State employees in Chicago and the rest of Illinois should closely monitor developments in Illinois pension law reform. Recently, Govern Pat Quinn released a proposal to manage the State’s pension woes. The five state pension systems impacted would be the State Employees Retirement System of Illinois, State Universities Retirement System, Judges Retirement System, the Teachers Retirement System, and the Public School Retirement System (for cities over 500,000 inhabitants).
Currently, Illinois faces $83 billion in unfunded pension liability, largely created by failure to make contributions in the past and declining asset values in recent years. Governor Quinn has cited the increased annual cost of maintaining the pensions, becoming 15% of state expenditures as opposed to 6% several years ago. This increase comes as a result of a few factors, though: retiring baby boomers, and previous failures to adequately fund the plan.
The current proposal aims to achieve full funding within 30 years. In addition to modifying entitlements, it does so by mandating contributions sufficient to achieve full funding status by 2042. One of the reasons the plans are so underfunded is because of the lack of required funding as is present in federal ERISA governed plans. The proposal modifies entitlements in the following ways. Employees must increase their own contribution by 3% of salary. Retirement age is increased to 67. Cost of living adjustments would be capped at the lesser of 3% or half the consumer price index. Also, the adjustments would not kick in until the later of age 67, or five years after retirement. Also, the funding obligation for local schools, colleges, and universities will be shifted to the employer, rather than the state. This last measure will eliminate abuses that have been present whereby the schools would negotiate early retirement for an employee by artificially raising the employee’s final earnings, thereby boosting the pension, in exchange for the employee voluntarily leaving the employer early. It was a loophole whereby many schools reduced their own budget by increasing the state’s pension obligation.
This proposal has already been criticized by unions as unconstitutional, though it appears to have governmental support. The criticizers, however, have not come forward with an alternative proposal, and have not yet proceeded with a court challenge, as it is not law yet. The state believes it can overcome any unconstitutional challenge because the reform will be “opt in” for any employees. They would have to elect to have the entitlements modified in return for continued retiree health care subsidies from the state. If this proposal becomes enacted, it surely will make its way to the Illinois Supreme Court. In this author’s view, with so many employers terminating defined benefit plans in favor of 401(k) style plans, a measure that preserves lifetime income for employees through a sustainable and funded system is a better measure than the plan terminations, freezing, and conversions present in the private sector. If you are a state employee and have questions about how the pension modifications could affect you, contact a pension lawyer.