Illinois faces a whopping $83 billion—and counting—in unfunded pension liabilities. Understandably, state employees are worried, and so are taxpayers. The Pension Funding & Fairness Act will address this massive problem, enabling Illinois to make its annual pension payments as required by law while protecting taxpayers from tax increases. Here are six steps to funding public employee pensions:
Use Governor Pat Quinn’s pension benefit reform proposal as the baseline. His plan would require greater employee contributions, increase the retirement age, and create a two-tier system for new state employees. This reduces the total unfunded liability and the annual payments required by law. This is a modest step and more aggressive reforms are needed, but we begin with this level of reform.
Enact a spending growth index that would allow the state budget to grow by the increase in inflation plus the increase in population. Over the last 20 years, inflation plus population has increased at an average annual rate of 2.4 percent. Assuming this same average going forward, the state budget will still grow over time, and funding to core government services will increase each year at a sustainable pace that taxpayers can afford.
Revenues have grown at a 20-year historical average of 4.8 percent, twice the rate of inflation plus population. Assuming that same rate of growth going forward, we direct all revenue that comes in over the projected spending growth limit of 2.4 percent to the state’s annual pension contribution amount. Under current law Illinois must have its pension systems 90 percent funded by 2045. The Pension Funding & Fairness Act follows the contribution schedule that was created to meet this target.
Because the state’s annual pension contribution will initially exceed the projected budget surplus from FY2011-FY2015, two provisions are necessary in the short term to meet the state’s obligations:
The first provision is to institute a three-year budget freeze at
FY 2010 levels. This would allow the state government to immediately
begin running a budget surplus after the enactment of a spending limit.
The second provision is to sell or lease state assets like the
Illinois Tollway System. Total proceeds could be as high as $23.8
billion, well above the $12.2 billion needed for the transition period.
Alternatively, limited borrowing with tight payback covenants could be
used.
Once the annual state pension contribution is at 100 percent, beginning in 2016 the surplus revenue would flow to the Budget Stabilization Fund, equal to 12 percent of the General Revenue Fund. The Budget Stabilization Fund is designed to provide emergency cash flow in the event that the increase in state tax revenue is not enough to cover the increase in state spending under the limits.
Remaining surplus revenue would then flow to the Taxpayer Relief Fund. The Taxpayer Relief Fund will send rebate checks to taxpayers in proportion to the number of exemptions claimed on the previous year’s tax return. The refunds begin as early as FY 2018 and total $45 billion by 2025 and $702 billion by 2045.
