Illinois is facing a fiscal crisis. The expense of retirement benefits is overwhelming many areas of the state budget. Lawmakers have known of this situation for years, but thus far have not adopted a comprehensive solution.
The state faces an $85 billion unfunded liability to its pensions systems. It owes another $45 billion in healthcare benefits to future retirees. And the state borrowed an additional $17 billion in bonds that were issued to cover pension costs. The state has no means and no plan to pay for these liabilities. Costs must be trimmed.
If lawmakers do not reform pensions, dollars for core government services will be crowded out by rising retirement costs. When Illinois sends more dollars to teacher retirements than it does to the classroom, the state is choosing pensions over schools.
- Higher education retirement costs will increase by nearly $350 million in fiscal year 2013.
- This jump in payments will almost certainly cause higher education retirement expenditures to eclipse other state support for higher education.
- Between fiscal years 2005 and 2010, approximately 80 percent of all new state funding for higher education has gone toward retirement expenditures.
The current pension system is not sustainable. Rising state retirement costs will continue to cut into education funding and other core government services if lawmakers do not address the problem. The longer reform is delayed, the more funding for other services will be squeezed.
States across the nation are implementing solutions that have reduced the burden on taxpayers and increased the security of state employee retirements. These solutions include modifying automatic cost-of-living-adjustments, introducing defined contribution systems combined with annuity plans and trimming generous retiree health care benefits.
In Illinois, legislators are contemplating a proposal which gives current state employees a choice of how to receive future retirement benefits: contribute more to keep the current benefit levels, contribute the current amount for reduced future benefits, or switch to a defined contribution plan similar to a 401(k).
While many of these changes would be improvements, the reform that will fundamentally reduce financial risk to taxpayers in the future is to move government workers to a defined contribution system. A defined contribution system would put state employees in direct control over their retirements and reduce future liabilities facing taxpayers.
Why this works
Pension reform is a necessary prelude to tax relief and a state budget that prioritizes classroom funding.
Voters understand that Illinois faces a budget crisis, and they want lasting solutions. Polling shows support for the proposal that would give state employees a choice of benefit packages that state government can afford.
Illinois cannot climb out of its current financial hole without cutting long-term pension costs. If Illinois is to be economically competitive and if state government is to work properly, then pension reform is a must.