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'We may soon pass the tipping point,' civic organizer says

Wednesday, April 28, 2010

The state of Illinois is virtually bankrupt. Through its general revenue fund and the other funds, Illinois takes in about $30 billion in a good year. The hole in its budget this fiscal year is nearly $14-15 billion. In other words, Illinois is spending $3 for every $2 it takes in.

Over the past dozen years, the state also has piled up huge unfunded obligations - arising out of its pension and retiree health care plans for state workers. Our unfunded pension obligations today are in the range of $76 billion. Add another $13.5 billion or so of pension bonds and notes, which the state must repay, and another $40 billion or more in obligations for the future health care costs of retired state workers and the total is nearly $130 billion. That's more than $25,000 per Illinois household. This retirement-related debt makes up most of the state's cumulative debt.

Why are these unfunded pension costs so large? One reason is that the state's pension systems are very generous by private-sector standards. State workers can retire with full pensions at 60 or 55 depending on the plan they are in and receive pensions for life with guaranteed annual cost-of-living increases. Another reason is that the state has woefully underfunded the plans.

The state's unfunded retiree health care obligations are likewise enormous. When employees retire from state government, they receive "gold plated" health insurance - they can go to any doctor, for any procedure, at any time and the state pays 100 percent of the health insurance premium for retirees with 20 years or more of service. Since workers can retire 5-10 years before the Medicare eligibility age, the state is on the hook for massive and growing amounts of health care costs.

If we don't get control of this quickly, the funding requirement for the pensions and retiree health care obligations will crowd out other vital areas of the state's budget. The result will inevitably be twofold: (a) massive cuts in other areas of the state's budget, and (b) pressures for huge tax increases.

The state's retirees and workers have a powerful interest in getting this fixed. If we do not reform the pensions and provide adequate funding, the pension funds at some point will run out of money. That would be catastrophic for retired workers. And it would be bad for all citizens in Illinois.

Reform of the state's pension system offers the largest potential relief for the state's budget. The pension reform bill recently signed into law does not go far enough, because it applies to future hires only. It does not reduce the $130 billion of retirement-related debt.

Any reform must protect the vested contract rights that retirees and workers have earned for past service. But it must also put in place less costly retirement plans for future service that are more in line with the benefits available in the private sector.

The Illinois Constitution guarantees the contract rights earned by state workers for past and present services - and those rights must be protected. But nothing in the Constitution says that the pension arrangements cannot be changed for future services - just as has happened in the private sector.

If Illinois does not cut its costs, achieve real pension and retiree health care reform, and balance its annual budgets, we may soon pass the "tipping point" beyond which no combination of drastic budget cuts or huge tax increases will be sufficient to avoid collapse - or prevent people, investment, businesses, and jobs from leaving the state.

Dealing with these budget problems now will be painful. Putting them off to future years will increase the pain - and the burden - and the taxes.