MILLER: Pensions continue to eat more of the state budget

The latest report from the Center for Tax and Budget Accountability shows that spending on four “core” state services in the governor’s proposed Fiscal Year 2026 budget will be 9.1 percent less in real dollars than it was way back in Fiscal Year 2000.

Those four core services are education, healthcare, human services and public safety.

The CTBA has been tracking this number for years. And although they didn’t mention it in their latest report, that 9.1 percent figure is actually a remarkable improvement. It’s also food for thought whenever you see claims that Illinois’ spending is at record levels. For core services, at least, we’re still far below where we were 25 years ago.

But that gap has closed a lot.

The Fiscal Year 2014 state budget’s core service expenditures (before the two+ year state budget impasse) were 28 percent less than in FY2000, according to CTBA at the time.

So, the “structural deficit,” as CTBA calls this comparison to 2000, has fallen by more than two-thirds in real dollars since 2014.

Fiscal Year 2022 ran from July 1, 2021, through June 30, 2022. CTBA reported back then that expenditures on those four core services were 22.3 percent below that of FY2000, after adjusting for inflation.

That means the structural deficit will fall by 59 percent in just four years, if the CTBA predictions and the budget hold up through next June 30.

Using federal pandemic money to pay off billions in state debt was a huge help.

And the state pension funding problem, which has historically crowded out necessary spending, has stabilized. Yes, the payments grow every year, but they’ve stayed somewhere around 20 percent of the total budget for several years.

Pension payments in the FY16 budget were $6.7 billion. They’re budgeted this coming year at $10.6 billion. After inflation is calculated over that ten years, that’s about a $1.75 billion increase in today’s dollars (about $175 million a year), and it will be lower than that by the end of June 2026 when the fiscal year expires.

Speaking of pensions, the governor has proposed spending an additional $78 million in the coming fiscal year to make sure the state doesn’t have a “safe harbor” problem with Tier Two retirees.

The state passed what’s called a Tier Two pension plan because the original plan – which had been grossly underfunded and overpromised for decades – was simply costing too much to be affordable. The plan reduced pension benefits in several ways for new hires.

However, under federal law, state pensions have to be at least equal to Social Security benefits. And when the state lowered benefits, at least some folks won’t receive that bare minimum when they retire.

The penalty for not meeting the minimum requirement is severe. All employees would have to be put into the Social Security system and the state would have to give those workers retroactive Social Security benefits for up to ten years, which could be billions and billions of dollars.

In addition, new hires wouldn’t be contributing into the pension funds, which would deprive those systems of revenue.

The teachers’ unions, however, say they want to go well beyond that minimum requirement. Taking care of the safe harbor issue would benefit mainly high-wage employees like principals. They want more money put into the system to increase benefits to encourage more people to become teachers in the first place and keep them on the job.

The Illinois Federation of Teachers released a statement last month saying the governor’s proposal was just “the beginning of a broader repair to a grossly unfair pension that hobbles Illinois’ ability to recruit and retain educators. Our members will continue to press for a proper and full legislative repair to Tier 2 pensions this session.” The Illinois Education Association’s statement last month said it wants “a fix to Tier Two that allows all those who serve students in Illinois an equitable retirement and that entices people to stay in the profession.”

That proposal would cost a huge amount of money. A study done for the Commission on Government Forecasting and Accountability found that the union proposal would cost the state $1.13 billion extra this coming fiscal year.

The governor has never seemed enthusiastic about that plan, hence his $78 million proposal.

Rich Miller also publishes Capitol Fax, a daily political newsletter, and CapitolFax.com.