December 4, 2013
The following opinion piece by Civic Federation President Laurence Msall was published by Crain's Chicago Business on December 4, 2013.
Decades of dire warnings and several years of legislative negotiations culminated yesterday afternoon with the passage of comprehensive state pension reform legislation in both houses of the Illinois General Assembly. Gov. Pat Quinn has indicated that he will sign the bill into law, setting up an inevitable legal challenge before the Illinois Supreme Court.
Despite the long road ahead, Illinois taxpayers have legitimate cause for optimism today. No one should be celebrating the fact that Illinois had to take this very difficult action. We all share the pain of a state that is unable to fully live up to its promises. However, taxpayers should be encouraged that the state is finally taking steps to halt its financial deterioration and stabilize its finances.
The legislation is a reasonable compromise achieved after a long legislative process requiring statesman-like concessions from the bipartisan conference committee, the four legislative leaders and the governor. Their efforts resulted in a balanced approach that spreads the pain of reform among all stakeholders while protecting the lowest-income employees. Instead of the recklessly inadequate funding schemes that have underfunded the state's pensions for decades, legislators are finally turning to an actuarially sound plan to reach 100 percent funding in 30 years. The legislation is projected to immediately reduce the state's $100 billion unfunded liability by $20 billion and save the state approximately $160 billion in required contributions over the next 30 years. Essentially, the legislation would result in a dramatically more secure retirement system at a more reasonable cost to the state.
With these reforms, state employees can be more confident that their pension funds will continue to provide generous retirement benefits. Most of the savings in this legislation come from a change to the automatic annual benefit increase. Current law provides for a 3 percent compounded annual increase that is not tied to inflation. The new legislation modifies this very expensive automatic increase but still provides some protection against inflation. The annual increase will apply to a portion of the full pension that is calculated based on a retiree's years of service with the state. Retirees will continue to receive their promised benefit, but at a more reasonable rate of increase. Other components of the legislation include a gradual increase in the retirement age for employees under age 46, a biennial schedule of skipping up to five COLAs, supplemental state payments of more than $1 billion a year starting in fiscal year 2020, a cap on pensionable salary and a 1 percent reduction in employee pension contributions.
This bill is neither perfect nor a panacea for the state's financial problems. When the General Assembly reconvenes in January, lawmakers will return to a state that still faces enormous challenges including billions of dollars in unpaid bills, a historically low credit rating and a looming revenue drop when the temporary income tax increase expires in January 2015. The General Assembly also urgently needs to address pension reform for the city of Chicago and other local governments whose financial outlook without reform is increasingly bleak. Lawmakers will need unrelenting vigilance and a continued willingness to make difficult choices to keep the state of Illinois moving forward. However, this courageous vote by 30 state senators and 62 state representatives is finally cause for cautious optimism that Illinois has started on the slow path to financial recovery.