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The Illinois Pension Deficit: Are Public Retirement Funds Safe?
There’s a showdown brewing over the Illinois pension deficit reform that has many current and retired state employees wondering if their retirement funds are safe. The answer to this question is far from simple. Regardless, government and personal budgets need an answer fast.
At the heart of the debate is a pension reform bill signed into law in December of 2013 by former Illinois State Governor Pat Quinn and set to go into effect June 1. State employees filed suit against the controversial law, a lower court then struck the law down in November 2014, and now the case is in the Illinois Supreme Court’s hands.
The Good, the Bad, and the Ugly
Illinois’ public pension deficit is a huge problem. Not only does the Midwestern state lack the funding to pay for pensions, but the state’s overall budget is projected to fall short by $9 billion in the coming fiscal year. Quinn’s reform aimed to gradually reduce the state’s pension liability by cutting back employee and retiree benefits. Opponents of the new law say that it violates Illinois’ constitution, which prohibits the state from making any changes that reduce or impair public pension benefits.
How bad is the debt? Illinois has the highest pension debt in the union—and the state ranks high for other debt levels, too. Current unfunded pension liability is at more than $111.18 billion, and if the court rules against the state, it may cost Illinois an extra $1 billion dollars per year.
The State of America’s Public State Pensions
The Illinois pension deficit isn’t the only public pension problem in the country, and the battle over pensions in this state may set the precedent for future court battles. Research collected by the Center for Retirement Research at Boston College on the statuses of 150 state and local pension plans between 2001 and 2013 reveals that all 150 plans, which began fully funded, were failing to meet their funding demands by 2013.
While not all of America’s 50 states are at the point of crisis, as of 2012, 26 states were less than 70 percent funded. This level of underfunding isn’t sound, and it could lead to more than half of the U.S. ending up in the same boat as Illinois in the near future.
Why are public pensions in such a crisis? The issue may result from poor investment returns, reduced contributions by employees and employers, or changes in benefit plans. Meanwhile, many state leaders say that the pension problem isn’t because of the IOUs they’ve written over the past decade for retirement funds. Instead, they say that the problem comes from a steep rise in cost-of-living increases compounded by the 2008 recession, which affected the entire country.
The state’s job is to protect all the people it serves, so if the courts continue to prevail, current public pensions could be safe. Current workers might not be so lucky, however, if the underfunding trend continues. Whether or not you are an Illinois resident, this leads us all to the question: Where does my state fall in terms of pension funding?