What’s the top policy issue facing Illinois today? Selling Thomson Correctional Center to the feds to house Guantanamo detainees? Governor Pat Quinn’s mishandling of the prisoner early release program? State government’s growing pile of past due bills?
Try public employee pensions. Really. “Pension reform” may be the least scintillating two words ever strung together in the English language, but you’ll be hard pressed to find an issue that contains more threat – or more promise – to Illinois’s economy and future prosperity.
Illinois is once again facing a mammoth budget deficit, likely to be in the billions of dollars. State government is spending more than it’s bringing in with tax revenues. At the heart of this budget imbalance is the growing contribution the state is expected to make each year toward public employee pensions.
State employees in Illinois earn a “defined benefit” pension for their time on the job. For example, former state employee (and now U.S. Senator) Roland Burris received a pension payment of $121,747 in 2009. You can look up the individual pension payments for state retirees at IllinoisOpenGov.org.
The money for these pension payouts comes from somewhere, namely, worker contributions, pension plan investment earnings, and contributions from taxpayers via the state budget.
Currently, Illinois’s state pension plans are underfunded to the tune of $83 billion. They’re required to be 90 percent funded by 2045. To hit this goal, Illinois government is supposed to make an annual contribution to the pension funds. Last year, the state’s expected contribution was $4.5 billion. To put this amount in perspective, a contribution of $4.5 billion would consume nearly half (40 percent) of all individual income tax collections in Illinois, or more than half (60 percent) of sales tax collections.
This year, state government will need to kick in $6.7 billion to the pension systems. That puts a squeeze on other general spending areas, like maintaining roads, guarding prisoners, and paying human service providers.
Pension benefits are guaranteed by the state constitution. There’s no way out of these payments. However, the political realities are such that the state’s pension contributions are often kicked to the end of the budgeting line. In 2010, Illinois borrowed to make the annual pension contribution rather than cut significantly into other state programs. Delaying payments only makes the unfunded liabilities worse.
So how do we make sure that the state pension contribution moves to the front of the funding line? How do we keep promises to retirees while protecting taxpayers from severe tax hikes?
The Illinois Policy Institute released a proposal this week that aims to tackle the pension funding dilemma. Essentially, the Institute’s “Pension Funding and Fairness Act” would enable Illinois to make its annual pension payments, as required by law. It would put reasonable speed limits on the growth of state government spending (based on the increase in inflation plus the increase in population). All surplus revenue above the spending limit will be used to fund annual state contribution to the pension system.
Once the annual state pension contribution is at 100 percent, the surplus revenue would flow to (in order of priority): pension debt payback, a “Budget Stabilization Fund,” and a “Taxpayer Relief Fund.”
The Taxpayer Relief Fund is designed to send rebate checks to taxpayers in proportion to the number of exemptions claimed on the previous year’s tax return. Based on the proposal’s projections, in 2023 $4.4 billion will be returned to taxpayers for an average of $342.56 per exemption—or $1,370.24 for a family of four.
The proposal comes with some initial challenges, like a three-year budget freeze and limited borrowing with strict payback requirements. But as Crain’s blogger Greg Hinz noted, “the plan has something in it to tick off just about every group, which maybe is a plus in this environment … this is a serious report that offers a good starting point for some much needed discussion.”
Overall, the Pension Funding and Fairness Act has the potential to help the government honor its commitments while also honoring its responsibility to the taxpayers – all while launching a new period of economic growth and fiscal accountability in Illinois.
Those are very good reasons for all Illinoisans – from legislators to retired state workers to taxpayers – to sit up and take notice of pension reform.