Illinois pension buyout program delivers just 3% of projected savings

A plan that allowed some pension enrollees to cash in early on their earned retirement benefits in exchange for curbing future benefits has so far generated only 3% of its expected savings.

A plan intended to ease the cost of Illinois’ pension contributions has fallen wildly short of expectations.

One year after giving certain pension enrollees the option to immediately collect their pension earnings and trim future benefits, the state’s voluntary “pension buyout” program has seen just $13 million of the $400 million in projected savings.

In other words, the program delivered around 3% of what state leaders anticipated saving over the year.

In June 2018, the Illinois Policy Institute underscored that these savings were speculative, cautioning that overly optimistic expectations of the buyouts could dig a hole in the already-unbalanced budget by hundreds of millions of dollars more.

Speculative savings

The buyout program, which came as part of former Gov. Bruce Rauner’s budget for fiscal year 2019, was extended to those enrolled in three of the state’s five major pension systems: the State University Retirement System, or SURS; Teachers’ Retirement System, or TRS; and State Employees’ Retirement System, or SERS.

SERS accounted for all the program’s savings over the year, according to the Civic Federation. SURS and TRS still had not fully implemented the program by the end of the fiscal year. Each of the three participating systems endured delays in rolling out the program, but SERS officials told the Civic Federation delays did not factor into that system’s failure to reach savings projections.

The program consisted of two separate buyout plans: One was a cost-of-living adjustment buyout offered to Tier 1 members, who are enrollees hired before 2011. This plan gave members the option to voluntarily adjust their future 3% compounding increases to a 1.5% simple annual increase, in exchange for an immediate lump payment of 70% of the net value of their future increases under the higher formula. Lawmakers claimed this would save $382 million.

The other applied to “inactive” members – those eligible for state pensions but no longer employed by the state. This option allowed pensioners to collect 60% of the net value of their pension annuity in a lump sum payment. Lawmakers projected $41 million in savings from this plan.

The scope of the problem

With minimal outside input, lawmakers’ flawed budgeting inflated the amount of possible savings from the program. As the Civic Federation points out, the plan had not been subject to thorough public debate nor had it received a proper actuarial analysis before passing the Illinois General Assembly.

Importantly, even if the state’s projections were sound, the program’s savings would not have come close to resolving Illinois’ severe pension crisis. Illinois’ pension debt stands at $134 billion, among the worst in the nation, according to state estimates. But Moody’s Investors Service – known to use more realistic assumptions in its analyses – pegs the state’s unfunded liability even higher, at over $250 billion.

Illinois spends nearly double the national average on pensions, with government worker retirement and health care costs consuming 25% of state revenue. Despite hiking the state’s income tax in 2011 and again in 2017, Illinois’ pensions systems remain among the worst-funded in the nation.

In April, a report from J.P. Morgan found that in order to properly fund the state’s pensions, it would need to devote more than half of all state revenue to pension benefits.

Constitutional pension reform

Why has increased spending failed to adequately fund the state’s pensions? Because the state uses defined-benefit pension systems with compounding interest rates that have no tie to actual inflation. They are simply unsustainable, enabling promises that far exceed taxpayers’ ability to pay. At the local level, the impact of soaring pension costs is already being felt across the state, subjecting government workers to uncertain retirement security and taxpayers to diminished standards of living.

Unfortunately, the Illinois Supreme Court’s interpretation of the state constitution’s pension clause has derailed even the most modest reforms.

Only through a constitutional amendment – not accounting gimmicks – will Illinois keep its pension funds solvent. Sensible reform would protect all earned pension benefits for government workers, while allowing for the adjustment of future benefit accruals that have not yet been earned. The state’s high court in 2015 ruled it unconstitutional for governments to modify unearned accruals.

State lawmakers who carried Gov. J.B. Pritzker’s “fair tax” proposal to the 2020 ballot stressed the importance of “letting voters decide.” Constitutional changes that could truly restore Illinois’ finances without tax hikes, such as pension reform and a state spending cap, have not been shown the same consideration.

Illinois is not the first state to find itself in crisis, but if it ignores the steps other states took – constitutional pension reform – it would be to the detriment of not just taxpayers, but to those they’ve made reliant on a dysfunctional retirement system.