MILLER: No easy fix for state pension issue

The Illinois legislature’s Commission on Government Forecasting and Accountability recently released an eye-popping actuarial analysis of a union-backed pension reform plan.

The analysis concluded that the proposal, House Bill 5909, would cost taxpayers almost $30 billion through the year 2045.

And the annual state cost starting in Fiscal Year 2027, which begins in mid-2026, would be $1.13 billion.

As you likely know, the state is bracing to deal with a $3.2 billion deficit in the upcoming 2026 fiscal year. The state’s projection for the following fiscal year, FY27, envisions a $4.3 billion deficit. So, adding another billion-plus on top of that seems untenable, even though these budget projections don’t include any upcoming changes to how the state funds government.

More importantly, that estimate only includes the “big 3” pension plans (state, university and teachers), and excludes local pension funds like the Illinois Municipal Retirement Fund and first responder funds, as well as the pension funds for judges and legislators.

Union members flooded the Statehouse during the November veto session demanding these changes to the state’s Tier 2 pension program.

Public employee unions hotly opposed Tier 2 when it was approved by the General Assembly and Gov. Pat Quinn in 2013. The idea back then was to force newly hired employees to accept a significantly reduced pension package because the state was being crushed by the large and ever-growing costs of the existing plan, due to many decades of woeful state underfunding and legislative over-promising. The state constitution forbids reducing any pension benefits once they are granted, so the change could only be made to new hires going forward.

The actuarial report was conducted by Segal, a consulting firm often used by COGFA. Segal also conducted an actuarial analysis on an earlier version of Tier 2 pension reform (HB4973) which found it would cost state and local governments a net $4.6 billion by 2045. But the unions instead came down to Springfield in full force to back the new bill which was introduced the day veto session began this past November.

Back in November, Gov. JB Pritzker told reporters he would “if necessary” agree to make sure all pension systems were in compliance with Social Security’s Safe Harbor provisions, meaning the pension benefits are at least as much as a Social Security payments, as required by federal law. The earlier analysis of the previous bill had pegged that safe harbor cost at $4.8 billion for all systems. The latest analysis of the new bill has that particular projected cost at $6.2 billion just for the big three funds.

According to the new COGFA report, the union-backed changes to the Final Average Salary calculation would cost an additional $1.1 billion through 2045; a redo of the annual cost of living adjustment payments would add $4.4 billion; and lowering the retirement age for Tier 2 recipients to equal Tier One recipients would cost a whopping $11.3 billion.

Total price: $29.76 billion, with the first additional payment of $1.132 billion owed in FY27, on top of the projected $10.8 billion projected pension payment that fiscal year.

Whew.

The previous Tier 2 bill was much more affordable. The legislation included a $500 million annual funding source by using revenues freed up from retiring debt. The price tag for that would’ve been a mere $47 million in the coming fiscal year. Needless to say, $47 million is a lot easier to swallow than $1.1 billion.

And again, the new actuarial projection for the new bill doesn’t include any of the municipal pension systems or smaller state systems. The total cost would be significantly higher than the projection claims.

Gov. Pritzker is not enthusiastic about the union-backed bill, to say the least.

While Pritzker reiterated his support last week to bring pensions into compliance with federal Social Security laws, his spokesperson said the governor “has been crystal clear that he will not support any pension proposal that is credit negative or threatens the State’s balanced budget.”

Adding $1.1 billion a year to the state’s outlays would just be too much of a budget hit to take.

And even the proposal’s Senate sponsor, Sen. Rob Martwick (D-Chicago) agreed that the state can’t afford the plan.

Martwick call his bill a “great starting point” in negotiations, “because it shows us the cost of doing the right thing,” and insisted that the pension benefits created by the bill “are not ‘too rich.’”

However, Sen. Martwick said, “The unfortunate reality is that Illinois and Chicago are such financial disasters that we very well cannot afford to do the right thing.”

Back to the drawing board.