Illinois General Assembly passes most significant structural Pension Reforms in State History

SPRINGFIELD - Governor Rod R. Blagojevich congratulated Democratic leaders and legislators in the Illinois General Assembly for passing this state's first major structural pension reforms in history, which will result in billions of dollars in savings for Illinois taxpayers today and future generations. These reforms, proposed by the Governor during his 2005 Budget address, will help guarantee that future pension costs will not consume all new state revenue and crowd out other budget priorities, such as K-12 education and health care.  The savings resulting from pension reform mean an additional $300 million for schools, and will allow 56,000 more working families to receive the health care coverage they need.  In recent years, forty other states, when facing budget deficits, have either kicked people off health care programs or significantly cut their benefits. During his first three years, Governor Blagojevich has expanded health care programs to cover another 305,000 men, women and children. 

 

"I applaud Speaker Madigan and Sen. President Jones for their support and for their strong leadership. We began this legislative session with a very ambitious agenda. We set out to fundamentally change and reform the way the pension system works.  That's what we did today," said Gov. Blagojevich. "Not all the ideas I proposed in February came to be.  We outlined a plan that could have saved our pension systems more than $100 billion over the next 40 years.  Instead, we passed some of those reforms that will save the system more than $30 billion over 40 years.  These savings, some invested today, will allow us to put more money in our schools, allow more people to get the healthcare they need, give more children the chance to go to pre-school and balance a structural deficit totaling more than one billion dollars.  And, we will do all of this - without raising income or sales taxes.  I, again, thank Speaker Madigan and Sen. President Jones and all the members of the General Assembly who voted for this plan.  It was the right vote to move our state forward." 

 

"We all agreed that we needed to reform our pension system.  The reforms we passed today are an important first step toward realistic reform of the pension system.  These reforms put Illinois on its way to making pensions more affordable in the long run.  These reforms, combined with restructuring the debt, allow us to provide $300 million in new funds for education and $30 million for Early Childhood Education," said Senate President Emil Jones (D-Chicago).

 

"This collaborative effort will develop a budget. It responds to the message heard at our Budget Summits," said House Speaker Michael J. Madigan (D-Chicago).

 

When Governor Blagojevich took office, he pursued a long-term strategy to reform the state's pension systems, make them stronger and better funded for all employees and beneficiaries. Within his first six months in office, the state issued a $10 billion pension obligation bond in June 2003 to infuse the state's retirement systems with much needed cash. Soon after, the pension systems not only received an infusion of $7.5 billion, but they also made $1.2 billion in investment gains from those pension obligation bond dollars. Most importantly, when Governor Blagojevich assumed office, the pension systems were funded at only a 48% level.  As a result of the Governor's efforts over the last two years to infuse dollars into the systems, pensions are now funded at an increased level of nearly 60%.

 

Overall, Governor Blagojevich's contributions to the pension systems have far surpassed those of his predecessors. Despite historic deficits, his average contribution to the pension system is nearly $2 billion, while Governor Ryan, who presided during prosperous economic times, averaged pension payments of $1.45 billion. Pension contributions under Governor Edgar averaged $687 million. Also, Governor Blagojevich's highest pension contribution was $2.3 billion, while Governor Ryan's was $1.6 billion and Governor Edgar's was $1.1 billion.

 

The Governor further pursued his pension strategy by appointing a commission in the Spring of 2004.  Its members would study pension reforms and make recommendations to the Governor and General Assembly. After 10 months of research and analysis, which included nearly 30 public hearings, they submitted a report consisting of several recommendations to reform the pension system. The Governor adopted a majority of those reforms. Many of those were included in the pension reform bill passed today by the General Assembly.

 

"For the first time in state history, the General Assembly has taken steps to address the most significant fiscal problem facing Illinois. While many of us here helped create this problem, it shouldn't stop us from trying to fix it," said Rep. Bob Molaro (D-Chicago).  "I am proud that so many of my colleagues had the courage to vote for these reforms and do the right thing for both our pension system and taxpayers. I also thank the Governor and the Speaker for moving this legislation forward."

 

The pension reforms passed today by the Illinois General Assembly represent the most significant reforms ever in state history that will also result in significant savings. These reforms include:

 

Under the current system, school districts can increase salaries by up to 20% every year to boost pension benefits, with the state having to cover those costs. Under the new plan, the state's share will be capped at 6%.

 

Currently, employees in SURS and TRS have two different pension formulas in which to choose from - and they automatically get the one that pays the most. Money Purchase is one of these formulas. Under it, the state matches an individual's contribution and the interest earned on that contribution at 140%. This will be discontinued for new hires.

 

3.      Allow Comptroller's Office to Independently Determine SURS Interest Rate.

Currently, the SURS Board sets the interest rate at the level they choose, which is the only pension board that does this. The rate is variable and often has been set at a rate that is far above what the system's investment returns have been. Instead of having a rate set arbitrarily by the SURS board, it will now be set based on criteria determined independently by the State Comptroller.

 

4.      Eliminate Lump Sum Awards for Unearned Sick Leave Used to Boost Pensions.

The state will eliminate the use of lump sum awards from unearned sick leave for pension credit beyond what is normally earned for contracts signed after the effective date of the act.

 

5.      Moratorium on Any New Benefits Without a Full Funding Source.

Between the time the 1995 pension funding plan was adopted and when Governor Blagojevich came into office in January 2003, the state's pension debt grew from $19 billion to an astounding $43 billion. This was due in part to the passage of several pension benefits that did not have a funding source to cover their costs. During this time, $6 billion in unfunded pension enhancements were added without a corresponding revenue in which to pay for them.  Creating this moratorium will ensure that the poor fiscal habits of the past, which has led to our current pension funding crisis, will not continue.

 

This formula was created for those on the front lines in our state's law enforcement community, as well as other special risk jobs on our highways. This formula has been expanded to too many administrative positions that do not meet this kind of criteria. We will now exclude future hires in certain administrative positions that currently participate in this formula.

 

We propose to create a new bi-partisan task force that includes members of the public and labor community to make recommendations regarding changes including, but not limited to, COLA provisions, normal retirement age for each system and member contribution rates for new hires. This will help us identify additional reforms that can create billions more in savings.

 

8.      Create a Cost Neutral ERO Paid for by Beneficiaries and Local Employers - Not the State. 

This Early Retirement Option would not place a new fiscal burden on taxpayers, but instead would be paid for by current employees and the local employer, rather than the state. By increasing the rates that teachers and administrators must contribute to this program, along with other cost controls, this ERO will be fully funded and no cost to the state.