The Illinois pension crisis refers to the rising gap between the pension benefits owed to eligible state employees and the amount of funding set aside by the state to make these future pension payments. As of 2020, the size of Illinois' pension obligation is $237B, but the state's pension funds have only $96B available for payouts to retirees.
Illinois has the second highest unfunded pension ratio, after
New Jersey
New Jersey is a state in the Mid-Atlantic and Northeastern regions of the United States. It is bordered on the north and east by the state of New York; on the east, southeast, and south by the Atlantic Ocean; on the west by the Delaware ...
. Illinois state budget contributions have fallen short of the increases in pension liabilities for 12 of the past 15 years, resulting in a three-fold increase in the funding gap.
[http://cgfa.ilga.gov/Upload/1117revenue_special_pension_briefing.pdf ]
Illinois' pension obligations are made up of five pension plans for public sector employees. The plans, and their respective size and funding level, include:
History
Dating as far back as 1917, reports by the
Illinois legislature
The Illinois General Assembly is the legislature of the U.S. state of Illinois. It has two chambers, the Illinois House of Representatives and the Illinois Senate. The General Assembly was created by the first state constitution adopted in 18 ...
described the condition of the state and municipal pension systems as "one of insolvency" and "moving toward crisis".
[https://www.nasra.org/Files/State-Specific/Illinois/IL%20pension%20history.pdf ] Such findings continued in the 1940s to 1960s, when the state pension commission warned of the pension systems' impending insolvency and the growth of unfunded pension liabilities, noting the appropriations were "grossly insufficient" and "below mandatory statutory requirements."
Throughout the 1970s, the funding of the state's pension systems rose from roughly 35% to 50%. From the 1980s to the mid-1990s, pension funding levels fluctuated between 50% and 60%.
1994 pension reform
In 1994, when unfunded pension liabilities hit a then-high of $17B, new legislation was passed under governor
Jim Edgar
James Edgar (born July 22, 1946) is an American politician who was the 38th governor of Illinois from 1991 to 1999. Previously he served as a member of the Illinois House of Representatives from 1976 to 1979 and as Illinois Secretary of State ...
to raise the funding ratio from 52% to 90% by 2045, referred to as the 'Edgar Ramp'. However, a later complaint by the
Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
noted even at the levels proposed by the reform package, unfunded pension liabilities would continue to grow. While the state's pension funding ratio increased to 75% by 2000, the funding improvements were driven by $15B of favorable changes to actuarial assumptions and better-than-expected investment returns, and state contributions fell $6B short of required amounts.
2000–2001: the dot-com crash
From 2001 to 2003, following the
dot-com crash
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Compos ...
, poor investment returns contributed to an increase in unfunded liabilities, representing $14B of the $27B rise.
By 2003, the unfunded liability reached $43.1B.
In 2003, the state sold $10 billion in pension obligation bonds used to reduce unfunded liabilities for fiscal year 2003 ($2.2B) and 2004 ($7.3B).
[http://illinoiscomptroller.gov/linkservid/5005F7CE-117D-4D76-B802513FFDBD8773/showMeta/0/ ]
2005 reform amendment
In 2005, Senate Bill 27 allowed for reduced contributions in times of budgetary pressure, known as 'pension holidays'. In 2006 and 2007, contributions were roughly $1B lower than the amounts required under the 1995 legislation.
Financial crisis of 2007–2008
From 2008 to 2010, poor investment returns caused by the financial crisis, combined with insufficient contributions, increased the unfunded liability from $42B in 2007 to $86B in 2010.
In 2009, Governor
Pat Quinn included pension reforms for newly-hired public employees, including a higher retirement age and capped cost-of-living adjustment rate, but the proposed changes were not enacted by lawmakers.
2013 pension reform and supreme court repeal
In 2013, Illinois passed a pension reform bill which reduced retiree cost of living increases, raised retirement ages, limited pensionable salary, lowered the amounts current employees contribute, set up voluntary
401(k)
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their ...
s and guaranteed the state makes contributions on time.
Legislators estimated the reform would save roughly $160 billion over three decades.
In May 2015, the Illinois Supreme Court unanimously overturned the law on the grounds that it violated the benefit protection clause in the
Illinois Constitution
The Constitution of the State of Illinois is the governing document of the state of Illinois. There have been four Illinois Constitutions; the fourth and current version was adopted in 1970. The current constitution is referred to as the "Constit ...
(Article XIII, Section V) which states
"Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."
Reform debate
Pension funding levels are determined by the contributions made in the state budget to fund pension liabilities, and the scale and formula of pension benefits offered to state employees. Additionally, actuarial assumptions used in the calculation of future pension payments and the financial performance of the pension fund asset investments affect the annual valuation of pension liabilities.
Illinois' General Assembly, Governor, lobbyists and unions disagree over what combination of reforms should be made to reduce the existing funding gap. The debate has centered around two mechanisms:
* Increasing state budget contributions toward pension liabilities (such as tax increases, new state revenue streams, spending cuts); and/or
* Changing benefit calculations and criteria (such as reducing 3% automatic annual cost-of-living increase in pension payments signed into law by James Thompson, limiting the impact of salary increases on benefit calculations, increasing the retirement age, increasing employee contributions)
A parallel debate exists on whether and how to restrict defined-benefit pension plans to new state employees to reduce future pension obligations.
A new model for reform referred to as the 'Consideration model', first advocated by Illinois Senate President
John Cullerton
John J. Cullerton (born October 28, 1948) is an American politician who served as a Democratic member of the Illinois Senate, representing the 6th district from his appointment in 1991 to 2020. He served as President of the Illinois Senate from ...
in 2012, has been discussed in the General Assembly. Based on the legal concept of
consideration
Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts (contracts by deed). The concept has been adopted by other common law jurisdictions.
The court in ''Currie v Misa'' declared ...
, pension plan members would be offered options to choose from to opt-in to lesser benefits, and the new agreement would represent a modification to the original contract. Former Governor
Bruce Rauner
Bruce Vincent Rauner (; born February 18, 1956) is an American businessman, philanthropist, and politician who served as the 42nd governor of Illinois from 2015 to 2019. Prior to his election, he was the chairman of R8 Capital Partners and chai ...
's 2019 budget included a proposed consideration model reform stated to bring $900M in savings.
References
{{reflist
Government of Illinois
Pension regulation