Vermont is the latest state to reform pensions with union support

Vermont and other blue states have recent pension reforms including reductions in cost of living adjustments. What makes Illinois different?

Illinois faces the nation’s worst pension crisis, but lawmakers in Springfield still show no desire to fix it. Their inaction threatens the retirement security of thousands of public employees and the prosperity of the state’s taxpayers. As funding ratios continue to decline and push the retirement systems toward insolvency, Illinois’pension debt is already inflicting great harm on Illinois through higher taxes, fewer jobs and slower economic growth, residents moving out, cuts to education, and other critical priorities.

While some point to the Illinois political landscape as a reason for inaction on pension reform, several states with similar political dynamics have made significant pension reforms in recent years.

Vermont is the latest blue state to recognize the need to address its public pension shortfalls. The state has over $7 billion in total pension liabilities with more than $2.5 billion in unfunded pension debt. A significant portion of Vermont’s pension problems also stems from other post-employment benefits, or OPEBs. The state’s overall debt is about half pension debt and half OPEB liabilities. Those combined costs have caused Vermont’s retirement funding gap to rise rapidly, going from $1 billion to $5.7 billion in less than 15 years.

Given the growing severity of the problem, state officials proposed potential changes to the retirement system in 2021 to make it more sustainable. There was union resistance to the proposed plan because it required state workers to work longer to receive benefits, accept reductions in benefits, and increase their contributions. The terms of the proposal and complaints from union leaders pushed lawmakers to create a task forcecharged with hammering out significant reform measures that were agreeable for both labor leaders and lawmakers.

Despite initial reluctance to accept reforms, Vermont unions and lawmakers unanimously struck a deal on some commonsense pension reforms that improve the sustainability of public pension funds for both state workers and taxpayers. The plan includes the following provisions:

• Makes no changes to the benefits of current retirees and beneficiaries.
• Invests $200 million in one-time funds toward unfunded pension liabilities and commits the state to ongoing additional payments.
• Phases in higher employee contribution rates for active members and modifies the Cost-of-Living-Adjustment (COLA) formula for all employee groups.

Labor leaders were pleased the deal does not require members to work longer for less retirement security and that the state committed to paying for the promises it made to workers. They also supported the progressive structure of the deal, which does not require increased contributions for the lowest earning workers in the bottom quartile, while those in the top earning quartile would see their required contributions increase by 0.5% over each of the next five years.

Senator Corey Parent, a Republican lawmaker on the task force, was encouraged to support the reforms due to the willingness of workers to accept smaller cost of living adjustments and pay more in contributions. He believes as the task force proceeded, the parties involved “started to realize the problem’s not easy to solve, and realistically can’t be solved just by taxing people more or having government put more in. It required adjustments in the actual program to remain sustainable.”

The resulting agreement makes significant changes to the structure of the state’s pension system, benefits, contributions, and state payments to pension funds which ultimately make the system more sustainable for taxpayers and more secure for workers. The deal also proves taxpayers and state workers can benefit from commonsense pension reforms that protect promised benefits, bring future benefits to sustainable levels, and require fiscal responsibility to fund pension systems.

While Illinois continues to struggle with its massive unfunded pension liabilities, some blue states with much healthier pension positions have recently taken steps to address their problems before they become the next Illinois. For example:

• In 2018, Colorado adopted automatic economic adjustments to its pension systems that impose shared sacrifice to prevent pension holes from growing. If a system’s funding ratio drops, cost of living adjustments fall while employer and employee contributions both automatically increase. The law also expanded access to an optional defined contribution plan.
• In 2020, New Mexico replaced unsustainable guaranteed annual benefit increases – much like the 3% compounding raises most Illinois pensioners receive – with a true cost of living adjustment tied to inflation.
• In 2013, California subjected the Public Employees Retirement – the largest U.S. public pension system – to greater cost and risk sharing.

Perhaps most surprising for those familiar with the politics of inaction on Illinois pension crisis, each reform had the support of government unions.

All of these states have acted in response to the unsustainable growth of unfunded pension liabilities and all have a funded ratio of at least 63% as of 2019, showing they are attempting to correct the problem before it becomes worse. Illinois, on the other hand, has a funded ratio below 39%, yet lawmakers and their union donors refuse to act on the problem. They have no excuse for avoiding pension reform. Unions and lawmakers in other states have acknowledged the sobering realities of their unfunded pension liabilities long before reaching the level of crisis currently faced in Illinois, where political alliances often override the desire for sound public policy.

The current pension politics in Illinois is creating winners out of union leaders and the lawmakers they bankrollwhile making losers out of state workers whose retirement security is at risk, as well as taxpayers charged with financing those unsustainable systems. Even though pension reform may not be politically desirable for the powers that be, it doesn’t change the fact that pension reform is good public policy because it corrects an unsustainable funding system, boosts retirement security for state workers, and saves taxpayers money.

For too long, Illinois unions and lawmakers have risked a financial catastrophe for taxpayers and jeopardized the retirement security of hundreds of thousands of state workers for no other reason than their unwillingness to acknowledge a problem that other states have already addressed. It’s time for Illinois’ political leaders and power brokers to stop pursuing political gain and start pursuing public policy solutions like pension reform.