Illinois’ public-pension buyout plan seemed to some like a good idea. They were wrong.
Every time Illinois’ elected officials take action to address this state’s serious pension problem, they fall on their faces.
Their first serious effort involved legislation that sought to slow the growth in future retirement benefits earned by members of the state’s five public pension programs.
But that legislation was struck down by the Illinois Supreme Court. The high court ruled that once a pension promise is granted, it is unconstitutional to modify promised benefits in any way, even those that have not yet been earned.
This week brought news of another failure on the public pension front.
Two pension buyout plans that former Gov. Bruce Rauner and legislators predicted would save more than $400 million this year came up a bit short on the savings front. In the end, the plans saved a mere $13.1 million.
Now that isn’t chump change. But in the context of the state’s overall pension debts — between $135 billion and $250 billion, depending on the calculation employed — it represents a few grains of sand on a desert of pension futility.
How could financial estimates be so far off?
State officials vastly overestimated how well-received the buyout programs were. Perceived as attractive to many, they proved to be attractive to few.
The buyout plans were designed to cut state pension costs by persuading workers to trade future benefits for present payouts.
The problem, of course, is that pensions for public employees in Illinois are so generous that few were willing to trade money down the road for money now. That’s because the money down the road is striking.
For example, state law allows for 3 percent annual cost-of-living increases, even if the actual increase in the cost of living is substantially less than that.
Those increases, which are compounded, have driven state pension costs through the roof.
One buyout plan called for public employees in the Tier 1 program to give up their 3 percent annual compounded increases for increases of 1.5 percent on their base pensions.
In exchange for that concession, those who accepted the buyout would receive a lump-sum payment of the “70 percent of the difference between the value of their benefits with the higher and lower increases.”
The second buyout proposal called for former state employees who are qualified to receive a state pension to trade their pension for a lump-sum payment equal to 60 percent of their pension’s value.
State officials foolishly estimated — on what was this estimate based? — that 25 percent of retiring Tier 1 members would opt for the COLA buyout and that 22 percent of former state employees would trade their pension for a one-time payment.
Wrong, wrong, wrong.
The state’s five public pensions are, roughly, 40 percent funded. So retirees will continue to receive their monthly payments, even as the level of under-funding increases.
But on the other side of the equation, the General Assembly is being forced to make larger and larger contributions to keep the pensions afloat, in the process making it increasingly difficult to pay for core programs like education, roads and highways and law enforcement.
The buyout plan was supposed to ease that deeply serious problem. Now it’s back to square one.