Budget Solutions 2014: Pension reform and responsible spending for state and local governments

By Benjamin VanMetre, Jonathan Ingram

Budget Solutions 2014: Pension reform and responsible spending for state and local governments

By Benjamin VanMetre, Jonathan Ingram

Illinois is in crisis. According to official government numbers, Illinois has an unfunded pension liability of $96 billion – the worst in the nation. This heavy debt burden, combined with the state’s culture of out-of-control, wasteful spending, has driven the state into an economic death spiral.

Illinois cannot be economically prosperous until real pension reform is implemented. And without reform, government workers are at risk of not having a retirement at all. Illinois’ largest and most troubled pension system, the Teachers’ Retirement System, is only 40 percent funded. Even the executive director of the fund has said that TRS will run dry by 2029 if reform is not enacted. Meanwhile, taxpayers – who are tapped out – continue to see money meant for core services used by lawmakers to fund retirements.

Over the years, Illinois has enacted a variety of pension “fixes.” Former Illinois Gov. Jim Edgar’s widely hailed pension ramp, which was meant to fund state pensions by 2045, failed within 10 years of its inception. Former Gov. Rod Blagojevich borrowed $10 billion to pay for pensions. His successor, current Illinois Gov. Pat Quinn, borrowed another $7 billion to pay for pensions. These plans all failed to fix pensions because they ignored the root cause of Illinois’ problem: a defined benefit system.

The state must change course. The Illinois Policy Institute’s plan shows lawmakers how.

Reforming pensions is the foundation of pulling Illinois out of its economic death spiral. But pension reform alone isn’t enough. As outlined in this publication, reviving Illinois’ economy will also require implementing a multistep plan that: returns $7 billion to taxpayers by repealing the 2011 income tax hike and implementing spending reforms; pays down the state’s $9.3 billion in unpaid bills by 2016; and improves health care and education to ensure the state’s most needy residents receive the support they deserve.

Paired with the Illinois Policy Institute’s pension reform plan, these measures provide Quinn and the Illinois General Assembly a roadmap to making Illinois first in economic outlook and job creation.

Summary of the problem
Illinois has the worst-funded pension systems in the nation. The unfunded liability currently stands at more than $96 billion according to official government numbers, and that number grows by $21 million every day lawmakers fail to enact reform. The problem at the root of Illinois’ pension crisis is the unmanageable, unsustainable defined benefit system.

Summary of our solution
The only way to end Illinois’ pension crisis is to empower government workers by transitioning benefits for all future work to a defined contribution system. The Illinois Policy Institute’s solution cuts unfunded pension debt in half and includes a defined contribution plan as the main pillar of its reforms while protecting already-earned benefits for government workers.

Summary of why this works
This is the only proposal that ultimately solves Illinois’ pension crisis. This plan also modernizes the state’s retirement system by eliminating political control and giving government workers the secure retirement they deserve. Ultimately, these reforms restore fiscal order to the state by eliminating unsustainable pensions and unfunded liabilities. This paves the way for the economy to flourish, fostering an environment where businesses can thrive and create the jobs Illinoisans need.

Here are the plan’s major outcomes:

  1. Reduces fiscal year 2014 unfunded liability by $46 billion. This 46 percent reduction brings the unfunded liability down to $55 billion from $101 billion, the government’s fiscal year 2014 projection.
  1. Reduces fiscal year 2014 state contributions to $4.7 billion, a nearly 30 percent drop from $6.7 billion under current law.
  1. Protects constitutionally guaranteed benefits already earned by retirees and current workers.
  1. Empowers current workers to control their retirement savings going forward with 401(k)-style plans modeled after the existing State Universities Retirement System’s 401(a) plan.
  1. Reduces the state’s annual pension contribution by more than $2 billion in the first year and eliminates the state’s unfunded liability by 2045. Ends the irresponsible repayment ramp and instead moves to level annual payments.
  1. Freezes cost-of-living adjustments until retirement systems return to healthy funding levels.
  1. Aligns the retirement age with Social Security’s retirement age while still protecting workers who are nearing retirement under current law.
  1. Promotes accountability and fiscal responsibility by requiring local governments to pay the employer share of their employees’ retirement savings plans.
  1. Makes government workers’ retirement savings plans portable, giving workers more flexibility and freedom to move their plan from job to job.

Four years ago, Illinois Gov. Pat Quinn took over a government trapped in a cycle of overspending and financial decline. Quinn had the unique opportunity to provide the fiscally responsible and moral leadership that Illinois so desperately needed.

At that same time, the Illinois Policy Institute introduced its first alternative budget. The Institute’s alternative budget offered Quinn and the General Assembly a plan to balance Illinois’ budget without a tax hike, rein in out-of-control spending and provide better outcomes for Illinoisans.

Fast forward to 2013. Illinois’ leadership failed to capitalize on the opportunity to restore Illinois’ financial stability. The state’s fiscal condition now is worse off than it was four years ago. Illinois’ unpaid bills have more than doubled as a result of yearly budget deficits. Illinois has the worst-funded pension systems in the nation. Lawmakers passed a record income tax increase in January 2011, and state debt continues to soar. Illinois now has the worst credit rating in the nation.

And when it comes to jobs and economic opportunity for the average Illinoisan, the state’s situation is still gloomy. Illinois’ unemployment rate is 1.6 percentage points higher than the average of its neighboring states, more than a million Illinoisans are unemployed and underemployed, and people continue to leave the state at an alarming rate.

All of this could have been avoided if Illinois had made responsible decisions.

The 2011 tax hike is scheduled to sunset in January 2015 and legislators must keep that promise. Illinois’ political leadership needs to discern what government can and should be doing, and return to the basics of good public policy – spend within its means and operate under a balanced budget.

Budget Solutions 2014 is the Institute’s fifth alternative budget proposal. This plan returns $7 billion to taxpayers by repealing the 2011 income tax hike and implementing spending reforms; pays down the state’s $9.3 billion in unpaid bills by 2016; reforms the state’s retirement system; and improves health care and education to ensure the state’s most needy residents receive the support they deserve. Paired with the Illinois Policy Institute’s pension reform plan, these solutions provide Quinn and the General Assembly with the reforms needed to make Illinois prosperous again.

Budget Solutions 2014 calls on lawmakers to:

  1. Implement the Illinois Policy Institute’s pension reform plan to save an estimated $2.011 billion
  1. Strengthen Illinois’ balanced budget requirement
  1. Enact a responsible spending limit
  1. Establish a competitive grant funding system to save an estimated $180 million
  1. Reform state retiree health insurance to save an estimated $685 million
  1. Empower patients with health care choice to save an estimated $1.45 billion
  1. Eliminate ineffective revenue sharing programs to save an estimated $1.7 billion
  1. Rededicate General State Aid money for education to save an estimated $750 million
  1. Improve quality and efficiency in human services to save an estimated $512 million
  1. Right-size state payroll to save an estimated $318 million
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