The problem

State government owes billions of dollars for the pensions and health insurance benefits of retired government workers. Local governments owe billions more. Illinois taxpayers are on the hook for the liabilities of both state and local government.

State government alone owes $83 billion to its pension funds. However, this figure alone presents an incomplete picture of the retirement crisis because it ignores five of the six types of debt for which Illinois taxpayers are on the hook. This figure includes only the unfunded liability of the state’s five retirement systems, completely ignoring bonds issued to tide over the pension funds and the additional debt taken on to provide retired government workers with generous health insurance. It further ignores all types of local debt, despite the fact that the same people — taxpayers — are on the hook for it.

Any solution focused exclusively on the state’s $83 billion in pension debt alone ignores the much larger crisis at hand.

Types of retirement debt

State: $152.6 billion

  • State pensions: $82.9 billion (note: this is the only type included in the $83 billion figure)
  • State pension bonds: $15.5 billion
  • State retiree health benefits: $54.2 billion

Local: $50.8 billion

  • Local pensions: $38.2 billion
  • Local pension and benefit bonds: $1.9 billion
  • Local retiree health benefits: $10.7 billion

This is the first report to give a complete picture of Illinois’ total retirement debt. All told, state and local governments in Illinois owe more than $203 billion for pensions and retiree health insurance. This is more than $41,000 in retirement debt for every Illinois household.

Our solution

There are three crucial steps that would lower the retirement debts of state and local governments:

  1. Offer more affordable retirement compensation for future work. State and local workers should be offered a starting pension as if they left government employment today. Moving forward, retirement savings should be contributed to an employee-managed savings account, similar to 401(k) plans used in the private sector.
  2. Reduce cost-of-living, or COLA, increases for all retirees. Lawmakers have already changed COLAs for future employees. “Tier 2” retirees will receive a COLA equal to one-half of inflation, rather than the 3 percent compounded COLA that “Tier 1” retirees receive. Lawmakers should do the same for all state and local retirees.
  3. Require government retirees to cover a majority of their health insurance premiums. State and local governments should ask retirees to cover a majority of their health insurance costs, just as government retirees in other states do. The state should also give local governments more flexibility in designing health benefits for retired workers.

There is an additional step that state government can take to dramatically reduce its pension costs.

Stop paying the retirement costs of other governments. The state should stop paying the retirement costs for state universities, community colleges and suburban and downstate school districts. This would save more than $1.1 billion in pension costs and millions more in retiree health benefits every year, and bring accountability to local governments.

Why this works

The only way to rescue the finances of state and local governments is to dramatically reform the structure, incentives and accountability within government retirement systems.

If lawmakers and local officials act swiftly, it is possible to maintain a fair and generous system of benefits for government retirees. If they fail to act, the retirement systems could become insolvent. The longer Illinois waits to reform its $203 billion retirement debt, the more likely the government will fail to meet its obligations to retirees.