Tackling a shortfall: Preamble to Madigan proposal
The Illinois House of Representatives on Thursday approved Speaker Michael Madigan's legislative proposal to reform the state's pension systems. The plan requires employees to pay 2 percent more of their salaries toward pensions and limits cost-of-living increases, tying COLAs to a cap of $1,000 for each year of service. Pensions may be paid on a total salary of $110,000, a limit that increases by half the rate of inflation each year, and retirement is delayed to age 67 for workers age 45 or younger.
The bill, SB1, addresses only four of the five pension systems: state employees, university professionals, teachers and legislators, excluding the separate pension account for judges. Opponents say the bill is unconstitutional because it diminishes the benefits of existing retirees, and they have vowed to challenge the bill in court if it passes in the Senate and Gov. Pat Quinn signs it into law.
The bill includes a unique, nine-page preamble that lays out in detail the fiscal crisis facing the state and steps lawmakers have taken to address it. Supporters hope it provides a bibliography of sorts to help Supreme Court justices see the necessity of the action. "It would be used in the argument to the court and as happens in all major legislation, we're concerned about legislative intent," Madigan said, "and that's part of the intent." The text of the preamble follows.
At the time of passage of this amendatory Act of the 98th General Assembly, Illinois possesses a lower credit rating than each of the other 49 states. This is a consequence both of atypically large debts and of structural imbalances that will, unless addressed by the General Assembly, lead to rapidly growing debts. The debts include a backlog of bills exceeding one-fourth of the State's annual general revenue, substantial unfunded liabilities associated with health insurance for employees and retirees, and approximately $100 billion in unfunded pension liabilities. The structural imbalances result from projected growth in non-discretionary and formula-driven expenses that significantly outpace projected revenue growth.
Of the factors that drive this phenomenon, the most substantial by far is the rapid growth of the annual pension payment, which increased nearly $1 billion between Fiscal Year 2012 and Fiscal Year 2013, and will again increase nearly $1 billion between Fiscal Year 2013 and Fiscal Year 2014, at which time it will consume approximately one-fifth of anticipated general revenue.
The depth of this financial crisis became clear in 2008, and since that time, the State has taken significant action to ameliorate the State's fiscal troubles. In 2011, the State increased the income tax by sixty-seven percent in Public Act 96-1496. Recognizing that increased revenue alone would not solve the problem, the State has enacted a series of budgets that included deep cuts to nearly every discretionary program, including areas of the budget that are essential in order to provide for the health, safety, welfare, and educational development of the people of Illinois, such as public elementary, secondary, and higher education, human services, and public safety.
The State has both reduced the size of its workforce and reduced discretionary spending. Staffing levels have reduced from more than 65,000 in 2001 to the current level of nearly 44,500. The staffing level is now the lowest it has been in at least the last 25 years. Discretionary spending from the General Revenue Fund (GRF) has been reduced by over $2.8 billion since Fiscal Year 2009, including reductions for primary education of nearly $1 billion, higher education of over $230 million, public safety of over $200 million, and human services, including health care for the poor, of nearly $1.3 million. These reductions have occurred in spite of the rising costs of goods and services, which are particularly high in the area of medical goods and services, which is a significant area of state spending.
In 2010, Public Act 96-889 established a package of pension benefits for new employees that has been determined to be among the least expensive public employee retirement schemes in the country. It can be argued that the new package of pension benefits has placed government employers at a competitive disadvantage, and our public universities, which are vital educational and economic institutions, have been exposed to a significant risk.
In the spring of 2012, the General Assembly made significant reductions to the Medicaid program, passage of Public Acts 97-687, 97-688, 97-689, 97-690, 97-691, a series of reforms to the Medicaid program that is projected to reduce State debt by over $2.5 billion each year by decreasing services, increasing the rate of taxation of cigarette purchases, and accessing available federal funds. The reductions include the elimination of a prescription drug program for low to middle income seniors, across the board provider rate cuts, elimination of health care for adults whose families make above 133% of the federal poverty limit ($31,322 for a family of four), elimination of restorative dental treatments for adults covered by Medicaid, and utilization limits on all remaining services covered by Medicaid. While the Medicaid reforms will result in savings for the State, these reforms have resulted in the denial of crucial health care to hundreds of thousands of needy citizens, threatening to further destabilize an already-troubled safety net.
The General Assembly took significant steps to reduce the cost of current and retired employee health care costs. With Public Act 97-695, the General Assembly eliminated provisions that require that retired state employees with more than 20 years of service receive a 100% premium subsidy for retiree health care coverage after 20 years of service. Beginning with Fiscal Year 2014, State employees will be required to contribute significantly more toward health care premiums, co-pays and deductibles. These changes to health care will result in an estimated savings of more than $900 million over the next two fiscal years. However, the backlog of payments to providers is estimated to be nearly $1.8 billion at the end of Fiscal Year 2013, and providers will experience a delayed payment cycle of up to 14 months.
Notwithstanding these many steps and their major fiscal, economic, and human impact, the fiscal situation in Illinois continues to deteriorate. Cuts as well as the inability to pay bills due and owing has had a significant impact on each branch of government, units of local government, social service providers, and other vendors.
Two-thirds of Illinois school districts are in a budget deficit, even after massive layoffs and programmatic reductions. For Fiscal Year 2013, General State Aid payments to school districts are currently being prorated at 89% of the calculated amount. For Fiscal Year 2014, the Governor's introduced level of General State Aid payments would result in a proration of 82%.
Illinois human service providers are experiencing extraordinary fiscal pressures, leading to deficit spending, discontinued programs, and, increasingly, bankruptcies. On January 19, 2012, the Jane Addams Hull House Association, one of the oldest and most renowned human service agencies in the country, founded by the first Illinoisan to win a Nobel Peace Prize, announced it would close due to financial difficulties.
These manifold challenges have exposed the people of Illinois to very substantial harm.
Cuts to the budget of the Department of Corrections have resulted in the closing of two major prisons and three Adult Transitional Centers. Similarly, the Department of Juvenile Justice was forced to close two youth centers. Funding for probation services to help break the cycle of recidivism and improve public safety have steadily declined over the past 5 years due to the fiscal strain on the state budget. For Fiscal Year 2014, the Supreme Court has requested an appropriation to meet statutory probation service requirements of $101,229,500; however, the Governor has proposed an appropriation of $47,140,000 — that's 53% less than necessary to fund probation services required under law.
Illinois has failed to invest the necessary resources to maintain a viable transportation plan in recent years. By year 2018, nearly 1 in every 3 miles of roads and 1 in every 10 bridges will be in an unacceptable condition. Recent reports have shown that roughly 8% of bridges in Illinois are structurally deficient and 7% of bridges are functionally obsolete. Illinois has not been able to invest the necessary dollars for state and local roads which has led roughly 73% of the roads in the state to be in poor or mediocre condition.
The State's credit rating has consistently worsened in the assessment of all three major ratings agencies, the State's backlog of unpaid bills has not grown smaller, and the various non-discretionary and formula-driven expenses whose growth has created the lion's share of the problem are projected to continue unabated. Under the current payment schedule set in Public Act 88-593, the pension payment especially is expected to grow extremely rapidly until Fiscal Year 2045.
Consequently, the coming months and years will necessarily see much more action by the State to achieve fiscal stabilization. If these steps toward fiscal stabilization do not include pension reform to restrain the growth of the annual pension payment, the result will be devastating and dramatic cuts to education, public safety, and transportation. The impact of such actions on the Illinois economy, and on the health, safety, welfare, and educational development of the people would likely be extremely severe. This harm could include significant economic contraction, which would in turn exacerbate the underlying fiscal challenge, resulting in a downward spiral of standard of living and likely leading to an eventual inability of the state to meet its short term statutory and Constitutional responsibilities.
The State has experienced well-documented pension debt problems for many decades. Throughout this time, General Assemblies and Governors have struggled to find workable solutions. On several occasions, most notably in the instances of Public Acts 88-593 and 96-889, reform efforts were heralded as comprehensive fixes; these claims have in each instance been disproven over time.
The inadequacy of past reform efforts has resulted from two phenomena. First, reforms have instituted actuarially unsound funding schedules that masked the depth of the problem by deferring payments far into the future. Indeed, this practice led to the Securities and Exchange Commission's charging of Illinois with securities fraud in March 2013. Second, steps that were taken to reduce costs or generate funds to make pension payments were insufficient to make it feasible for the State to meet an actuarially sound funding schedule. Simply put, reform efforts left the State with an unaffordable pension liability, and in order to mask this, the State instituted artificial and ultimately ruinous funding schedules.
The General Assembly has held numerous hearings and reviewed hundreds of documents detailing the problem, probable solutions, and constitutional issues with proposed reform.
Given that and all of the above: The General Assembly finds that the fiscal crisis in the State of Illinois jeopardizes the health, safety, and welfare of the people and compromises the ability to maintain a representative and orderly government.
The General Assembly finds that the pension debt is so great, and the State's fiscal condition is so challenged, that it is unclear whether any set of actions by the State that do not include substantial reforms to its pension systems can result in the full payment of all promised benefits.
The General Assembly finds that in order to truly solve the State's pension problem, a reform measure must render the pension liability affordable on an actuarially sound funding schedule, and it must, in a binding fashion, commit the State to maintaining this schedule.
The General Assembly finds that the reforms in this amendatory Act of the 98th General Assembly are necessary to address the fiscal crisis without incurring further severe and irreparable harm to the public welfare.
The General Assembly finds that this amendatory Act of the 98th General Assembly constitutes the substantial reform of the State's pension systems that, along with a series of further steps toward fiscal stabilization, will enable the State to credibly promise the full payment of all pension benefits without incurring unacceptable harm to other areas of State interest.
The General Assembly finds that this amendatory Act of the 98th General Assembly, with its significant cost-savings, its institution of an actuarially accepted payment schedule, and its historic and binding funding guarantee, is necessary and sufficient in order to meet these goals and solve the State's pension problem.