Consider this scenario. You’re a state employee. You’ve served your time in a government position and were promised a defined-benefit pension plan as part of the deal. You helped fund your pension over the years with personal contributions. You expect that money to be there when you retire.
There’s a problem. A big one. Illinois’s public employee pension system is in dire shape. Pension assets are at $48 billion, while liabilities are estimated to be $131 billion. This leaves an unfunded pension liability of $83 billion.
Under current law, the pension systems must be 90 percent funded by 2045. To meet this goal, each year the state is supposed to make an ever-larger contribution. This year, it’s $5.4 billion (more, when you count the payback of borrowing to make the 2003 and 2010 payments).
Since this annual pension payment comes out of the state’s general fund, it’s squeezing other spending areas, like health care and transportation, while heightening the calls for a tax hike. Until you fix pension funding, you can’t fix the state’s budget dysfunction.
Now consider this perspective. You’re a taxpayer. You work in the private sector and times are tough. You chaff at sending more of your hard-earned money to state coffers to help somebody else retire early with generous benefits when your own retirement savings have taken a hit.
How do we reconcile the conflicting positions?
In the great pension battle, state workers and taxpayers don’t have to be at odds with one another. It’s possible for Illinois to make its annual pension payments as required by law and protect residents from tax increases.
The solution is the Pension Funding and Fairness Act, which focuses on developing a funding mechanism for today’s pension system. Essentially, the state would fund its annual required pension payments by using the surplus revenue above a new spending growth index.
We’d start by placing reasonable limits on the growth of state government spending, based on the increase in inflation plus the increase in population. This is projected to grow at an average annual rate of 2.4 percent, based on data from the Census Bureau and the Congressional Budget Office. Meanwhile, Illinois’s revenues have grown at a 20-year historical average of 4.8 percent. Revenues that come in over the projected spending growth limit of 2.4 percent would be directed to make the state’s annual pension payment.
Surplus revenues above the required pension payment would then be allocated to a Budget Stabilization Fund. It’s designed to provide emergency cash flow in the event that the increase in state tax revenue is not enough to cover the increase in state spending under the limits – which would most likely be due to an economic recession.
After the Budget Stabilization Fund is filled, surplus revenue would be returned to Illinoisans via tax refund checks. Based on our projections, which you can see at IllinoisPolicy.org, the cumulative value of the tax refunds would total hundreds of billions of dollars by 2045.
To ensure that funds actually flow where they’re supposed to go, the Pension Funding and Fairness Act could be implemented initially by statute and then constitutionally via a referral by the legislature for a vote by the people.
As expected when tackling such a daunting problem, the plan does come with transitional hurdles. In the initial years of implementing this plan, revenues above the spending cap are not expected to be sufficient to make the required pension payments. To fund this gap, assets sales and leases, like that of the Illinois Tollway System, can be considered along with further spending reforms. Alternatively, limited borrowing with tight payback covenants could be used.
Passing benefit reforms – like those suggested by Governor Pat Quinn last year – reduces many of these initial challenges. Small changes make a big difference over the long run, to say nothing of more expansive reforms proposed by groups like the Civic Committee of the Commercial Club of Chicago.
What’s transformative about this plan is that it realigns priorities. Instead of fighting over a shrinking budget pie, both state employees and taxpayers will have every incentive to pursue policy solutions that grow our state’s economy. After all, every dollar that comes in above the spending index will help fund pension benefits and then tax refund checks.
Overall, the Pension Funding and Fairness Act will help the government honor its commitments to public employee pensioners while also protecting taxpayers – all while launching a new period of growth and government accountability in Illinois. We can all look forward to that scenario.
Kristina Rasmussen is the executive vice president for the Illinois Policy Institute.