For years annual pension costs have been crowding out spending on education, health care and public safety. Now, Illinois legislators are looking to lock that in.
The latest pension proposal, the Nekritz-Biss plan, proposes that the state, and by extension taxpayers, become the guarantor of the state’s pension systems. That means funding pensions could legally take priority over all other discretionary spending.
Today, state law says that pension benefit payments are an obligation of the pension systems themselves, and not the state.
But the Nekritz-Biss bill would make a trade with the unions that would change that.
exchange for accepting the bill’s proposed reforms, the unions would
receive guaranteed yearly funding from the state to make the pension
systems fully funded by 2043 and thereafter. This guarantee may be
viewed as “consideration” – a legislative way of saying that lawmakers
will make this grand concession in exchange for unions accepting
reforms. It’s still likely, however, that unions will sue over any
changes to the system.
This guarantee raises a number of unanswered questions and pushes accountability away from the unions and politicians – and puts it on the backs of taxpayers.
The Nekritz-Biss bill would also reduce legislators’ ¬– and by extension taxpayers’ – ability to further reform state pensions and their unfunded liabilities. The contractual nature of the agreement would prohibit reforms to some of the key components of the state pension systems, even if runaway pension costs crowd out funding for education, health care and roads.
The law contains a legal enforcement mechanism that ensures pensions would take precedence over all other funding except bonds. Everything else – key core government services – would be subordinated to pensions. And because this would be a contractual guarantee, there wouldn’t be much taxpayers could do about it.
Today’s official pension underfunding is at $96 billion, but new accounting rules will put the liability at more than $200 billion. And given the flawed nature of defined benefit plans, there are no real mechanisms to stop that underfunding from growing. If stock markets collapse, if investment returns are subpar or if politicians continue to give away overly generous benefits to the very unions that fund their war chests, the unfunded liability will only go up. So would taxpayers’ financial obligations, no matter how much they may have already contributed.
The unions want this guarantee because they know that the pension systems are at risk of running dry. Just last year the head of the Teachers’ Retirement System, or TRS, Dick Ingram, warned that its pension fund could be insolvent as early as 2029. Based on Moody’s Investors Service’s proposed new rules for pension accounting, that fund is only 24 percent funded and truly at risk.
Legislators should recognize the difference between an Illinois government that exists to provide great core services to its residents and one that exists to ensure that government employees receive generous retirement benefits at the expense of the average Illinoisan.
The guarantee is a dangerous precedent and part of a bill that preserves the same flawed defined benefit system that’s been at the core of Illinois’ pension ills. The state’s crisis has been long in the making, but legislators must avoid the temptation to just pass something – anything – on pension reform. Instead, they should look to a defined contribution system that delivers a secure retirement for government employees and liberates taxpayers from funding a failed system.
Ted Dabrowski is Vice President of Policy at the Illinois Policy Institute