to minimize the impact on those who
receive small pensions and who need
greater protection from inflation. Any
changes should also take into account
that many workers have more time
invested in the systems and are closer to
retirement age. Therefore, they are less
able to make career adjustments. Finally,
since the greatest single contributor to
the current mess is the failure of the
General Assembly to make payments
to the system that are based on valid
actuarial science and not fuzzy Illinois
pension math, any solution must put the
state on an actuarially sound schedule to
be 100 percent funded. A strong funding
guarantee also must be put in place to
ensure that the state keeps its promise
to fund the pensions in the future.
Any pension solution proposal
cannot be viewed in isolation.
The crisis impacts not only
those paying into the system or
receiving pension benefits, but
also every other program funded
by state government in Illinois.
The Illinois General Assembly is currently
considering the following proposals:
in a 401(k)-style plan that shared
actuarial and investment risks
between employees and employers.
The employer also could negotiate
the generosity of the benefit and the
cost of its contribution to the plan.
percent compounding annual
increase for pension recipients,
with some modifications. Those
receiving pensions of less than
$25,000 would continue to receive
the compounding annual increase.
All others would receive an annual
increase of 3 percent only on the
first $25,000 of their benefit, an
annual increase of $750. Currently,
this benefit is applied to all pension
recipients and accounts for about
20 percent of the overall cost of the
retirement benefit. The change to
this annual adjustment, the single
most important cost-saving measure,
was approved by the Illinois House
in March and was awaiting Senate
action when this article was written.
Membership in any pension or
retirement system of the State,
any unit of local government or
school district, or any agency or
instrumentality thereof, shall be an
enforceable contractual relationship,
the benefits of which shall not
be diminished or impaired.
established that would allow the
pension systems, in exercising their
fiduciary obligations, to sue the state
in state court to require an annual
actuarially required contribution.
There are as many theories about how
to craft a pension solution that satisfies
the Illinois Constitution as there are
lawyers who have reviewed this issue.
off borrowing that was used to make
pension payments in prior budgets
would continue to be dedicated to
paying down pension debt when
the notes are paid off in 2020.
Proponents of the proposals currently
before the General Assembly—
including the author, who sponsored
the legislation passed in the House—
contend that the changes meet the
requirements of the Illinois Constitution,
in that they ultimately preserve pension
benefits rather than impairing or
diminishing them. Opponents of the
measure that recently passed the House
have threatened to sue the state over
this question if the bill becomes law.
get the state to a 100 percent
funding level by 2043.
based would be frozen at the higher
of current salary or the Social Security
Wage Base, which currently is about
$113,000, indexed to inflation.
While these proposals are dramatic,
they are of the magnitude necessary to
meet the goals of preserving benefits
and making payments affordable. Under
these proposals, the pension system’s
unfunded liability would fall from $95
billion to $68 billion—a 28 percent
reduction. The total payments the state
would be obligated to make through
2045 would be reduced from $397 billion
to $228 billion. Most significant for the
short term, the pension payment due
in the next fiscal year would be reduced
by nearly $2 billion. In a $35 billion
state budget, that is significant relief.
contribute an additional 2 percent of
their salaries toward their pensions.
start to collect a pension would
gradually be increased. Those older
than 45 would see no change to
their retirement age, but those
younger than 35 would be required
to work an additional five years.
The state pension systems are currently
so severely underfunded that changes
are not only desirable, but they are also
required to ensure that future benefits
can be paid. The best example of this
is the General Assembly Retirement
System. GARS has a current funding
level of 17 percent, which is anticipated
to decline to 6 percent by 2017. At
that point, GARS will have almost no
investments because it will be necessary
for the pension fund to be entirely
liquid to pay benefits. That is a recipe
for insolvency if ever there was one.
An important question to be addressed
in any pension solution is raised by the
Illinois Constitution. Article 13 states that:
Courts have also given legislatures broad
latitude to solve problems in the event