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Chicago Tribune
27-05-2025
- Business
- Chicago Tribune
Civic leaders: State lawmakers still have time to adopt a measured fix for Tier 2 pension problem
Illinois faces a defining fiscal challenge: a staggering $144 billion in unfunded liabilities across its five state pension systems. This immense burden strains state resources; crowds out critical investments in education, public safety and infrastructure; and undermines economic confidence. Meaningful pension reform isn't just desirable; it's essential for Illinois' future solvency and prosperity. And a 'fix' to one key pension issue — the need to address some evident shortcomings in the state's Tier 2 pensions — could yet happen before the legislature adjourns on May 31. The Civic Committee, Civic Federation and Better Government Association have consistently advocated for comprehensive solutions to address this major, intractable issue. Today, we urge the legislature to take a careful and fiscally responsible approach to a specific aspect of the system that demands attention: the growing concern that Tier 2 pensions will eventually fall short of federal 'safe harbor' rules that ensure public pension benefits are deemed equivalent to those paid to Social Security recipients. Tier 2 refers to the benefit structure offered to people who started working for the state on or after Jan. 1, 2011. The cost-saving new tier raised the retirement age, capped pensionable salaries, lengthened the number of years of salary used to calculate benefits and reduced post-retirement benefit increases. These changes significantly improved the trajectory of Illinois' pension systems, but they also put Tier 2 pensions at future risk of violating safe harbor rules. Gov. JB Pritzker's budget proposal currently under consideration in Springfield includes a plan to address this risk. Specifically, his plan calls for a $78 million set-aside to address potential Tier 2 compliance costs. This measured approach does what responsible fiscal management requires: It acknowledges the Tier 2 risk, sets aside funds and stops short of overcommitting before more is known. That is the right approach. Similarly, any permanent changes to Tier 2 should only proceed based on clear, actuarially sound analysis. A well-justified fix is appropriate and necessary but only when federal requirements are in jeopardy, and only to the extent required to meet those legal obligations. Once a pension benefit is promised in Illinois, the state constitution prevents it from ever being reduced or revoked. We strongly caution against any effort to turn this Tier 2 fix into an opportunity to add enhancements — so-called 'sweeteners' — that would deepen Illinois' already-substantial pension challenges. Lawmakers should resist that temptation. A responsible Tier 2 fix is one of 10 principles of pension reform our organizations published last fall to guide fair and sustainable pension policy. Illinois desperately needs progress on pensions; this measure is an essential building block for the larger solution ahead. What the state does not need, and cannot afford, is any form of pension 'reform' that makes matters worse. A Tier 2 fix should be no more than is needed, when it is needed, as determined by reliable, public-facing estimates of timing and cost. At present, the analysis showing exactly when a Tier 2 fix is required simply is not available. No state official, agency or consultant has put out a comprehensive estimate of how many employees or retirees might be affected and when. Such data is needed in order for policymakers, and the public, to understand both the scale of the problem and the timeline by which it must be addressed. Likewise, there is no complete estimate for some of the more ambitious proposals put forward by those arguing to 'undo Tier 2' by essentially replacing those pensions with the higher level of benefits that put Illinois' pension systems into such fiscal trouble in the first place. For example, cost estimates for a bill backed by a coalition of unions do not include cost projections for local plans, which would also be covered by the bill. Implementing pension changes without knowing the true cost is one of the original sins of past pension reforms — a grave mistake state lawmakers must not repeat this time. The magnitude of potential costs for making changes to Tier 2 benefits underscores the importance of being cautious. According to a report by the Commission on Government Forecasting and Accountability, implementing the bill would increase the state's pension liabilities by roughly $60 billion and would increase required contributions to the pensions by $30 billion through 2045. This is hardly the first time these data deficiencies have been brought to light: The Tribune Editorial Board made a similar argument in February, and other civic leaders have said as much, too. Now is the time for policymakers and the public to focus on gathering the essential data that can help draw the map toward responsible pension reform. Only then will we know if Pritzker's proposed $78 million set-aside is the appropriate target number, one that will address Tier 2's shortcomings and set the stage for tackling even greater pension challenges still ahead.
Chicago Tribune
11-04-2025
- Business
- Chicago Tribune
David Greising: State action on pension reform is slow. That may prove auspicious in the end.
Not so long ago, there was hope that major pension reform could happen sometime this year, possibly by the end of the spring legislative session. But events are not playing out this year. Two big topics have consumed the legislature's attention this spring: expunging a projected $3.2 billion budget shortfall in order to deliver a balanced budget, and addressing a $771 million funding shortfall for the four transit agencies in the Chicago area, including the prospect of merging them. Unions are taking advantage of the relative inattention to the pension issue by pushing for a change to the state's Tier 2 pensions — reduced benefits, offered to employees who started work for the state beginning in 2011. There is concern that the pension payments don't or won't keep up with Social Security benefits, which would violate federal policy. Editorial: Springfield doesn't seem to know the scope of its 'Tier 2' pension problem. How about we find out? Late last year, a group of unions held a Springfield rally under the theme 'Undo Tier 2.' The slogan is shorthand for efforts to claw back cost-saving measures and regain the unusually generous benefits that contributed toward Illinois' worst-in-the-nation pension underfunding. Sweeping pension reform may be on the back burner for now. But after a trip to Springfield this week, I'm pleased to report the lack of intense pressure is possibly allowing time and space to find a path toward a resolution of one of the state's most intractable problems. Sen. Robert Martwick, chair of the Senate's Pensions Committee, opened a hearing on pension reform by observing it takes two key factors to fix pensions: money and math. It takes money, because fixing $144 billion in pension underfunding will involve lots of state dollars over an extended time. And it takes math, because any effective fixes will involve sophisticated calculations about income tax; the sale of pension obligation bonds; even the sale of complex instruments to help smooth the pension deficit in later years. (Trust me; I've done the math. They would help.) In other words, merely understanding the scale of Illinois' pension problem is complicated enough. Devising the tools to fix it could require a degree in public finance, not to mention a talent for political finesse. To date, three main proposals have emerged. And for months, these ideas existed in isolation from one another. But at the Martwick hearing, and in conversations I had with key actors leading up to it, there were signs that some of the best ideas might converge and that a workable solution could emerge from the very deliberative process that has led us to this point. The Civic Committee of the Commercial Club of Chicago has a comprehensive and ambitious plan, the key funding mechanism of which is a 0.5% surcharge on individual income taxes over 10 years. For two years, the Civic Committee has resisted adjustments to its proposal. But at the hearing Wednesday, the business group's leader, Derek Douglas, allowed that some adjustment to the Civic Committee's proposed tax surcharge might be acceptable, if such a switch helped pension reform progress. The Center for Tax and Budget Accountability, a liberal-leaning think tank, last fall overhauled its pension reform proposal. Its key feature is the sale of $9.6 billion in bonds over five years, in order to help pay down the state's pension debt. The CTBA previously had argued that the state should be satisfied if it can bankroll enough money to meet 80% of its pension obligations — up from its current 46% funding ratio. After criticism that such a low goal, if adopted, would torpedo the state's credit rating, the group's leader, Ralph Martire, on Wednesday was arguing in favor of seeking 100% funding. In other words, the CTBA proposal now aims for the same goal — a fully funded pension system — as the plans put forward by Gov. J.B. Pritzker and the Civic Committee. This clears the way for consideration of all three proposals on their merits, including the controversial approach of selling bonds in order to pay the state's pension bill. For the time being, Pritzker is letting his existing pension-reform proposal speak for itself. Its key feature would cause little pain: As existing bond issues are paid off, including $10 billion in pension bonds sold by Rod Blagojevich when he was governor, Pritzker would apply half the amount previously paid on those bonds toward paying down the pension debt. The other half would go toward rebuilding the state's rainy day fund. The big news I heard this week regarding Pritzker's approach doesn't involve adjustment to his plan. Rather, it involves a negotiating stance that could be immensely powerful and do the state a lot of good. A fix to Tier 2 is part of Pritzker's plan — ' if necessary,' the precise wording in his budget pointedly notes. What's more, I'm told, Pritzker likely will not back a Tier 2 fix unless it is part of a more sweeping reform of our state's $144 billion in pension underfunding. Pritzker would be wise to pursue such a stance. For starters, the burden of proof of the need to 'fix' Tier 2 should be on those who say the benefits do not meet minimum federal requirements. And on top of that, any Tier 2 fix should be undertaken only as one step in a more sweeping reform. By pairing the two objectives — addressing Tier 2 and the worst-in-the-nation pension underfunding at the same time — Pritzker could help apply the energy behind efforts to fix Tier 2 toward the more costly, more complicated and more consequential reform of the entire state pension system. Pension reform is not happening quite as fast as some had hoped. It would be good if all parties take this extra time to get the reforms right. David Greising is president and CEO of the Better Government Association.
