State braces for major deficits

The Illinois legislature’s Commission on Government
Forecasting and Accountability recently released an eye-popping actuarial
analysis of a union-backed pension reform plan.

The analysis concluded that the proposal, House Bill
5909, would cost taxpayers almost $30 billion through the year 2045.

And the annual state cost starting in Fiscal Year 2027,
which begins in mid-2026, would be $1.13 billion.

As you likely know, the state is bracing to deal with a
$3.2 billion deficit in the upcoming 2026 fiscal year. The state’s projection
for the following fiscal year, FY27, envisions a $4.3 billion deficit. So,
adding another $ 1 billion-plus on top of that seems untenable, even though
these budget projections don’t include any upcoming changes to how the state
funds government.

More importantly, that estimate only includes the “big three”
pension plans (state, university and teachers), and excludes local pension
funds like the Illinois Municipal Retirement Fund and first responder funds, as
well as the pension funds for judges and legislators.

Union members flooded the Statehouse during the November
veto session demanding these changes to the state’s Tier 2 pension program.

Public employee unions hotly opposed Tier 2 when it was
approved by the General Assembly and Gov. Pat Quinn in 2013. The idea back then
was to force newly hired employees to accept a significantly reduced pension
package because the state was being crushed by the large and ever-growing costs
of the existing plan, due to many decades of woeful state underfunding and
legislative over-promising. The state constitution forbids reducing any pension
benefits once they are granted, so the change could only be made to new hires
going forward.

The actuarial report was conducted by Segal, a consulting
firm often used by COGFA. Segal also conducted an actuarial analysis on an
earlier version of Tier 2 pension reform (HB4973) which found it would cost
state and local governments a net $4.6 billion by 2045. But the unions instead
came down to Springfield in full force to back the new bill, which was
introduced the day veto session began this past November.

Back in November, Gov. JB Pritzker told reporters he
would “if necessary” agree to make sure all pension systems were in compliance
with Social Security’s Safe Harbor provisions, meaning the pension benefits are
at least as much as a Social Security payments, as required by federal law. The
earlier analysis of the previous bill had pegged that safe harbor cost at $4.8
billion for all systems. The latest analysis of the new bill has that
particular projected cost at $6.2 billion just for the big three funds.

According to the new COGFA report, the union-backed
changes to the Final Average Salary calculation would cost an additional $1.1
billion through 2045; a redo of the annual cost of living adjustment payments
would add $4.4 billion; and lowering the retirement age for Tier 2 recipients
to equal Tier One recipients would cost a whopping $11.3 billion.

Total price: $29.76 billion, with the first additional
payment of $1.132 billion owed in FY27, on top of the projected $10.8 billion
projected pension payment that fiscal year.

Whew.

The previous Tier 2 bill was much more affordable. The
legislation included a $500 million annual funding source by using revenues
freed up from retiring debt. The price tag for that would’ve been a mere $47
million in the coming fiscal year. Needless to say, $47 million is a lot easier
to swallow than $1.1 billion.

And again, the new actuarial projection for the new bill
doesn’t include any of the municipal pension systems or smaller state systems.
The total cost would be significantly higher than the projection claims.

Gov. Pritzker is not enthusiastic about the union-backed
bill, to say the least. While Pritzker reiterated his support last week to
bring pensions into compliance with federal Social Security laws, his
spokesperson said the governor “has been crystal clear that he will not support
any pension proposal that is credit negative or threatens the state’s balanced
budget.”

Adding $1.1 billion a year to the state’s outlays would
just be too much of a budget hit to take.

And even the proposal’s Senate sponsor, Sen. Rob Martwick,
D-Chicago, agreed that the state can’t afford the plan.

Martwick call his bill a “great starting point” in
negotiations, “because it shows us the cost of doing the right thing,” and
insisted that the pension benefits created by the bill “are not ‘too rich.’”

However, Sen. Martwick said, “The unfortunate reality is
that Illinois and Chicago are such financial disasters that we very well cannot
afford to do the right thing.”

Back to the drawing board.

This article appears in Healthy, wealthy and wise 2025.