Policy Documents

Research & Commentary: Illinois Pension Reform

March 28, 2013

The state employee pension system in Illinois is broke, both financially and structurally. Without an overhaul of the current, unsustainable system, Illinois taxpayers will continue to suffer substantially higher taxes to bail out the state for its imprudent policies. If state workers and union representatives cannot accept sensible changes to the pension system, more state workers will be laid off, taxes will increase, and the state’s economy will decline even further.

A bill currently being considered would take bold steps toward creating a pension fund that allows the state to ensure its obligations to workers while keeping costs down. Based on a model from the Illinois Policy Institute, House Bill 3303, sponsored by Reps. Tom Morrison (R-Palatine) and Jeanne Ives (R-Wheaton), would cut the state’s unfunded pension debt in half, move new hires into a 401(k)-style defined contribution plan, and protect the benefits that government workers already have earned.

The bill would end the pension payment ramp and freeze cost-of-living increases until the fund’s fiscal health improves. It also would set the retirement age for state workers at the same level as Social Security and would increase the responsibility of local governments for their pension plans by requiring them to pay the employer’s share of their workers’ retirement savings plans.

In a statement, Morrison argued workers need additional control over their retirement funds in order to maintain pension benefits in the long run. Under a defined-contribution plan, employers pay a fixed amount during the course of a worker’s career. That amount is deposited into a personal account the worker controls and manages. This allows workers to customize their retirement funds to fit their own needs.

According to its sponsors, the Morrison-Ives bill would reduce the unfunded pension liability by 46 percent in fiscal year 2014, a total decrease of $46 billion. In addition, the reforms would reduce yearly contributions to the fund in 2014 by 30 percent to $4.7 billion, a sharp drop from the current $6.7 billion annual payment. The proposal would eliminate the unfunded liability by 2045.

This proposal makes substantive reforms that cut current costs, manage future pension liabilities, and protect existing benefits for public employees. Defined-contribution plans, which are used extensively in the private sector, would allow the state to lower its pension costs while giving employees control over their retirement plans.

The documents linked below offer additional information about pension system reform. 

Budget Solutions 2014: Pension Reform and Responsible Spending for State and Local Governments
http://heartland.org/policy-documents/budget-solutions-2014-pension-reform-and-responsible-spending-state-and-local-gover  
Illinois has the worst-funded pension systems in the nation. The total unfunded liability currently stands at more than $96 billion according to official government numbers, and that number grows by $21 million every day lawmakers fail to enact reform. The Illinois Policy Institute plan would modernize the state’s retirement system by giving government workers the secure retirement they deserve. Ultimately, these reforms restore fiscal order to the state by eliminating unsustainable pensions and unfunded liabilities. This paves the way for the economy to flourish, fostering an environment where businesses can thrive and create the jobs Illinoisans need. 

401(k) Proposed for State Teachers
http://daily-journal.com/archives/dj/display.php?id=504317
Scott Reeder of the Illinois Policy Institute examines the key points of the institute’s plan and the differences between its proposal and others being circulated in Springfield. 

Rep. Morrison on Plan to Fix Illinois Pension Crisis
http://video.foxbusiness.com/v/2212297056001/rep-morrison-on-plan-to-fix-illinois-pension-crisis/
Rep. Tom Morrison explains his pension reform proposal on the Fox Business Channel. 

Research & Commentary: Defined Contribution vs. Defined Benefit Pensions
http://heartland.org/policy-documents/defined-contribution-vs-defined-benefit-pensions
John Nothdurft, director of government relations at The Heartland Institute, provides a bullet-point comparison of defined-benefit pension and defined-contribution retirement plans. 

The State Public Pension Crisis: A 50-State Report Card
http://heartland.org/sites/all/modules/custom/heartland_migration/files/pdfs/27578.pdf
The Heartland Institute examines problems facing public pension systems, including the enormous burdens they pose in some locations. The report ranks each state on the operation and disposition of its pension plans and suggests ways to solve states’ pension system problems. 

Research & Commentary: Public Pensions and the Assumed Rate of Return
http://heartland.org/policy-documents/research-commentary-public-pensions-and-assumed-rate-return
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change the projected rates of return on pension fund investments. 

The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
http://heartland.org/policy-documents/gathering-pension-storm
The Reason Foundation considers the looming crisis created by states’ continued use of defined-benefit pension plans, offering solutions to the pension problem and an analysis of why the current system is a disaster in the making. 

Pension Time Bomb
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/10/AR2008091002726.html
Columnist George Will describes how a California city had to file for bankruptcy because of its underfunded and over-generous defined-benefit pension plan. 

Defined Contribution Pension Plans in the Public Sector: A Best Practice Benchmark Analysis
http://heartland.org/policy-documents/defined-contribution-pension-plans-public-sector-best-practice-benchmark-analysis
The TIAA-CREF Institute “addresses best practice benchmarks for the design of public sector primary (core) defined contribution pension plans. [The white paper] includes an examination of the environmental conditions and factors affecting these plans as well as general principles for the design of effective defined contribution plans. Selected public sector core defined contribution plans are reviewed against identified best practices.” 

Let Employees Control Future of Retirements
https://www.cato.org/pub_display.php?pub_id=6556
Jagadeesh Gokhale and Peter Van Doren of the Cato Institute explain why the market is best-suited to relieve the fiscal pressures caused by state pension funds. 

State Pension Funds Fall Off a Cliff
http://heartland.org/policy-documents/state-pension-funds-fall-cliff
Barry W. Poulson and Arthur P. Hall consider different measures of historical and current funding shortfalls in state pension plans. Two case studies—the Public Employee Retirement Association of Colorado (PERA) and the Kansas Public Employee Retirement System (KPERS)—are examined in depth to explain the fatal flaws that have caused funding crises in these plans.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Budget and Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org