The Illinois Legislature’s Commission on Government Forecasting and Accountability recently released an eye-popping actuarial analysis of a union-backed pension reform plan.
The analysis concluded that the proposal, House Bill 5909, would cost taxpayers almost $30 billion through the year 2045.
And the annual state cost starting in fiscal year 2027, which begins in mid-2026, would be $1.13 billion.
As you likely know, the state is bracing to deal with a $3.2 billion deficit in the upcoming 2026 fiscal year. The state’s projection for the following fiscal year, FY27, envisions a $4.3 billion deficit. So, adding another billion-plus on top of that seems untenable, even though these budget projections don’t include any upcoming changes to how the state funds government.
More importantly, that estimate only includes the “Big Three” pension plans (state, university and teachers), and excludes local pension funds like the Illinois Municipal Retirement Fund and first responder funds, as well as the pension funds for judges and legislators.
Union members flooded the statehouse during the November veto session demanding these changes to the state’s Tier 2 pension program.
Public employee unions hotly opposed Tier 2 when it was approved by the General Assembly and Gov. Pat Quinn in 2013. The idea back then was to force newly hired employees to accept a significantly reduced pension package because the state was being crushed by the large and ever-growing costs of the existing plan, due to many decades of woeful state underfunding and legislative over-promising. The state constitution forbids reducing any pension benefits once they are granted, so the change could only be made to new hires going forward.
The actuarial report was conducted by Segal, a consulting firm often used by the commission. Segal also conducted an actuarial analysis on an earlier version of Tier 2 pension reform (HB 4973), which found it would cost state and local governments a net $4.6 billion by 2045. But the unions instead came down to Springfield in full force to back the new bill, introduced the day veto session began this past November.
Back in November, Gov. JB Pritzker told reporters he would “if necessary” agree to make sure all pension systems were in compliance with Social Security’s safe harbor provisions, meaning the pension benefits are at least as much as Social Security payments, as required by federal law. The earlier analysis of the previous bill had pegged that safe harbor cost at $4.8 billion for all systems. The latest analysis of the new bill has that particular projected cost at $6.2 billion just for the big three funds.
According to the new commission report, the union-backed changes to the final average salary calculation would cost an additional $1.1 billion through 2045; a redo of the annual cost of living adjustment payments would add $4.4 billion; and lowering the retirement age for Tier 2 recipients to equal Tier 1 recipients would cost a whopping $11.3 billion.
Total price: $29.76 billion, with the first additional payment of $1.132 billion owed in FY27, on top of the projected $10.8 billion projected pension payment that fiscal year.
Whew.
The previous Tier 2 bill was much more affordable. The legislation included a $500 million annual funding source by using revenues freed up from retiring debt. The price tag for that would’ve been a mere $47 million in the coming fiscal year. Needless to say, $47 million is a lot easier to swallow than $1.1 billion.
And again, the new actuarial projection for the new bill doesn’t include any of the municipal pension systems or smaller state systems. The total cost would be significantly higher than the projection claims.
Pritzker is not enthusiastic about the union-backed bill, to say the least.
While Pritzker reiterated his support last week to bring pensions into compliance with federal Social Security laws, his spokesperson said the governor “has been crystal clear that he will not support any pension proposal that is credit negative or threatens the State’s balanced budget.”
Adding $1.1 billion a year to the state’s outlays would just be too much of a budget hit to take.
And even the proposal’s Senate sponsor, Sen. Rob Martwick, D-Chicago, agreed that the state can’t afford the plan.
Martwick call his bill a “great starting point” in negotiations, “because it shows us the cost of doing the right thing,” and insisted that the pension benefits created by the bill “are not ‘too rich.’”
However, Martwick said, “The unfortunate reality is that Illinois and Chicago are such financial disasters that we very well cannot afford to do the right thing.”
Back to the drawing board.
- H-W - Monday, Jan 27, 25 @ 8:59 am:
Thanks for the thorough presentation, Rich. When I was a member of the Union, our local sometimes presented desires that were out of sinc with what was possible. When Rauner froze spending, our local was advocating for cost of living adjustments and contract provisions that in theory were logical, but on paper did not balance. Then the bottom fell out, and we had to debate “our way or the highway.” The highway meant large layoffs in order to increase earnings for those who survived layoffs. A compromise was reached in which we actually gave back our previous wage increase, and settled for no immediate pay raises. In the end, about 50 just were saved.
At the local level, each worker represents a family with needs. Their first need is a job sufficient to make ends meet. At the same time, each state organization can only spend money it has or will receive. It cannot spend according to the desires for more money. Finding a compromise in labor relations always involved balance wishes and desires with actual budget projections.
IT seems the one thing that is clear today, is that the Tier 2 pension plan must by any means necessary match social security, or pay social security. If the latter, then early retirement is fixed by federal law. It also seems likely that switching to social security will require some form of fiscal compensating for those who were previously employed under Tier 2 whose retirement plan was less than they would have receive from through Social Security payments.
This seems to be the floor from which the state and the unions must begin negotiation - State Retirement or Social Security. Right now, we are not there.
- Southern Dude - Monday, Jan 27, 25 @ 9:22 am:
=== Public employee unions hotly opposed Tier 2 when it was approved by the General Assembly and Gov. Pat Quinn in 2013. ===
Tier II started in January 2011. I think the Union’s biggest problem is the not everyone’s pension needs reformed to meet the social security requirements. They will have to improve some members pension but not all.
- TNR - Monday, Jan 27, 25 @ 9:22 am:
== our local sometimes presented desires that were out of sinc with what was possible. ==
A lot of that happening here. Martwick’s comments are on target.
- RNUG - Monday, Jan 27, 25 @ 9:27 am:
== due to many decades of woeful state underfunding and legislative over-promising … ==
More like a century. And the underfunding is a feature, not a bug, to give the Legislature some wiggle room on the budget.
- City Zen - Monday, Jan 27, 25 @ 9:29 am:
How much are Tier 2 members willing to pay for Tier 1 benefits? What are Tier 2 members willing to exchange today for a better benefit tomorrow?
Would Tier 2 teachers be willing to contribute 15% of their salary for a full Tier 1 benefit? Maybe 13% to lower the retirement age a couple years? The state should be open to bargaining in good faith for Tier 2 pension enhancements. But by no means should the state simply give it away for free like the unions want.
Tier 1 is gone, folks. Tier 1.x has a price. How much are Tier 2 members willing to pay for it? Zero is non-negotiable.
- RNUG - Monday, Jan 27, 25 @ 9:39 am:
== They will have to improve some members pension but not all. ==
The above is on point. The Safe Harbor provision only requires the average meet the rule. If the State meets that bare minimum, there will still be retirees who will earn less than they would have under SS.
One interesting point that I’m not sure has been factored in: the recent change to the government pension SS offset rules. I don’t see that affecting SERS (since they are mostly already in SS also), but it could affect SURS, TRS, GARS and JRS. Especially if they had SS earnings outside their State employment or if they could potentially draw from a spouse.
This change was just passed a couple of weeks ago, and could be a game changer. I haven’t fully absorbed the potential impact.
- Donnie Elgin - Monday, Jan 27, 25 @ 10:02 am:
=More importantly, that estimate only includes the “Big Three” pension plans (state, university and teachers), and excludes local pension funds like the Illinois Municipal Retirement Fund=
IMRF should not be lumped into the state-run pensions - yes they will have a tier 2 problem - but the huge difference is that IMRF is mandated to be fully funded each year - and when any tier 2 fix is implemented the municipalities will be “forced” to cough up the cash with a higher employer rate. won’t be easy - but it is much less of a crisis than the state-run plans that have not had proper funding for decades.
- Wisco Expat - Monday, Jan 27, 25 @ 10:14 am:
As a Tier 2 member, I wish that my retirement age matched those of Tier 1 employees. To get my full pension benefits, I will have to work for 45 years to get my full pension at age 68. I have had coworkers who retired a full decade before I can and still receive their full benefits. However, you can’t pay pension benefits if the state doesn’t have the money. Fixing the safe harbor issue is the bare minimum. From there, the state should implement incremental increases to pension benefits IF it is in the budget. While we all want a nice fat retirement check, that’s just not realistic.
- Enfuego - Monday, Jan 27, 25 @ 10:27 am:
They will kick can down the road
- Center Drift - Monday, Jan 27, 25 @ 10:36 am:
While there are lots of people blame can be attached to on this debacle it’s clear that it’s a mess. State employees also need to keep in mind that most of the public that doesn’t have a relative employed by the state considers state compensation to be wildly out of touch with reality. The last thing, the very last thing, the public wants is to pay more for pension packages they will never see.
- Donnie Elgin - Monday, Jan 27, 25 @ 10:52 am:
= I have had coworkers who retired a full decade before I can and still receive their full benefits=
One voluntary way to help with this is to contribute to a 457 plan. These are similar to 401(K) and many public employers offer them. As the saying goes big things have small beginnings - start when you are young with a very small contribution each paycheck and annually increase by 1 or 2 percent.
- Mike Gascoigne - Monday, Jan 27, 25 @ 10:55 am:
Bummer.
- Candy Dogood - Monday, Jan 27, 25 @ 10:57 am:
===Tier 1 is gone, folks. Tier 1.x has a price. How much are Tier 2 members willing to pay for it? Zero is non-negotiable. ===
Tier 2 employees are already paying the same amount into the pension as Tier 1 employees for a reduced benefit. The theme in Illinois and the rest of the country is to completely ignore the concept of generational equity.
Today a Tier 2 employee pays the same for a worse pension and pays higher taxes on their income than people did in the 1970s, 1980s, 1990s, and 2000s, which is the time frame that largely contributed to the State of Illinois unfunded pension liabilities while the people that received those services without paying the full cost of those services are able to subtract 100% of their federally taxed retirement from the Illinois base income. Any discussion of asking the people in our state who are the most responsible for the poor fiscal condition of the state to pay any amount of tax on their retirement income is completely abandoned.
===But by no means should the state simply give it away for free like the unions want.===
“Give it away for free” is what the body politic in the state, the law makers and the people who voted for them were doing when they refused to pay the full cost of their services by paying for pension costs as the accrued.
Pension benefits are earned through employment. No public employee’s pension in Illinois is “free” to the employee.
===Would Tier 2 teachers be willing to contribute 15% of their salary for a full Tier 1 benefit? Maybe 13% to lower the retirement age a couple years?===
Why should anyone come to work for a school district that believes their faculty and staff deserve such a garbage arrangement for retirement?
I understand that we live in a world of political absurdity right now, but do you really expect the adults that leave our state to pursue education in other states because it is cheaper than paying in state tuition here would choose to return and remain teachers in Illinois if this is the kind of garbage they can expect? We already have a problem with the current conditions of Tier 2 in recruitment and retention and you want to make the problem worse and pretend like it is a good idea?
Next are you going to propose the Governor turn out the militia to force teachers to work for substandard benefits?
- H-W - Monday, Jan 27, 25 @ 11:06 am:
@ RNUG
I am a Tier 1 employee who spend half of my working career in the private sector, and half with the state. Needless-to-say, I was more than pleased with the elimination of the Windfall Tax Act by the last Congress. It will give me a significant bump (about 40% increase) in my social security income when I retire from the state in 2026. That in itself will make the difference between retiring, and retiring well.
- Grimlock - Monday, Jan 27, 25 @ 11:21 am:
As a Tier 1 member I can honestly say Tier 1 is over generous, I’ll retire at 51. So for the unions to demand that Tier 2 just go back to Tier 1 is just ridiculous. Just wait another decade or two, then everyone will have the same retirement system and it will be “fair.” The unions sound like entitled children. When I bought my first house I didn’t cry about the price or mortgage rates compared to what my parents paid. I understood that changes change over time.
- Pot calling kettle - Monday, Jan 27, 25 @ 11:22 am:
==This seems to be the floor from which the state and the unions must begin negotiation - State Retirement or Social Security.==
That is the key point that often gets lost in this discussion. There will be a cost to not fixing Tier 2; the bill from the Feds if the safe harbor is lost. Employers and employees will be on the hook for that bill (6.2% from each). If Tier 2 is not fixed, employees will see a 6.2% pay cut. The employers (the state and/or local governments) will need to come up with their 6.2% and will likely be asked to increase pay to make up the other 6.2%.
I have not seen an estimate of what that cost would be, but it is a necessary measure when evaluating the cost of a Tier 2 fix.
- thechampaignlife - Monday, Jan 27, 25 @ 11:43 am:
===Would Tier 2 teachers be willing to contribute 15% of their salary for a full Tier 1 benefit? Maybe 13% to lower the retirement age a couple years?===
I am Tier 1 in SURS, and I would be willing to pay a premium above and beyond the full cost to lower the retirement age a couple years. If buying a year of service credit means I would draw my pension a year earlier and that would be 66% of my pre-retirement salary, let me pay 79%. The State gets to keep that 20% premium and they get me to retire early so they can replace my higher end-of-career salary with a lower one for someone earlier in their career. And I get the benefit of retiring a year earlier at the cost of giving up that last year’s salary and paying an extra 20%. It is a win-win for the State and employees looking to retire early.
===This change was just passed a couple of weeks ago, and could be a game changer.===
Could you expand on this? Is this likely to cost the State even more?
- Peter Kowalski in Champaign - Monday, Jan 27, 25 @ 11:51 am:
I disagree with the idea Tier II are paying the same for reduced benefits. The surviving spouse benefit is 50% higher and there is better protection from long-term high inflation rates. The benefits are different but not necessarily reduced, everyone has a different life story.
- thechampaignlife - Monday, Jan 27, 25 @ 11:59 am:
=== there is better protection from long-term high inflation rates===
I cannot speak to the surviving spouse benefit, but the long-term high inflation rates is worse, not better. It is 3% or half of CPI-U, whichever is lower. For Tier 1, it is always 3%. So, the automatic annual increase (AAI) for Tier 2 is only as good as Tier 1 when CPI-U is 6% or greater. The Tier 2 AAI is never greater than Tier 1, and it is always worse that Tier 1 when CPI-U is less than 6% (which it almost always is).
- Appears - Monday, Jan 27, 25 @ 12:25 pm:
There is another thing to be considered: payroll.
A lot of people who work for the State do so for a lower wage so that they will have a pension. If the public wants good teachers, good police and firefighters, good nurses at the Veterans homes, good people working in all branches of public employment…most of these people are working at lower cost now for a pension later. If the pension doesn’t hold up, then the State will either have to pay higher wages now or take those employees that didn’t cut it in the private sector.
- Candy Dogood - Monday, Jan 27, 25 @ 12:28 pm:
===there is better protection from long-term high inflation rate===
Tier 2 is a non-compounding COLA that is the lesser of 1/2 CPI or 3%. Tier 1 is a compounding COLA that is fixed at 3%.
No matter what occurs with the rate of inflation, Tier 1 has better protection against inflation in all circumstances. Tier 2 will never match inflation and because it is non-compounding the longer an employee is retired the more the reduction of real spending power of their defined benefit accelerates every year the employee is retired.
The monthly defined benefit is also lower because it averages over the previous 8 years. A modest increase to the surviving spouse benefit is a red herring at best and does not support your non-factual opinion.
- Mason County - Monday, Jan 27, 25 @ 12:51 pm:
My thoughts.
Drop Tier 2. Go into SS with up to a 5% matching IRA (limit to SS maximum salary eligible).
Not unlike many of those in the private sector which counters the hatred of those who hate public employee pensions.
Downside: Federal government and pension plans do not take IOU’s. No gimmicks. State has to up with the money on time.
- Big Dipper - Monday, Jan 27, 25 @ 12:51 pm:
== the recent change to the government pension SS offset rules.==
Biden signed that. Will 45/47 try to undo it?
- Back to the Future - Monday, Jan 27, 25 @ 12:52 pm:
Well written and researched column.
Candy Dogood, as usual,
brings a thoughtful analysis to the fundamental concerns with this issue.
- City Zen - Monday, Jan 27, 25 @ 12:54 pm:
==Tier 2 will never match inflation==
Pensions are under no obligation to keep up with inflation. Their only job is to cut you a check until the day you (or your surviving spouse) die.
==when they refused to pay the full cost of their services by paying for pension costs as the accrued.==
Would you have preferred large cuts in health benefits and long term wage freezes in exchange for full pension payments all those years? Guessing no.
- Rich Miller - Monday, Jan 27, 25 @ 12:54 pm:
===Downside: Federal government and pension plans do not take IOU’s===
Even bigger downside: without those people paying into the pension system, the taxpayers have to pony up even more money.
Next!
- Mason County - Monday, Jan 27, 25 @ 12:58 pm:
=Even bigger downside: without those people paying into the pension system, the taxpayers have to pony up even more money=
Yes, thank yo for pointing that out. I know that and forgot to mention it.
That is the problem when individuals or governments don’t pay their ‘bills’ on time.
- Candy Dogood - Monday, Jan 27, 25 @ 1:00 pm:
===As a Tier 1 member I can honestly say Tier 1 is over generous, I’ll retire at 51.===
This is a pretty easy conundrum for you to address. Stay at your job until you’re 67.
- No Pension Here - Monday, Jan 27, 25 @ 1:04 pm:
The thing to do is to give ALL the Taxpayers Rich references a binding opportunity to weigh in the Illinois Pension related Constitution language.
Anticipating…….Never Gonna Happen response….
- Big Dipper - Monday, Jan 27, 25 @ 1:06 pm:
Even a constitutional amendment would be only prospective so that argument is just hot air.
- City Zen - Monday, Jan 27, 25 @ 1:50 pm:
The good folks at TRS are kind enough to not only provide CAFRs going back 30+ years, but they also break out the pension normal cost (the cost of pension benefits for current/active employees that year with no pension debt) from the overall pension cost that year that includes all the debt owed.
Around 30 years ago, the normal cost for a teacher’s Tier 1 pension (the only tier that existed back then) was about 6-7% of payroll. According to the latest TRS CAFR, that percentage is now 15%. It’s projected to be 16% next year.
So the yearly cost of Tier 1 pension benefit has more than doubled over a generation. Yet some are arguing these benefits are a birthright to any current and future public sector employees unti the end of time. Ridiculous.
- The South Springfield Shoplifter - Monday, Jan 27, 25 @ 1:51 pm:
The unions were doing a pretty good job building consensus around the inadequacy of Tier 2. I don’t understand what they accomplished by introducing this bill. Going into this session, all anybody’s going to talk about is “30 billion.” Every Tier 2 pension article is going to lead with that figure. How did this bill help their cause?
- Jane - Monday, Jan 27, 25 @ 2:05 pm:
We need to move to Social Security for public sector employees. Other states do it - and most state employees (SERS) workers are in Social Security already. This solves the whole “safe harbor” issue and forces the state to provide and fund an appropriate top-up pension/benefit just like the private sector.
- Rich Miller - Monday, Jan 27, 25 @ 2:06 pm:
===This solves the whole “safe harbor” issue===
As noted above, it creates a whole new issue that the taxpayers will have to fund.
- Chicago Teacher - Monday, Jan 27, 25 @ 2:26 pm:
Major league bummer. Teaching until 67 isn’t sustainable. What’s worse is that we’re basically paying out of our salary to make sure veteran teachers can retire on time and early.
I don’t want to get rich and I don’t want to bankrupt the state on pension obligations, but you have to think there’s an improved benefit out there that makes sense for everyone.
I’m not really in favor of 401ks per se, but if you’re going to give every new teacher a 10 year vesting period for a stressful job and one of the worst teacher pensions in the country I’d almost rather just do 401k + social security.
I get the yearly update from the Chicago Teachers Pension fund and they’re getting 4-6% returns in years that my former private corp 401k is getting 20%.
Not trying to complain woe is me/us, teaching is ultimately a choice, but you’d love to see something pass that works for everyone and keeps the best people in the profession (Teachers/cops etc).
- RNUG - Monday, Jan 27, 25 @ 3:45 pm:
== Go into SS with up to a 5% matching IRA (limit to SS maximum salary eligible). ==
Better to use the Deferred Comp 457 plan.
- RNUG - Monday, Jan 27, 25 @ 3:47 pm:
== Biden signed that. Will 45/47 try to undo it? ==
Actual bill passed through Congress with bipartisan support. Can’t easily undo that with an Executive Order.
- RNUG - Monday, Jan 27, 25 @ 3:50 pm:
== Would you have preferred large cuts in health benefits and long term wage freezes in exchange for full pension payments all those years? ==
Or just maybe the State could have cut spending in other areas …
- Jane - Monday, Jan 27, 25 @ 3:57 pm:
Oh, and bonus content: my son is looking into policing when he graduates. If state/municipal pensions were an add-on to Social Security, he’d have that safety net, but there is at the moment no or very weak protection against high inflation during retirement.
- RNUG - Monday, Jan 27, 25 @ 3:59 pm:
== We need to move to Social Security for public sector employees. ==
Some State employees, primarily the majority of SERS members, already pay into both the State pension system and SS.
The majority that are not paying in SS are educators and life / safety.
If you switched those 2 groups to SS only, then you would have to follow the SS rulrs, including age, instead of the more generous benefits under the current systems. Things like educators getting to boost their pension earnings through generous (but recently a bit limited) late career raises or life / safety, who pay more, being able to retire at 20 years due to the physical requirements.
- Sue - Monday, Jan 27, 25 @ 4:47 pm:
Without maligning Segal- it has historically been known as the go to actuarial firm by organized labor- so take its work product with that in mind- regardless- tier 2 was aimed at saving the state money so assuming any corrective fix must occur? - it should be the bare minimum necessary to satisfy any federal requirement not revamping the program to approach tier 1 benefits or costs
- Tim - Monday, Jan 27, 25 @ 9:09 pm:
Do the minmum to hit Safe Harbor. We can’t afford anything else. Fair or not. Answer the following question. We are going to pay for this with what?