7 pension reforms that Illinois can still enact despite the SB1 ruling
Although the Illinois Supreme Court has ruled that altering pension benefits of current government workers violates the Illinois Constitution, there are still actions – from politicians voluntarily reforming their own pension system, to allowing municipal bankruptcy – that Illinois can take to set government-worker pensions on a more fiscally sound path.
Since the Illinois Supreme Court in May struck down Senate Bill 1 – a modest pension-reform law meant to bring some relief to Illinois’ fiscal crisis – most people assume there is little that can be done to fix Illinois’ broken government-worker pension system. That’s far from the truth.
In its decision, the court ruled that the Illinois Constitution’s pension-protection clause protects both earned and unearned benefits of current state workers – ending any chance for significant pension reform involving current workers.
Real, structural reforms to government-worker pension plans will need to wait until Illinois’ Constitution can be amended to allow them – or until the state’s government-worker unions agree to pension changes at the bargaining table.
However, that doesn’t mean the state is without remedies in the meantime to fix Illinois’ broken government-worker pension systems.
Here is a list of what Illinois lawmakers can do immediately to address, and at the very least slow down, Illinois’ growing government-worker pension crisis:
The pension plan for Illinois lawmakers is the most bankrupt of the five state-run pension plans – it only has 16 cents for every dollar it should have today to meet its future obligations.
With no unions to oppose reforms, Illinois politicians should lead by example and transition their own pensions into self-managed plans such as 401(k)s.
2. Offer 401(k)s for new workers
The Illinois Supreme Court’s ruling on SB1 doesn’t affect the retirement plans offered to new government workers.
Illinois lawmakers should follow the lead of states across the country – from Michigan to Oklahoma to Alaska – and adopt self-managed plans for all new state and municipal workers.
And Illinois doesn’t have to look far for a model self-managed plan. Illinois’ State Universities Retirement System has offered an optional 401(k)-style plan to its employees since 1997. Approximately 18,000 state-university workers have opted into the plan since its creation. Those workers don’t have to worry about pension-fund bankruptcy – they own their own retirement accounts.
3. Offer optional 401(k)s to current employees
Government workers shouldn’t be trapped in insolvent, politician-run retirement plans over which they have no ownership. Many workers, especially younger ones, believe the current pension system may be broke by the time they retire and would prefer to have self-managed plans. The state should offer opt-in self-managed plans for current workers so they have the option to own and control their own retirement plans.
4. Require all teachers to make contributions toward their own pensions
In Illinois, most public-school teachers don’t pay the required 9.4 percent employee contributions toward their own pensions. Instead, many school districts pay, as a benefit, some or all of the teachers’ required payments.
This means taxpayers are footing the bill not just for the massive shortfall in the teachers’ pension plan by paying for increased employer contributions, but also for the individual employee contributions that each teacher is supposed to make.
Eliminating teacher pension “pickups” could save Illinois school districts about $430 million annually.
5. Get the state out of the business of managing local school-district pensions
Currently, local school districts can get away with end-of-career salary spikes and other “sweeteners” for teachers that inflate their future pensions – all because the actual pension costs of their employees are borne by the state – not the school districts themselves.
School districts should be responsible for the true costs of their employees and pay for both teachers’ salaries and annual pension costs.
Going forward, the annual benefits accrued each year by teachers should be paid for by local school districts and not the state.
6. Limit the growth of pensionable salaries
Government-worker pension benefits are growing at a pace that far exceeds the growth of taxpayers to fund them. For example, at Chicago Public Schools, accrued pension liabilities have been running at more than 2.5 times the rate of inflation since 1997, and most other city and state government-worker funds have similar growth rates. It’s simply unsustainable.
With no way to structurally reform pension benefits for current government workers, the General Assembly’s only lever is to limit salary growth and other items that drive up pensionable salaries.
Without the ability to reform pensions for existing workers, local government officials have their hands tied. That means they can’t reform one of the largest cost drivers in their budgets. And when pensions push local budgets to the brink of collapse, local officials aren’t able to file for bankruptcy either.
Local governments should have more control over how they operate. That means having the option to file for bankruptcy.
Bankruptcy should be the option of last resort, but it can help struggling municipalities restructure their debt, renegotiate contracts and reform pensions.
The Illinois Supreme Court’s decision on SB1 hurts everyone in Illinois – from city employees and residents to state workers, retirees and taxpayers.
The state and the city of Chicago, both trapped in severe financial crises, can’t make the significant, fundamental changes they need to get their finances in order.
The decision also threatens the pensions of government workers. Without reforms, many pension systems across the state may become insolvent, destroying the retirement security of hundreds of thousands of retired government workers.
The decision also harms younger government workers who are trapped in the pension systems, forced to pay into broken pension funds from which they may not ever see benefits.
And it threatens taxpayers with massive, ever-escalating taxes to bail out a system that is not sustainable. More and more taxpayer money is going to government-worker pensions, far outpacing taxpayers’ ability to pay for them.
But despite the Illinois Supreme Court’s decision on SB1, there is no reason why lawmakers cannot agree on and pass the reforms outlined above, which are still possible under current law.