The Bond Buyer
Illinois Gov. Quinn Unveils Plan to Erase $80B of Pension Liabilities
Monday, April 23, 2012
CHICAGO — Illinois Gov. Pat Quinn unveiled a sweeping plan aimed at erasing $80 billion of unfunded pension liabilities and fully funding in 30 years a system now just 43% funded by increasing employee contributions, raising the retirement age, and limiting cost of living increases.
Quinn pegged savings from the reforms at $65 billion to $85 billion. “Unsustainable pension costs are squeezing core programs in education, public safety and human services, in addition to limiting our ability to pay our bills,” Quinn said.
“This plan rescues our pension system and allows public employees who have faithfully contributed to the system to continue to receive pension benefits. I urge the General Assembly to move forward with this plan, which will bring a new era of fiscal responsibility and stability to Illinois,” he added.
Quinn squarely placed the blame for the system’s struggles on “decades of fiscal mismanagement” under past administrations and lawmakers. The state will pay $5.2 billion into the system in fiscal 2013 under the current funding schedule. That figure is up from $4.1 billion in the current fiscal year. Pension payments in the next fiscal year account for 15% of the general fund budget, up from 6% in 2008.
Illinois’ unfunded pension obligations grew by about $7 billion in fiscal 2011 to $82.9 billion while its funded ratio dipped to 43% from 45%, according to the state’s latest pension figures. The figures are based on a model in which investment returns are smoothed over a five-year period.
Under the package of reforms, employees would be asked to shift to a plan that would require a 3% increase in their contributions. It would limit their cost-of-living increases to the lesser of 3% or one-half of the consumer price index. The state would phase in lifting the retirement age to 67 and establish a funding schedule based on the actuarially required contribution needed to fully fund the system by 2042. The state currently adheres to a plan adopted in 1995 to fund the system at 90% by 2045 that requires contributions of about $310 billion over the remaining years.
To provide incentive for employees to shift to the plan, the state would continue to count participating members’ pay increases in their pension calculations and they would receive a state subsidy for health care when they retire. Employees who don’t shift to the plan would lose those incentives. Quinn said he anticipates at least 75 % participation in the new plan although it was unclear how he came to that conclusion. Most retirees currently pay little toward health care costs.
The plan also would phase in first-time contributions from school districts, community colleges, and public universities toward teacher pensions. None, with the exception of the Chicago Public Schools, currently pays into the system although they account for 78% of the state’s cost. The proposals were crafted by the administration with the help of a Quinn-appointed working group that included bipartisan legislative membership. “It’s a bold step. It’s a necessary step,” Quinn said.
State handouts on the package cited rating agency reports underscoring the fiscal stress placed on the state’s credit by its mammoth pension obligations. Without action this year “we are risking not only one downgrade, but perhaps…a double downgrade,” Quinn said in citing a warning from Standard & Poor’s.
The state faces limits in how it approaches pension reform because its constitution affords stringent legal protections of pension benefits, which cannot be impaired or diminished. While lawyers agree the protections apply without exception to accrued benefits, legal opinions differ as to whether those protections are extended to future, not-yet-earned benefits. The state’s retiree health care benefits are not constitutionally protected and Quinn said Friday he believes the proposals will pass constitutional muster because they ask employees to move to a new plan going forward.
The state in 2010 adopted a series of reforms that cut benefits for future employees. The state has previously disclosed that statements made on the impact of those reforms had become the subject of an inquiry by the Securities and Exchange Commission. The state issued $10 billion of bonds in 2003 to help bring down the unfunded liability although nearly $2 billion covered current year payments. The state has covered its fiscal 2010 and 2011 payments also through borrowing.
Lawmakers and civic groups praised the plan but said it needs further review and refinement. “While the proposal will need to be resolved through further discussions with stakeholders,” Senate President John Cullerton “is pleased that the governor’s proposal embraces the legal framework that will allow the state to control pension costs in a constitutional way,” a statement read.
Minority Senate Republican Leader Christine Radogno and Minority House Republican Leader Tom Cross said in a joint statement: “It is a huge step in the right direction. We look forward to seeing the details of the plan outlined. But we share a deep concern about the so-called 'cost-shift’ that equals property tax increases for downstate and suburban families” on teachers’ pensions.
The Civic Committee of the Commercial Club of Chicago praised the plan but said more work may be needed. “We agree with much of what is outlined in the governor’s plan, but believe that further refinement is necessary,” said the committee’s president Ty Fahner.
A day earlier, Quinn unveiled a plan to save $2.7 billion in Medicaid spending. Rating agencies cite pensions and Medicaid as two of the most significant burdens that threaten the state’s fiscal stability. Standard & Poor’s rates the state A-plus rating with a negative outlook. Moody’s Investors Service rates the state’s GOs A2 with a stable outlook and Fitch Ratings assigns an A and stable outlook.