SPRINGFIELD, Ill. 鈥� With a month-and-a-half left in the Illinois General Assembly鈥檚 spring session, Gov. J.B. Pritzker鈥檚 administration is readying its proposal to address the state鈥檚 chronically underfunded pension system.
But the governor last week also acknowledged in the strongest terms yet that any plans to finally get the state on track toward fully funding retirement plans for public school teachers, university employees and state workers could be derailed by a looming legal fight over a 14-year-old law.
Pritzker鈥檚 comments came as Illinois鈥� two influential statewide teachers unions were wrapping up a encouraging their members to and urge them to essentially 鈥渦ndo鈥� a 2010 law that created a new less generous pension system for those who began their jobs after Jan. 1, 2011.
The General Assembly and then-Democratic Gov. Pat Quinn quickly approved that law in the wake of the Great Recession, which forced state leaders to grapple with decades of underfunding in Illinois鈥� pension systems.
But in the years since, economists and labor leaders have repeatedly warned that the retirement benefits in the Tier 2 system are so low, they might violate federal 鈥淪afe Harbor鈥� laws. Those laws dictate Social Security replacement plans, like pensions, can鈥檛 offer benefits that don鈥檛 at least match Social Security.
Lawmakers 鈥� the majority of whom were not in the legislature when Tier 2 was passed 鈥� have picked up on those warning signs, and in the last few years have been studying the issue in occasional committee hearings. In February, Pritzker signaled his willingness to get ahead of the looming legal issue, and on Thursday he took a big step forward in his position.
鈥淲e need, obviously, to make some changes to Tier 2 to make sure that we're meeting the Social Security Safe Harbor,鈥� the governor said at an unrelated news conference late Thursday night in his Capitol office. 鈥淲e don't yet really know what that's going to cost.鈥�
Earlier in the day, Pritzker鈥檚 top budget advisor, Governor鈥檚 Office of Management and Budget Director Alexis Sturm, told a House committee that the governor was 鈥渙pen to that conversation鈥� about increasing the cap on Tier 2 pension earnings to match Social Security.
Ahead of Pritzker鈥檚 annual budget address in February, Sturm and other top staffers laid out a larger plan to address Illinois鈥� underfunded pension systems, which included a nod to the Social Security issue.
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At the time, the plan merely encouraged the boards of the state's retirement systems for teachers, university employees and state employees, along with the legislature, to 鈥渞eview and adjust, if necessary, the structure of the Tier 2 pensionable earnings cap.鈥�
But in acknowledging the Tier 2 issue on Thursday, the governor also signaled to New York-based credit ratings agencies that he was still committed to fiscal moves that would earn the state . Pritzker said state leaders 鈥渏ust need to be exceedingly careful鈥� about pension 鈥渟weeteners鈥� 鈥� including any fix made to Tier 2 pensions.
鈥淪o that, in a way, is a sweetener in the sense that it's going to cost taxpayers something,鈥� Pritzker said. 鈥淏ut we have to do it because the alternative would cost the taxpayers much more.鈥�
There is no official price tag on tweaking the law to comply with Social Security rules, but run for the state鈥檚 Commission on Government Forecasting and Accountability last year estimated it could cost the state $5.6 billion through 2045, or about $255 million annually.
Path to 2048
Sturm鈥檚 appearance in a House committee Thursday was intended to sell lawmakers on the governor鈥檚 plan to fully fund Illinois鈥� pensions by 2048. Pritzker鈥檚 team had laid out the proposal ahead of his budget address in February, and one credit rating agency immediately signaled its approval.
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The plan would alter a 1995 law signed by then-Republican Gov. Jim Edgar that put the state on a 50-year ramp to get Illinois鈥� pension systems to a 90 percent funded level by 2045.
Pritzker wants to extend that deadline three more years, but up the funding goal to 100 percent. He鈥檚 also pushing to keep spending half of the amount of money Illinois is currently spending on debt repayment for old bonds taken out in 2003 and 2017 when they鈥檙e retired in the early 2030s and put that money toward the pension systems.
The 2003 bonds were taken out to pay for pensions during Democratic Gov. Rod Blagojevich鈥檚 administration, and the 2017 bonds were sold in the aftermath of the state鈥檚 two-year budget impasse under Republican Gov. Bruce Rauner to help pay down Illinois鈥� record near-$17 billion backlog of unpaid bills accumulated during the political struggle.
Sturm called the plan a 鈥渂alanced鈥� way to address Illinois鈥� longstanding practice of not paying enough into its pension systems, creating an ever-growing sum of unfunded liabilities.
鈥淚t was there in the 鈥�90s, it was there in the 鈥�70s and the 鈥�40s,鈥� Sturm said of the pension debt.
She also clarified that Pritzker is 鈥渘ot interested鈥� in issuing any bonds to put an infusion of cash into the state鈥檚 pension systems, a move made under Quinn in 2010 and 2011 several years after the state borrowed $10 billion in the 2003 bond sale under Blagojevich.
Thursday鈥檚 discussion on the pension plan was subject matter only, meaning it did not receive a vote from the committee. It鈥檚 unclear if the measure will pass before lawmakers adjourn their spring session in May.
Just as in the past, public employee unions will likely have tremendous influence over whether the legislature approves the governor鈥檚 pension plan.
Pat Devaney, the secretary-treasurer of the Illinois AFL-CIO organized labor umbrella organization, told the panel Thursday that the We Are One Illinois coalition 鈥� a group of unions that formed after the Tier 2 pension system law passed 鈥� was not yet taking a stance on Pritzker鈥檚 plan.
鈥淚t is difficult to provide comprehensive comments on the governor鈥檚 proposal without having specific legislative language and funding projections to review,鈥� he said. 鈥淭hat said, the problematic nature of the current funding ramp is well-documented.鈥�
The coalition, Devaney said, 鈥済enerally鈥� supports making larger-than-necessary contributions to the state鈥檚 retirement systems.
鈥淭he state has always set forward with a plan to underfund the pension systems,鈥� he said. 鈥淲e鈥檙e encouraged that the governor has a plan to actually fund it to 100 percent and come out with a deliberate, responsible way to provide that funding.鈥�
Tier 2 history
But Devaney had a much more strident position to share with House members about Tier 2 pensions.
鈥淲e can do that,鈥� he said of Pritzker鈥檚 plan to shore up Illinois鈥� pension systems. 鈥淏ut we can also address the illegal, immoral, and, frankly, things that are hurting the operations of government at every level with the Tier 2 benefit level.鈥�
After a long pause, state Rep. Steve Reick, R-Woodstock, signaled his agreement 鈥� with a big caveat.
鈥淵eah, but how?鈥� Reick said. 鈥淭hat鈥檚 the thing that we need to get people together in a room and talk about because this isn鈥檛 gonna get any better for the next 20 years. I鈥檓 not going to be here 20 years from now but...I鈥檇 like to leave knowing that we started something that would get us to where we want to be.鈥�
Reick said his email inbox has been inundated with messages about the Tier 2 pension system. The Illinois Federation of Teachers and Illinois Education Association 鈥� the state鈥檚 two largest teachers unions 鈥� have encouraged their members to flood their local lawmakers with requests to address the Tier 2 pension system.
As of Thursday evening, union members had sent more than 55,000 letters this week to lawmakers urging them to 鈥渇ix鈥� Tier 2 pensions, according to the Illinois AFL-CIO.
鈥淚 mean, I get a lot of emails from people who demand that we do away with Tier 2 altogether and go back to Tier 1,鈥� Reick said later on during the hearing. 鈥淯m, that鈥檚 not going to work.鈥�
As Illinois began its slow recovery from the Great Recession, lawmakers were facing a sudden jump in unfunded pension liabilities, as the stock market hobbled its way to recovery. But the General Assembly also felt the squeeze from decades of decisions from their predecessors shorting the state鈥檚 pension systems.
Beginning in 2009, credit rating agencies began a series of downgrades to Illinois鈥� ratings of creditworthiness, making it more expensive for the state to borrow money via bond sales. In explaining their reasoning at the time, the influential agencies repeatedly noted the state鈥檚 pension systems were underfunded.
The financial downturn came not long after the state skipped out on paying half of its pension obligation for two years under Blagojevich, which came on the heels of more than 11,000 state workers taking early retirement under Republican Gov. George Ryan. Both moves increased the liability to the state鈥檚 pension systems by billions of dollars.
So in 2010, the Democratic-controlled General Assembly created the new Tier 2 system, which nixed the Tier 1 practice of 3 percent compounded annual cost of living adjustments for retirees, raised the age for retirees to get full benefits from 62 to 67 and changed eligibility for full benefits from five years of service to 10 years.
Tier 2 also caps the maximum salary a pension can be based on and changes the calculation of the base salary to discourage a practice known as pension 鈥渟piking,鈥� wherein those close to retirement age would seek raises to substantially increase their pension under the Tier 1 system.
Because it takes a decade to 鈥渧est鈥� in the Tier 2 pension system, those who made late-career switches to government employment have begun to be eligible for retirement only in the last few years.
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