The Crisis We’ve Ignored for Far Too Long

In this week’s newsletter, it’s time to talk about the least exciting and most important topic that most people in State Government want to avoid – PENSIONS. Before your eyes glaze over, let me make my pitch to you on why you should spend your time reading the next several paragraphs.

I serve as the Republican Spokesman on the House Personnel & Pensions Committee, and though we didn’t figure out where to come up with $130-some billion necessary to pay off our unfunded pension liability this legislative session, we did make some changes to bring some stability to our police and fire pensions, which is a start. 

Illinois’ public pensions are in shambles and are the worst funded in the nation, with nearly 25% of our general revenue now going to pay off the debt. And at the local level, it is probably higher. This is the largest problem facing Illinois today. My aim in this newsletter is to lay out the reality of our pension problem in a simple and concise way that will convince you that this issue can’t be avoided any longer. 

The Big Picture 

There are 5 pension funds administered by the State of Illinois – these are for state employees, state university employees, teachers outside of Chicago, judges, and lawmakers. The legislative pension fund is the least well-funded at around 22%, but all of the funds are in trouble. The State University Retirement System has the highest funding ratio at only 45.2%. (“Funding Ratio” is defined as the percentage of assets within the fund needed to pay benefits. A fully funded plan will have a funding ratio of 100%.)

Illinois also has a strict constitutional limitation on reducing pension benefits. Article XIII, Section 5 of the Illinois Constitution says explicitly that benefits of membership in a public retirement system ‘shall not be diminished or impaired.’ This places strict rules on changes that can be made to existing pensions. A constitutional change would have to happen before changes could be made to existing pension benefits. 

This constitutional limitation is why Tier II, which was an attempt passed in 2010 to make state public pensions more affordable and sustainable, only applied to new hires. And now, as we’ll talk about in a bit, even Tier II needs to be changed. 

Additionally, there are hundreds of local pension funds and funds for police and firefighters. These funds are also in trouble and are forcing local governments to raise property taxes, increase local fees, and cut essential services like ambulance services to make their payments.  With every local and state tax increase or fee increase, pressure to pay pension payments is likely a driving force. If we want to get Illinois taxes in check, we have to tackle the pension problems. 

Tier II Fix 

The “Tier II” pension was meant to be a more sustainable pension plan from the standpoint of cost to the state, with more modest benefits, a less generous Cost of Living (COLA) adjustment and a longer time for members to become vested. 

  • As happens far too often when passing legislation, the General Assembly did not consider the downstream effects of what it was doing when this law was passed. Now it has become clear that Tier II doesn’t meet Federal requirements known as “safe harbor” provisions, which are rules that ensure that employees receive a pension benefit of at least what they’d receive if they were part of the Social Security system. Changes must be made to bring the Tier II benefit structure into compliance with safe harbor, otherwise Tier II retirees will have a cause of action to recover the shortfall, and that shortfall will be paid by local taxpayers, not the state.
  • I have introduced a bill with a fix for Tier II. Other legislators have different plans. This will not be a simple fix. Since our Constitution does not allow for benefits to be diminished or impaired, we find ourselves in a situation where we have to determine how best to comply with safe harbor at the lowest cost, and then figure out how it’s going to be paid for. This is one of the most urgent changes that must be made. 

Not A Good Look 

A recent Wirepoints article explained in great detail the results of bad financial decisions that were made setting up these pension systems. There are many pensioners who are receiving more in retirement than they ever made while they were working. The number of active workers and pensioners receiving over $100,000 annually has increased by 50% since 2018. There are over 43,000 pensioners receiving annual pensions of over $100,000. 82 of them are former legislators or statewide officials. 

Additionally, there are loopholes in the system where employees can boost their pension with temporary salary increases at the end of their career. In the article an example is: 

Meanwhile, the top Chicago municipal pension belongs to yet another beneficiary of the pension loophole for union leaders: Dennis Gannon. His current annual $232,000 pension was boosted when he was hired by the city for a single day then granted an indefinite leave of absence till his retirement at age 50. In all, Gannon can expect to receive over $5 million during his retirement.

Pension boosting like this is a blatant affront to taxpayers and should not be allowed. 

Additionally administrators at public school districts should not be making over 17x the average household income of their district. 

Taxpayers deserve answers about these kinds of salaries that lead to inflated pensions, because they’re the ones footing the bill. There are many hardworking public servants across our state, and some of whom are probably listed in this chart. But, as they say, when you’re in a hole, quit digging. And with no upper limits on salaries, that means the pension hole gets worse. 

Local Pensions, Statewide Problem 

In 2018 (2018!), I wrote a blog post about the problems local pension funds are facing. Here’s a snippet: 

Municipalities across Illinois are now confronted with the choice of cutting essential services or raising taxes to avoid having their pension contributions certified as delinquent, thus risking the loss of millions in LGDF funds:

And, as I predicted then, there was no “adult conversation about what’s about to be dumped upon thousands of unsuspecting citizens of Illinois.”

Local governments are not going to be able to fix this issue by themselves. Property taxes will keep increasing or vital services will be cut until this is fixed. It is going to take a statewide solution and serious policy makers on both sides of the aisle to make it happen. 

What Does This Mean for Taxpayers

Any time pension legislation comes before the General Assembly for a vote, the problem is somehow made worse. Each year the General Assembly takes up a variety of pension sweeteners. While those are sometimes one-off changes that impact a few individuals to make their pension benefit “more fair,” ultimately, they all add up. 

The problem is not going to go away, and it’s not going to get better on its own. Taxpayers are going to foot the bill. So, it is time that taxpayers start demanding reform. 

A Dose of Reality 

What I’ve written today is a look from the macro perspective. Systems, legislation, funding levels, etc. I know well that this issue is also very personal for families. Everyone knows a teacher, a police officer, or a prison guard who has served the people of Illinois well and who plans on their promised pension in retirement. They have to be a part of this conversation too. 

We need to establish a pension system that provides a reasonable and sustainable retirement benefit, one which will allow us to attract and retain talented men and women to teach our children, maintain public safety and do all the other things that it’s the government’s job to do within the bounds of fiscal prudence.

Happenings in McHenry County

Summer is upon us, and there’s no better way to celebrate summer than to enjoy the many wonderful places and attractions here in McHenry County.

  • For the 140th consecutive year, the Woodstock City Band will perform free concerts on the Square on Wednesday nights. Click here for more information and a full schedule.
  • The Raue Center for the Arts in Crystal Lake has a full schedule of events. You can learn more by clicking here.
  • “Cary Cruise Nights” are the longest running vintage car show in the county. Click here for the schedule.
  • And don’t forget about the Gavers Community Cancer Foundation’s “Barn Dance”, also known as the “Seven Best Hours of the Summer” on July 20th at Emricson Park in Woodstock. You can buy tickets here.

Want to explore all the things going on in McHenry County? They’re just a click away!

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