Perhaps the most lasting and important part of Gov. J.B. Pritzker’s financial plan for Illinois was not even included in his budget address last week.
For far too long, Illinois has held a shameful worst-in-the-nation status for protecting retirement income for thousands upon thousands of state workers and retirees. The $142 billion in pension debt — unfunded liabilities — means the state has only 45% of the resources needed to cover its obligations.
Pritzker does have a plan, and that makes him the first Illinois governor in 30 years to propose a way out of this seemingly insurmountable pension problem. Nationally prominent pension experts I talked to over the last week expressed pleasant dismay that an Illinois governor at long last is taking on a problem that for decades has ravaged state budgets, driven away investment — and damaged Illinois’ credit ratings, too.
The idea does not come in a vacuum, it’s worth noting. Alternative options are out there, highlighted by one put forward by the Civic Committee of the Commercial Club of Chicago a year ago.
There likely will be time to debate the alternative options. Chances are, Pritzker’s idea won’t be taken up during the current legislative session. But let’s embrace a breakthrough while we can — before the messy work of lawmaking gets underway and compromises and accommodations come into play.
For the first time in memory, an Illinois governor is proposing to fully fund Illinois’ five statewide pension plans. The last one to try, Jim Edgar, aimed only for 90% funding, making Illinois the only state with a stated goal that has set its aim lower than 100%.
Pritzker plans to do this without raising taxes or cutting pension benefits. And he does so with no additional cost to budgets until 2030.
At that point, the state’s contributions toward pensions would jump by as much as $750 million per year through fiscal 2040, but the source is a form of found money: As a series of general obligation bonds retire — followed by final payments on the detestable $10 billion of pension bonds passed by then-Gov. Rod Blagojevich in 2018 — half of the sums previously earmarked for interest payments would instead go toward pensions.
The other half, incidentally, would go toward the state’s rainy day fund, which has grown to $2 billion due to shared effort by Pritzker and Comptroller Susana Mendoza. That’s up from $3 million left behind by Gov. Bruce Rauner — enough to run state government for, well, about 15 minutes.
How high a priority pensions will play in the spring legislative session remains an open question. One tell is pride of place: Pritzker’s silence on the matter in his budget address was notable. Instead, the plan was consigned to the state’s “budget book” — the 632-page compendium of every fiscal fancy on the administration’s mind as it heads into the legislative session.
There are complicating factors that could block full pension paydown, too. The biggest potential hurdle: a need to address a problem with Tier 2 pensions, a program of decreased pension benefits that the state imposed on employees hired from 2011 forward.
For many retirees, Tier 2 benefits have not grown as fast as Social Security payments, and because most Illinois government pensioners are not eligible for Social Security, federal law requires the state to catch up. A state consultant’s report last year estimated the cost of the Tier 2 makeup payments at $5.6 billion through 2045 — nearly enough to wipe out the $5.1 billion in savings Pritzker projects from his pension fix.
About those projected Pritzker savings: They’re not as sizable as the savings estimated in the main alternative pension proposal, the one put forward by the Civic Committee, a group of prominent Chicago business leaders, last year. That plan calls for an incremental tax surcharge of 0.5% a year over 10 years on individuals and 0.7% on corporations — $28.5 billion in new taxes over a decade, all of it set aside for pension payments.
The Civic Committee estimates its approach would save the state $35 billion over 22 years, more than seven times as much as Pritzker’s plan. And by front-loading pension payments for that first decade, the plan also would reduce the steep annual increases required under current state pension law. Those payments currently are slated to reach $18 billion a year by 2045, or about 25% of the state’s projected budget.
Pritzker’s plan also calls for pension payments to remain above $16 billion for fiscal years 2046 to 2048. By that point, under the Civic Committee plan, state payments would be about half that amount. But under the Civic Committee plan, it takes nearly a decade longer to reach full funding than under Pritzker’s plan.
Still, a tax increase is a tax increase, and it’s no wonder Pritzker prefers to avoid the ones proposed by the Civic Committee, especially in an election year.
All of which brings us to the question of timing. If Pritzker could get the votes for his pension plan in the spring legislative session, the state would be better for it. No plan is perfect, and the realistic objective of achieving 100% funding by 2048, without reducing pension benefits, is the most serious proposal yet put forward by any elected official in Illinois.
If there’s a legislative opening, the governor should take it. Yet, if the matter does not come to a vote this spring session, there is a chance the state could wind up even better off.
More time would allow for careful study of the relative merits of the two leading plans, Pritzker’s and the Civic Committee’s. It would allow time to factor the full cost of the Tier 2 fix into the equation. More time would give all stakeholders — taxpayers, state workers, retirees, investors and others — a chance to assess the relative merits and weigh in with their concerns.
Not quite a year ago, Pritzker appeared at a private luncheon before the Civic Committee’s parent organization and expressed interest in the group’s plan. Now he has come up with one of his own.
Imagine that: Here in Illinois, the worst-in-the-nation state as measured by pension debt, and there are two worthy options in play. Before us lies an opening that our elected representatives, and our state, cannot afford to miss.
David Greising is president and CEO of the Better Government Association.
