Pritzker says state ‘obviously’ needs to change 2010 law that shrunk pension benefits

With a month-and-a-half left in the General Assembly’s spring session, Gov. JB Pritzker’s administration is readying its proposal to address Illinois’ chronically underfunded pension system.

But the governor this 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’s comments came as Illinois’ two influential statewide teachers unions were wrapping up a “week of action,” encouraging their members to call and email lawmakers and urge them to essentially “undo” 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’ 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 “Safe Harbor” laws. Those laws dictate Social Security replacement plans, like pensions, can’t offer benefits that don’t at least match Social Security.

Lawmakers – the majority of whom were not in the legislature when Tier 2 was passed – 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.

“We need, obviously, to make some changes to Tier 2 to make sure that we’re meeting the Social Security Safe Harbor,” the governor said at an unrelated news conference late Thursday night in his Capitol office. “We don’t yet really know what that’s going to cost.”

Earlier in the day, Pritzker’s top budget advisor, Governor’s Office of Management and Budget Director Alexis Sturm, told a House committee that the governor was “open to that conversation” about increasing the cap on Tier 2 pension earnings to match Social Security.

Ahead of Pritzker’s annual budget address in February, Sturm and other top staffers laid out a larger plan to address Illinois’ underfunded pension systems, which included a nod to the Social Security issue.

[ Read more: With budget proposal and fiery address, Pritzker paints himself as progressive pragmatist ]

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 “review and adjust, if necessary, the structure of the Tier 2 pensionable earnings cap.”

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 further credit upgrades. Pritzker said state leaders “just need to be exceedingly careful” about pension “sweeteners” – including any fix made to Tier 2 pensions.

“So that, in a way, is a sweetener in the sense that it’s going to cost taxpayers something,” Pritzker said. “But we have to do it because the alternative would cost the taxpayers much more.”

There is no official price tag on tweaking the law to comply with Social Security rules, but one analysis run for the state’s 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’s appearance in a House committee Thursday was intended to sell lawmakers on the governor’s plan to fully fund Illinois’ pensions by 2048. Pritzker’s team had laid out the proposal ahead of his budget address in February, and one credit rating agency immediately signaled its approval.

[ Read more: Pritzker proposes over $2B in spending growth, backed by tax increases for corporations, sportsbooks ]

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’ pension systems to a 90% funded level by 2045.

Pritzker wants to extend that deadline three more years, but up the funding goal to 100%. He’s 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’re 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’s administration, and the 2017 bonds were sold in the aftermath of the state’s two-year budget impasse under Republican Gov. Bruce Rauner to help pay down Illinois’ record near-$17 billion backlog of unpaid bills accumulated during the political struggle.

Sturm called the plan a “balanced” way to address Illinois’ longstanding practice of not paying enough into its pension systems, creating an ever-growing sum of unfunded liabilities.

“It was there in the ‘90s, it was there in the ‘70s and the ‘40s,” Sturm said of the pension debt.

She also clarified that Pritzker is “not interested” in issuing any bonds to put an infusion of cash into the state’s 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’s discussion on the pension plan was subject matter only, meaning it did not receive a vote from the committee. It’s 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’s 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 – a group of unions that formed after the Tier 2 pension system law passed – was not yet taking a stance on Pritzker’s plan.

“It is difficult to provide comprehensive comments on the governor’s proposal without having specific legislative language and funding projections to review,” he said. “That said, the problematic nature of the current funding ramp is well-documented.”

The coalition, Devaney said, “generally” supports making larger-than-necessary contributions to the state’s retirement systems.

“The state has always set forward with a plan to underfund the pension systems,” he said. “We’re encouraged that the governor has a plan to actually fund it to 100% and come out with a deliberate, responsible way to provide that funding.”

Tier 2 history

But Devaney had a much more strident position to share with House members about Tier 2 pensions.

“We can do that,” he said of Pritzker’s plan to shore up Illinois’ pension systems. “But 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.”

After a long pause, state Rep. Steve Reick, R-Woodstock, signaled his agreement – with a big caveat.

“Yeah, but how?” Reick said. “That’s the thing that we need to get people together in a room and talk about because this isn’t going to get any better for the next 20 years. I’m not going to be here 20 years from now but ... I’d like to leave knowing that we started something that would get us to where we want to be.”

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 – the state’s two largest teachers unions – 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 “fix” Tier 2 pensions, according to the Illinois AFL-CIO.

“I 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,” Reick said later on during the hearing. “Um, that’s not going to work.”

As Illinois began its slow recovery from the Great Recession, lawmakers were facing a sudden jump in unfunded pension liabilities, due in part to poor investment returns 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’s pension systems.

Beginning in 2009, credit rating agencies began a series of downgrades to Illinois’ 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’s 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’s 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 “spiking,” 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 “vest” 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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