Illinois will have to be pension reform pioneer

Illinois has to look beyond the 50 United States, to Puerto Rico, when searching for a pension system in worse shape than its own, experts say.

The commonwealth is the only government in the United States whose pensions are in a worse state than Illinois’, said Luke Martel, a senior policy specialist at the National Conference of State Legislatures. But Puerto Rico has made recent strides toward reform that could point to a potential path to solvency in Illinois.

Besides Puerto Rico, Illinois is essentially peerless when it comes to pension problems, Martel said. Because of that, Illinois will have to be a trailblazer when it comes to comprehensive state pension reform, but Puerto Rico and other states offer a glimpse at potential solutions and a lesson in what went wrong with the state’s pension system.

According to several studies, the pension system in Illinois is about 45 percent funded, the lowest funding level of any state in the country. Puerto Rico’s pensions are funded at a level of about 7 percent.

Martel and credit analysts applaud a recent reform proposal from Puerto Rican Gov. Alejandro Garcia Padilla that included raising the retirement age for public employees and increasing employee contributions to the pension fund, two ideas that are part of nearly every reform that has been proposed in Springfield.
In his budget address March 6, Gov. Pat Quinn blamed the state’s budget woes on “skyrocketing pension obligations” and said failure to reform the public retirement system has forced cuts in core areas of the state budget like education and infrastructure. In fiscal year 2014, which begins July 1, 2013, Illinois will have to pay $6 billion in pension costs, up almost $1 billion from the amount owed in 2013.

Illinois has $96 billion in pension debt, which is almost twice as much as the state’s $49 billion operating budget this year.

“Inaction on comprehensive pension reform has left our state with less revenue for our most important priorities. Without pension reform, within two years, Illinois will be spending more on public pensions than on education,” Quinn said.

In his proposed budget for 2014, Quinn dedicated $6.3 billion to the State Board of Education.

Reform will not be easy. Because it is in worse shape than any other state in the nation, Illinois will have to enact broader and more comprehensive reform than has ever been attempted, said credit analyst Rachel Barkley of Morningstar, a Chicago-based credit research group.

“If Illinois passed the pension reforms that they would need to pass, then they would be among the most all encompassing [reforms] that has been enacted,” Barkley said.

Barkley said there are “different ways to go about” pension reform in Illinois, but she said other states like Rhode Island and California have enacted reform that included raising the retirement age, increasing employee contributions and making cuts in benefits.

While consensus on specific reforms have been hard to come by in Springfield, what Quinn, lawmakers and pension experts can all agree on is what led to the state’s current crisis: past failures to properly fund the pension system.

Barkley said Illinois is not unique in the size or scope of its pension system, but it is unique in its refusal to fund it. She blamed low levels of funding, and the state’s history of borrowing from the fund for Illinois’ staggering pension debt.

“It is of their own making … they have historically some bad practices,” she said.