 30 after an 8-4 vote along party lines, with all Democratic members voting in favor and all Republican members voting against the bill.
The bill, Senate Bill 1937 House Amendment 2, would make sweeping changes for pension systems across the state, increasing benefits for Illinois’ “Tier 2” members, hired after 2010.
The bill is projected to cost the state $52.7 billion across the three largest state-run retirement systems for teachers, state employees and state universities. The bill would also cost billions of dollars to the other state-run systems – for Judges and General Assembly members – and all other local pension systems except the system for the Chicago Transit Authority, though no analysis of the exact costs have been performed.
Among the changes made to pensions within the bill are:
- Lowering the normal retirement age from 67 to 65 with 20 years of service or 62 if pension benefits are fully maxed out.
- Reducing early retirement penalties, allowing for pensioners to retire as early as 57 with reduced benefits.
- Increasing Cost-of-living-adjustments in the Illinois General Assembly Retirement System and Judges’ Retirement System to a compounded 3%.
- Giving a 3% non-compounding COLA to all other Tier 2 pensioners every year
- Calculating benefits based on six years of salary instead of eight
- Increasing the pensionable salary cap
- Lowering the downstate police and fire retirement age from 55 to 52 with 20 years of service, reducing early retirement penalties (police and firemen can retire at any age without penalty if they’ve maxed out their pension) and calculating benefits based on four years of salary rather than eight years
The bill would change the state’s current funding plan for pensions by extending the current payment “ramp” by 4 years, through 2049, increasing the final target funding ratio from 90% to 100%, and dedicating a portion of previous bond payments to the state’s pension systems.
The benefit increases are currently valued at $57.3 billion for pensioners and are anticipated to cost taxpayers an additional $52.7 billion in higher contributions through 2049. Illinois taxpayers already pay $11.7 billion every year into the state’s pension systems. That amount is more than $5 billion short of what actuaries say is needed to fund current benefits, not to mention the additional benefit increases that may be passed in SB 1937.
While increases in pension promises might appeal to public sector workers, it increases the risk that state government pension systems will fall into default, paying out a fraction of their promises, rather than supplying retirement security for our public servants.
Illinois’ statewide pension systems already have $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.
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 and assumptions that make defined benefit pension systems inherently risky. Now lawmakers are considering adding an additional $53 billion to that figure.
In addition to modifying the pension funding ramp, SB1937 would also create a new “20-year layered amortization approach” when calculating the minimum state contribution starting in 2036.
While actuaries say too little detail was available to analyze what the increase in state pension contributions would be as a result, the new policy would extend pension debt costs far beyond even the 2049 end date for the new funding ramp, further placing the burden of Illinois’ pension debt on future generations of Illinoisans.
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 and are at an increased risk of insolvency.
The Illinois General Assembly enacted similar legislation for Chicago’s public safety pensions earlier this year, adding more than $11 billion to Chicago’s police and fire pension liabilities and dropping the systems funded ratios from 25% to 18%.
Worst of all, the change is completely unnecessary. Advocates falsely claim that the changes are needed because Tier 2 pensions may eventually be found to violate Internal Revenue Code provisions known as “safe harbor” which allow the state to avoid payroll taxes. This potential was definitively addressed in a provision of the Illinois budget passed this year stating:
“If, after the effective date of this amendatory Act of the 104th General Assembly, any enforceable determination concludes that the benefits for a Tier 2 member or participant under Section 1-160 or 15-111 of the Illinois Pension Code do not provide the minimum retirement benefits required under Internal Revenue Service regulations or other provisions of federal law such that the wages of such member or participant would be subject to tax under the Federal Insurance Contributions Act, then moneys in the Tier 2 SSWB Reserve Fund may be used by the State Employees’ Retirement System of Illinois, the Teachers’ Retirement System of the State of Illinois, or the State Universities Retirement System to pay the difference between benefits otherwise available and benefits that would constitute minimum retirement benefits under applicable federal law or regulation.”
The changes made by SB1937 wouldn’t just affect state-wide pensions though. Local governments will be forced to fund these new benefits with no funding from the state. The bill even says as much. In fact, the last line reads: “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.
Fortunately, 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. Gov. J.B. Pritzker has also stated that the bill would not be passed or signed during this legislative session.
Even so, the push for sweeping benefit increases for Tier 2 pensions will continue into the upcoming legislative session scheduled to being in January. Lawmakers must reject increases to Tier 2 pension benefits, particularly because “safe harbor” concerns have already been addressed in last years’ budget bills. Secondly, the state must pursue guardrails that protect taxpayers and pensioners during benefit increase debates such as:
- A state law that outlaws the gradual amortization of benefits and requires all pension changes to be funded with the undiscounted future stream of benefits at the time they are enacted; or
- A state law that requires that all changes to pension plans that would increase liabilities be approved by voters.
We have both an obligation to public servants to provide them with sustainable retirement benefits and future Illinoisans to leave them a state with financial flexibility — not a burdensome legacy of un-covered liabilities. SB1937 would threaten both of these commitments.
