The problem
Illinois state government owes more than $83 billion to the pension plans it operates for retired employees; servicing this obligation is crippling the state’s budget. But pension debt is only part of the story. Much less publicized are the additional obligations the state has taken on to provide health insurance for pensioners, the unfunded liability of which totaling more than $54 billion.

Career retirees from state government and public universities pay little or nothing toward the cost of their health insurance, while taxpayers pick up the tab. As a result, state government is on pace to spend nearly $1 billion on these benefits in fiscal year 2013, more than double what it spent in 2003. By 2045, state and local taxpayers will be paying more than $7 billion a year to provide free or subsidized insurance through the state’s three retiree health insurance programs.

Our solution
Illinois could realize $500 million in immediate savings for fiscal year 2013 if government retirees paid, on average, 54 percent of their own health care costs – the average paid by government retirees in neighboring states. Even after this adjustment, the benefit would be far more generous than what private sector employers can afford to provide their retired workers. This would also reduce the state’s current unfunded liability by upwards of $21 billion.

These savings could be realized by basing premium subsidies on income, age at retirement and years of service. Lifelong public workers collecting modest retirement incomes would largely see their insurance subsidies remain the same, but former union bosses or university executives collecting annual pensions nearing $200,000 would be required to cover their own health insurance costs. Moving forward, the state could reduce this liability further by capping subsidies to new retirees at supplement levels and by phasing out subsidies for new hires altogether.

Why this works
Illinois state government is awash in red ink. Taxpayers are on the hook for every penny their government owes, regardless of whether the state advertises its $54 billion in retiree health obligations. The state can reduce these obligations, however, simply by reforming retiree health benefits.

It’s possible to establish a new, more affordable system that’s both fair and practicable. If Illinois is going to provide this perk that is almost entirely unavailable to the private sector, such steps must be taken. The state must reduce its retirement costs if it hopes to remain solvent and to avoid further tax hikes.