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Proposed Illinois Budget Includes Deep Cuts to State Pensions

Presenting a budget he said was “honest with the people of Illinois,” new Illinois Gov. Bruce Rauner (R) has proposed massive cuts to balance the state’s budget, with state pension plans bearing the brunt, The New York Times reports.  


“Our top priority for financial reform must be our pension system,” explained Rauner in unveiling a proposed $6 billion in budget cuts that includes $2.2 billion in pension reductions immediately and more than $100 billion over the next 30 years. According to a report in Crain’s Chicago Business, the budget proposal accomplishes that by freezing all benefits as of July 1, 2015 and moving workers to a new plan in which cost-of-living hikes would be cut from the current 3% a year to the lesser of either 3% or half the inflation rate, non-compounding. The proposed budget also calls for raising the normal retirement age to 67 and no longer counting overtime in calculating pension benefits. However, these changes would apply only to benefits earned after July 1; benefits earned prior to that date would be paid at the previous rate.

Rauner’s budget also gives employees hired before 2011 a choice to take a buyout option — a lump sum payment and a defined contribution plan in return for a voluntary reduction in cost-of-living adjustments. All told, Rauner said the reforms would yield more than $2 billion in savings in the first year alone.

Meanwhile, legislation that former Gov. Pat Quinn (D) was able to get enacted raising the retirement age and reducing cost of living adjustments is being contested in the courts by public employee unions, who claim it violates a provision in the state constitution that prohibits the “diminishment or impairment” of state workers’ benefits. In introducing the budget, Rauner made a point of saying that, “…the pension reform plan protects every dollar of benefits earned,” with an emphasis on “earned.”

The Democrat-led Illinois legislature is expected to put up a fight, claiming that Rauner’s cuts harm the state’s middle class without any pain to wealthy taxpayers. But facing what Rauner called “the worst pension crisis in America,” the state’s funding deficit exceeding $100 billion, and nearly 25 cents of every tax dollar going into the pension system, he described his budget proposal as the “last, best chance to get our house in order.”  

Just as Gov. Chris Christie (R) did in New Jersey to balance the budget by limiting payments to the state pension system, other states — particularly Illinois and Rhode Island — are waking up to the difficult choice of either raising taxes, eliminating services or cutting benefits. The recent Detroit bankruptcy played out that drama real time. 

With some estimates that there is up to a $4 trillion deficit in the nearly $6 trillion state and municipal DB system, watch for other states and entities to cut benefits rather than alienate their entire tax base of voters.