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How Illinois finances fell apart — and how we can set them right

Politicians promised to deliver on perks that were too good to be true. And they promised that skimming more tax revenue from the people of Illinois could make the numbers work. It has not worked.

Members of the Illinois House debate a budget proposal in February, 2016. The state’s political leaders over decades have created a “pension monster,” writes Adam Schuster of the Illinois Policy Institute.
AP Photos

Many Americans view the 2020 election as a pivotal moment, a time to decide what we want the future of our country to look like.

Here in Illinois, past mistakes will dictate our future, unless we learn from them. The choice between continuing the downward slide or a comeback in our state will be determined by the next big decisions we make. We can make better decisions with an honest look at how we got here.

In 1980, Illinois had $4.5 billion in unfunded pension debt and a perfect credit rating. Today, Illinois has nearly $140 billion in unfunded pension debt and its credit rating is just one notch above junk status. That debt now eats $31 of every $100 taxpayers send to the state. It has cut by one-third into essential services. Illinois just spent a record $10 billion on pensions, the largest share in the nation, and still the pension debt grew.

Decades of bad decisions put us in this predicament. Politicians promised, repeatedly, to deliver on politically popular perks that were too good to be true, and they promised, repeatedly, that skimming more tax revenue from the people of Illinois could make the numbers work.

It hasn’t worked yet. The latest scheme, the progressive income tax, won’t work, either.

A little Illinois pension history:

• In 1970, delegates to the Illinois Constitutional Convention voted in favor of the pension clause, which states government employee retirement benefits shall not be “diminished or impaired.”

• In 1989, Illinois politicians passed legislation, without an actuarial cost estimate, that was the start of the 3% compounding benefit increases for retirees in Illinois pension systems. The increases are not tied to inflation. That bill also allowed state politicians to spike their pensions, allowing Democratic state Sen. Emil Jones, the chief sponsor, to boost his by $41,000 annually. That perk ended for lawmakers elected after 2003.

• In 1994, Republican Gov. Jim Edgar passed the “Edgar Ramp.” It set a target of 90% funding by 2045, rather than the 100% recommended by actuaries. The ramp lowered pension payments for the years Edgar was in office and raised them dramatically for his successors.

• In 2002, House Speaker Mike Madigan sponsored an early retirement plan promoted by disgraced former Gov. George Ryan that allowed more than 11,000 state employees to retire as early as age 50 with full pension benefits. It cost taxpayers $2.3 billion.

• In 2003, Illinois issued $10 billion in bonds to inject into pensions.

• In 2011, politicians promised a temporary tax hike would fix the state’s backlog of bills and pension debt. It didn’t, and so a year after that tax hike expired, Springfield revived it, creating the current 4.95% income tax rate we all pay today.

• In 2013, state lawmakers realized they had created a problem. Pension reforms were passed.

• In 2015, the Illinois Supreme Court ruled that those pension reforms were unconstitutional, because the “diminished or impaired” language in the state’s constitution prevents any meaningful reform without a constitutional amendment. Once a benefit enhancement is offered to a worker, it can never be modified for sustainability or affordability, even for future work not yet performed.

While the pension clause may sound like a protection, the unsustainable pension crisis it underpins actually threatens the retirement security of public workers.

What the clause doesn’t guarantee is that pension funds will have the money to actually pay promised benefits. The resulting pattern has been Illinois politicians who promise perks taxpayers can’t afford and then cover up with reckless funding games and growing piles of debt.

Pension reforms would go a long way toward solving Illinois’ fiscal crisis. Original actuarial analysis of a plan developed by the Illinois Policy Institute found fixing the automatic cost-of-living increase alone could eliminate more than 11% of the state’s pension debt. These savings are possible through temporary targeted COLA freezes to allow inflation to catch up to past benefit increases and replacing the 3% guaranteed compounding raise with a true COLA tied to inflation.

Such reforms would enhance the stability of the systems for retirees without diminishing their core benefits.

Illinois can continue to allow pension debt to grow and eat more resources, just as it can continue to willfully damage its economy with high taxes that drive away residents — more than 850,000 during the past decade. High taxes are the top reason for leaving Illinois, according to public opinion polling for NPR and the University of Illinois-Springfield. Analysis from the Institute has uncovered a weak housing market and poor job opportunities as other core causes of the exodus, which are linked to the tax burden.

Illinois is a place where people don’t shrink from hard work, but it’s not fair to ask them to work harder to support a cycle that has failed them. They aren’t being given the chance to have a voice on the problem that created our financial downfall — they’re only being told to say “yes” or “no” to changing how they’re taxed.

Illinois needs a constitutional amendment allowing it to attack its pension monster, not more food for the beast.

Adam Schuster is the senior budget and tax research director at the nonpartisan Illinois Policy Institute.

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