Illinois’ Escalating Pension Crisis – And What to Do About It

By Marc Levine and Tom Cross, Illinois House Republican Leader

Just a few weeks ago, Standard & Poor’s downgraded Illinois to a credit rating lower than all but one other state, specifically referencing the state’s pension crisis. The downgrade is more evidence that the state’s underfunded pensions threaten Illinois’ future. Unfortunately, essential reform efforts failed recently because of a fundamental disagreement over whether the solution requires predominantly increasing taxes or reforming the system’s runaway cost drivers.

Illinois’ pension system is heading toward insolvency, and accounting tricks and a blame game do nothing to save it. Our real problem is that employee contributions will cover less than 20 percent of future benefits and investment returns will provide little help because the assets are such a small fraction of liabilities.

Illinois needs to face reality. Our $34 billion state budget just can’t make a dent in the hundreds of billions of dollars of pension debt. Absent real reform, the debt will grow until the system collapses and retirees face draconian benefit cuts.

How have our Democrat-controlled Legislature and governor reacted? In a lame-duck session last year they passed a 66 percent income tax rate increase and raised our corporate tax rate. When the higher corporate tax (7.0 percent) is added to the personal property replacement tax (2.5 percent) Illinois employers are forced to pay one of the highest combined business tax rates in the nation (9.5 percent). Recently Gov. Pat Quinn and the speaker of the House attempted to shift the cost and risk of the broken pension system onto local school districts. Given that those districts are funded predominantly by local property taxes, this “cost shift” would have put up taxpayers’ homes as collateral to pay for past mistakes and a failed system.

This crisis cannot be solved by more taxes and more debt, only by political courage and real reform. In Rhode Island a bipartisan consensus was reached to pause unaffordable annual raises and adopt a hybrid benefit package for all workers with a modest defined benefit and a 401(k)-type account. We need to look to those successes to ensure that our reforms center on cost controls rather than self-defeating tax increases.

Major components that must be included in a comprehensive pension reform bill include increasing employee contributions, decreasing and delaying cost-of-living adjustments, limiting public pensions to public-sector employees, and establishing a 30-year funding schedule.

Illinois has always been an economic power, a transportation hub and a national leader in industry, agriculture and education. But now we are asking our citizens to pay substantial taxes on their income and homes—not to fund services that enhance our community, but to pay retirement benefits for work performed long ago. Financial mismanagement is pushing families and businesses out of our state. The time to reform the pension system is now.

Representative Tom Cross is the Illinois House Republican Leader.  Marc Levine publishes LevineOnPolicy.com.