Illinois scratches tip of pension iceberg

If the looming public employee pension funding crisis in Illinois were an iceberg heading straight for the ship that is the state, then it appears as though lawmakers in Springfield are prepared to take action that is roughly equivalent to shaving an icecube off of the frozen mass. Today, the Illinois House of Representatives may consider a bill that will reduce pension benefits for thousands of future police and firefighters, but ignores current retirees and the costs their pensions impose on the system.

While this bill might sound like a major reform, it is anything but one. Notably, SB 3538 would cap the maximum salary on which a pension can be based at $106,800 and use an employee's average final salary, rather than the employee's "last day" salary, to calculate the pension. This is a positive development. But the bill's provisions only apply to future employees and retirees, which means the bill does nothing to move the state's retirees away from the antiquated, costly defined-benefit plans currently in use in Illinois to the defined-contribution plans, such as 401(k)s, used in the private sector and an increasing number of states. The lack of any such reforms is troubling, given that current retirees and their pensions are where the major costs lie, not necessarily with employees who have not yet been hired. As Larry Morrissey, the Mayor of Rockford, put it, “What about all the existing employees and existing retirees? We’re debating about what’s going to happen with future employees when we’re not doing any hiring."

As Illinois is Broke points out, for FY2011, Illinois faces a projected budget deficit of $14-15 billion and total debt of around $160 billion. About $130 billion of that debt is related to public employee pension costs, which amount to a cost of $25,000 per Illinois household and serve as a heavy weight on the state's credit rating. Without credit to borrow billions, the state would be unable to finance its operations.

Illinois lawmakers need to get serious about pension reform. That means the General Assembly needs to consider major pension reforms, not half-measures that sound important but do not address the cost drivers of pensions. Lawmakers also need to do this soon, before the approaching iceberg hits.