History of Neglect Leads to Today’s Pension Woes

24 Mar

Senate President John Cullerton has called on legislative leaders to make pension reform a major focus during the upcoming legislative session. The President has recently led the Senate in passing numerous pieces of legislation meant to shore up the retirement plans of thousands of teachers, university professors and state employees, including making this year’s full pension payment without borrowing, while also cracking down on pension abuses by union leaders and advocating common sense reforms for future employees.

How did we get here?

To fully understand the current predicament of Illinois’ pension systems, we must take a look at the history behind this problem. It is no secret that the financial health of our pension systems has been undermined by the lack of employer contributions by the State.

A report from as far back as the 1950’s warned of inadequate state contributions that at the time were threatening the very existence of the Teachers Retirement System (TRS). One such report listed the funding of the TRS at only 23% with the entire system labeled as “unsound.”

Throughout the 1970’s and 1980’s, political leaders failed to fully fund their portion of pension costs and instead used those monies to fund other state programs and expenses, ranging from education to health care.

“The problems we are faced with today are a direct result of the failure of past leaders to contribute to these retirement plans,” State Senator Toi Hutchinson (D-Chicago Heights) said.

Governor Jim Edgar and the Republican led legislature finally acknowledged a funding problem in 1995 and passed reforms that were set to increase pension funding to 90% by 2045. While the plan was hailed by Republican leaders as a long-term solution, the plan was back loaded and instituted an unreasonable schedule of gradually increasing payments that put off obligations for future generations to deal with. Republicans essentially put a ‘balloon mortgage’ on our pension debt that we could not afford.

Where do we now stand?

Since 2003, pension funding levels have dropped dramatically. Recent figures released from the Commission on Government Forecasting and Accountability (COGFA) estimate a bleak 38.3% funding rate for all of the state pension systems. A reduction in expected investment returns due to the Great Recession has also severely lowered expected funds.

What recent action has been taken?

Senator Heather Steans (D-Chicago) led the General Assembly last year in making the mandated pension payment for Fiscal Year 2012 without borrowing, totaling over $4.3 billion.

“We are obligated to the many teachers and state employees who have paid their share while the State has not,” Steans said.

Recognizing the long history of proposing band-aid fixes that do nothing to bring long-term stability to the states pensions, the General Assembly passed historic reforms that affect the benefits of state employees hired after January 1st of 2011. The legislation raises the retirement age to 67, sets the highest pensionable salary at $106,800 and reduces cost of living allowances.

After a series of Chicago Tribune and WGN-TV investigative reports highlighted the practice of some union officials receiving municipal pensions based on union salaries, Senator Kwame Raoul (D-Chicago) passed legislation to crack down on the practice.

“This legislation closes doors that should have never been opened in the first place,” Senator Raoul said. “Illinois taxpayers should not be asked to subsidize the retirement of union leaders who have used the pension system for their own financial gain.”

The Illinois Senate Democrats recognize that the retirement plans of our public employees are partially paid for with taxpayer money, meaning everyone is affected by this problem. We have shown our commitment to keeping the pension systems viable by passing measures that have produced savings and reduced waste and fraud in an effort to maximize a limited amount of resources.

Unfortunately, a combination of bad decision making and a poor economic climate requires more to be done. Later this week, we will examine what actions other states have taken to secure their own pension systems, including a focus on actions taken by our Midwest neighbors.

CLICK HERE to read a detailed analysis of the Illinois Constitution’s pension clause as interpreted by the Illinois Senate Democrat.

Illinois is Not Alone: How Other States are Dealing With Their Pension Problems

Numerous states across the country are facing serious pension funding shortfalls, with weak investment returns from a battered economy and an increase in the number of retirees threatening the retirement plans for thousands of public workers nationwide.  Figures released in 2009 by Businessweek highlighted 25 states with retirement plans that were below the federally recommended 80% funding percentage.  Many of our Midwestern neighbors joined Illinois on that list, including Indiana, Missouri and Kentucky.

What actions have other states taken?

States have responded to their pension funding deficits in a variety of ways.  Measures to reduce future employee benefits have gained traction in many states, including New Hampshire, Rhode Island, Maryland, New Jersey, Mississippi, Nevada, Missouri, and New Mexico.  Common changes to future employee’s benefits include increasing the eligible retirement age, lowering cost of living adjustments, and increasing the percentage employees pay for their retirement plans.

Several states have used their pension funding woes to crack down on real or suspected abuses, such as legislation in Oklahoma that prevented state employees and officials from collecting pensions if convicted of a work related crime.  A recently passed measure in West Virginia prevents dramatic increases in pay before retirement from inflating pension amounts.  And Massachusetts recently passed a measure preventing elected officials from using a loophole to claim a full year’s service with only one day of work.

How do Illinois’ recent reforms compare?

Many of the reforms recently enacted by other states have already been implemented in Illinois:

  • New employee benefits were altered to increase the retirement age to 67, reduce cost of living adjustments, eliminate inflated pension receipts caused by pay hikes and bonuses, instituted a cap on the highest pensionable salary, and lowered maximum benefits for legislators.
  • Pension abuse protection legislation limits the ability of municipal employees from using time spent working for a union as credit towards a municipal pension.
    • Additional reform legislation prohibits union officials from obtaining teachers certificates just to qualify for pension benefits.

While Illinois has taken a proactive stance in reforming its pension systems, several states with serious funding problems have failed to take substantial action to protect the retirements of their teachers and public workers.  Indiana, for example, seems content on relying on commissions to study the issue further.

Working with, not against, Unions

While some states have enacted reforms through strong-armed anti-union tactics, Vermont instituted several changes to its pension system by sitting down and compromising with its teachers.

Faced with an underfunded pension system, Vermont leaders worked with the state’s teachers union on a plan that slightly increases employee contributions and the retirement age in exchange for more generous retirement plans.  Under this plan, Vermont’s retirement accounts will increase its funding levels to a secure level without dramatically slashing the retirements of educators.

“What we’ve all produced is better: teachers working a bit longer, paying a bit more, but getting more when they retire”
– Vermont-NEA President Martha Allen.

Vermont has shown the country that by negotiating with unions instead of issuing knee-jerk policy changes, meaningful advances can be made.  Hard-working folks who have worked their entire lives deserve that kind of support from their political leaders.


A history of fiscal mismanagement and poor economic conditions led the General Assembly to take serious action to ensure the long-term viability of Illinois’ public employees’ retirement systems.  Senate Democrats passed laws that ensured mandated payments were made, prohibited union officials from obtaining credits in municipal pensions, and banned the practice of allowing teacher retirement credits for one day of service.  New employees’ benefits have also been reduced as we work toward the goal of strengthening the financial health of our pension systems.  While these measures are a strong start, more must be done.

What additional reform proposals have been introduced? 

Senate Bill 512 (House Republican Leader Tom Cross) requires current teachers and state employees choose from three different retirement plans: Tier I, Tier II, and a self-managed plan similar to a 401(k).

·         Tier I plans allow members to receive the same retirement benefits by contributing more of their own money into the system;

·         Tier II plans provide the same amount of benefits that are currently given to new hires, which raises retirement to age 67, sets the highest pensionable salary at $106,000 and reduces cost-of-living increases from Tier I levels;

·         Self Managed Plans create an individual 401(k) style retirement account.

Several high-profile business organizations, such as The Civic Committee of the Commercial Club of Chicago, have publicly supported Senate Bill 512, explaining that the expected increase in future state contributions will cripple the State’s finances and reduce the available amount of money for education and public safety programs.

A central reason for the ever-growing increase in state mandated contributions, however, comes from pension ramp legislation that put off full funding and instead back-loaded payments for future generations.  This measure failed to address the issue during booming economic times that would have brought a larger investment return to the retirement accounts.

Is Senate Bill 512 constitutional?

It is the opinion of the Senate Democratic Caucus, based on the exhaustive research of the Chief Legal Counsel to Senate President Cullerton as well as many constitutional scholars and experts, that the Constitution protects current employees’ future retirement benefits with language stating benefits ‘shall not be diminished or impaired’.

In addition, basic contract law states an agreement that is entered into by two parties is a legal document that must be adhered.  Teachers and public employees who signed a contract were under the impression that the State would keep up with its end of the bargain.

Have other states faced legal action for reducing pension benefits?

States that have similar pension protections in their constitutions have had pension reductions challenged in court.  Changes to New Hampshire’s pension systems were recently challenged as unconstitutional, costing the state valuable financial and legal resources.  Recent pension changes in Rhode Island also face the prospect of legal action, as benefit reductions there are claimed by some to violate contract laws.

“I think we, in the Senate, can take the initiative to pass constitutional laws, not something that will be unconstitutional and only cost legal fees, and not do anything to strengthen the systems” -Senate President Cullerton.

Senate President Cullerton believes decades of fiscal mismanagement should not be fixed by taking away from the employees who have never failed to make their retirement contributions.

For many teachers and state workers who are not eligible for Social Security, their pension is the only form of retirement income they have.  These individuals have worked their entire lives in public service for a modest retirement.  Their retirement plans must be strengthened through constitutional measures that follow the law, plain and simple.

via History of Neglect Leads to Today’s Pension Woes

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