On Friday, Governor Quinn proposed the most drastic pension reforms to date in Illinois. To meet the funding gap in the pension system, which on an actuarial basis is reported at $83 billion, the Governor will offer workers a choice between higher annual contributions to the system or the loss of health care benefits and a reduced pension.
The measures reflect the growing pressure the pension system is placing on general revenues. In FY 2008 Illinois contributed six percent of its revenues to the pension system. In FY 2013, the state must contribute 15 percent of general revenues or $5.2 billion to keep the system afloat.
Employees who accept the terms will contribute 3 percent more to their pensions, have a reduced or delayed COLA upon retirement and in some cases be required to retire at age 67 (up from the current 65). However, any pay increases would continue to count for the purpose of calculating benefits. Employees who refuse the terms and continue under the current plan will lose their health care benefits and their pay increases will not count towards their pension benefit calculation.
Considering the legal framework of Illinois’ pension plan, which constitutionally guarantees workers’ pension benefits, Governor Quinn’s reforms are quite bold. The proposal offers a kind of “constitutional test” to the system and could set a legal precedent in the state for pension reform. It is a sure bet that public unions will take legal action against the measures.
If they are adopted, will Quinn’s new proposal be enough to fill the funding gap? On a market basis, Illinois’ unfunded pension liability is several times larger than reported. We calculate it is closer to $173 billion, so mathematically speaking, no. However, the plan confronts current employee costs and shows a new willingness to tackle the problem. Up until now pension reform in Illinois has only affected new hires.