According to the Illinois Retirement Security Initiative, working under the auspices of the Center for Tax and Budget Accountability, state lawmakers should instead focus on how to pay off the $40 billion debt run up by the five state-funded pension systems.

"It was not our current (benefit) system that created Illinois' unfunded pension liability, it was the state's failure to fund the system," said Jourlande Gabriel, author of the study. "Switching to a defined contribution system will not erase the debt. It will simply cost the state more money while depriving retirees of adequate benefits."

The state-funded retirement systems for state employees, university workers, downstate teachers, judges and lawmakers are all defined-benefit - as opposed to defined-contribution - plans. Benefits are based on a formula that takes into account salary, years of experience and a benefit multiplier.

Some have suggested new public employees be put into defined-contribution plans, such as the 401(k) programs common in private industry. (Pensions for existing employees could not be changed). In those, employees decide how much of their salaries they want to contribute, and their benefits are based on the balances in their accounts at retirement.

The study found that retirement benefits offered to Illinois public employees are around the national average. The study included public employees in both the state and local pension systems, although the state does not fund local pension programs.

The study also concluded that the administrative costs of defined-contribution programs are three to six times as high as those for traditional defined-benefit plans. In Illinois, the study determined, that could add $275 million to $610 million in administrative costs.

The study also warned that peo-ple in a 401(k)-style plan could end up with lower benefits than those in a traditional plan.

Worst of all, said center director Ralph Martire, the switch would do nothing to reduce the pension debt already facing the state.

"It doesn't matter if we switch the pension system we have today," Martire said. "It wouldn't reduce by a penny the current unfunded liability."

He said switching pension plans has "been thrown out as a panacea."

The Civic Committee of the Commercial Club of Chicago last year recommended moving new state employees into a 401(k)-style system, along with other pension changes. The group also argued that a tax hike is needed to help pay off state debt, not only in pensions, but in health care.

Earlier this year, Sen. Bill Brady, R-Bloomington, and three other Republican senators sponsored a bill creating a defined contribution pension system for state employees.

Brady acknowledged that his approach would not cut Illinois' current pension debt, but believed it would reduce future costs. The bill has been bottled up in the Senate Rules Committee since early February.

Gov. Rod Blagojevich's office has said it wants pension system changes, but is concerned that a defined contribution approach may be too costly.

The Civic Federation of Chicago also has recommended a number of state government pension changes, such as increasing employee contributions, raising the retirement age and changing health benefits for retirees. That group said the state should study a defined contribution plan.

Martire said his group supports Blagojevich's proposal to lease the state lottery and issue $16 billion in bonds to reduce the pension debt. However, that would go only part of the way, he said, because state revenues don't keep pace with the costs of the pension plans and other state services.

"To solve the pension problem, we think we need fiscal reform, and to get there, we have to raise taxes," Martire said, adding that his group is promoting legislation to raise the income tax and expand the sales tax to services as a way of raising money. The plan also calls for tax relief.

Martire said the combination would mean 60 percent of Illinois taxpayers would see no increases in their taxes.

Doug Finke can be reached at 788-1527 or doug.finke@sj-r.com.

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Reader Comments - 25 comments

producing worse benefits wrote at 5/8/2007 7:21:42 AM

I guess anything less than the golden parachute of State retirement is technically "producing worse benefits" ....

lease the state lottery and issue $16 billion in bonds to reduce the pension debt. wrote at 5/8/2007 7:28:20 AM

In 1985, a law was enacted to deposit all Lottery profits in the state’s Common School Fund (CSF), which helps finance K-12 public schools throughout Illinois. Lottery proceeds of $619 million in fiscal year 2005 represent about 9 percent of the state’s contribution to schools. If Blago LEASES the Lottery How is that going to Impact School Funding? Just Curious ...

Simply Pathetic wrote at 5/8/2007 7:44:27 AM

"retirement benefits offered to Illinois public employees are around the national average" It currently takes 30 years of state employment to earn 50% of your pre-retirement salary. So if you are lucky to make $30,000 a year you will see a benefit of $15,000 upon retirement. I would like to know what the average Illinois private business pays their retirees after 30 years of service.

CC wrote at 5/8/2007 7:54:05 AM

We were hired at lower wages than the public sector for years with the promise of miniscule pensions when we retire. Leave it alone, it is guaranteed by the State Constitution.

and stop the spending.... wrote at 5/8/2007 8:06:43 AM

I cannot even imagine how they could continue to fund the pensions if the State changed midstream to defined contribution plans. And the costs of doing that would be astronomical. Martire recommends raising taxes, as others have. I don't like the concept of a GRT but as an individual taxpayer, I would not be opposed to paying a higher sales tax, or even a temporary increase in state income taxes until the debt is paid down, but along with that, I WANT TO HEAR THEM SAY THEY WILL REDUCE SPENDING!!! Stop with the "free for all" giveaways, Blago, Jones & Co.!

To lease the lottery wrote at 5/8/2007 8:08:18 AM

I am not for leasing the lottery. But if you look closely at the numbers you will find that in the last ten years none of the lottery money has gone to schools. It's something the schools have been complaining about for awhile.

how they choose to spend our money...tsk tsk wrote at 5/8/2007 8:16:23 AM

Shame on Republican Senator Brady and the three other Republican senators who would have the audacity to ramrod a bill which would drastically jeopardize the state pension funds, without having the benefit of a study to see if this measure would be fiscally doable! Most of this administration, as well as the members of the current General Assembly, could benefit from a crash course in Suze Orman Basic Finances 101! Running around half-cocked isn't doing much for the image of the Republican Party.

The National Average of What? wrote at 5/8/2007 8:20:44 AM

This study claims that the retirment benefits paid to Illinois public employees "are around the national average". The national average of what? Public employees in other states? And does that comparison include the cost of the health care benefit or the fact that the State of Illinois employees can retire at the age of 55 or sooner? These seemingly inconsequential differences add up to Illinois taxpayer dollars providing some rather generous pension benefits to the retirees, benefits that my employer nor myself will be ever be able to match. These benefits are way too generous for the taxpayers of Illinois to support. The benefits of new employees must be ratcheted back. The retirement can remain at 55 but with greatly reduced benefits. The health insurance insurance benefit can remain at retirement but at with a high participative premium. Otherwise we will all be working to support public pensions.

Davos wrote at 5/8/2007 8:59:09 AM

Of course switching from a defined-contribution to a defined-benefit will not effect the current pension shortfall. It is supposed to help reduce future costs, but why do something that might be beneficial in the future. They actually think that it is cheaper to have a defined-benefit program instead of the defined-contribution? Are did they just look at management fees and called it a day? There is probably a reason that governments and maybe the U.S. auto industry are the only ones that still have defined-benefit. But leave it up to the government to say lets keep the old broken system so we can save chump change on the fees.

anonymous wrote at 5/8/2007 9:22:20 AM

"Golden Parachute"?? Hardly. As the article states "retirement benefits offered to Illinois public employees are around the national average." Also, as many state workers will tell you, there is a trade off for working at the state. Work in the private sector and get more pay and a little less benefits, or work in the public sector for less pay and a little more benefits.

John Terwilliger wrote at 5/8/2007 9:25:21 AM

As a retiree under the State Universities Retirement System (SURS) - and a taxpayer - I am in favor of the reforming Illinois retirement plans. The model I propose is the University Of California Retirement Plan (UCRP) which is similar to SURS. One big difference. From 1992 till today, UCRP has paid ALL pension benefits – about $9 billion - from investment earnings. Not one dollar of taxpayer money or employee contributions has been needed! How’d they do this? Simple. Prior to 1992, employees and the state ALWAYS paid their required amount into the system and investment earnings did the rest. The pension reform needed in Illinois is pay off the debt to the systems and then make full required payments each year. California taxpayers saved over $9 billion and Illinois has run up a $40 billion taxpayer bill. Illinois has a DEPT problem, not a pension problem!

Disgusted University Employee wrote at 5/8/2007 9:31:32 AM

Had the State adequately funded the pension program we wouldn't be in this position now. Changing to a 401k style plan isn't going to do anything to fix the problem. We will have another program with just as many problems, if not more!

read wrote at 5/8/2007 9:39:15 AM

Davos, read the report. If we switch pension systems the bill will be larger and you will pay even more in taxes than is proposed now. It's a lengthy report with solid data. They looked at the whole picture. The cost for an employer to pay Social Security and some form of a 401 K match is a higher cost than the employer cost in the state pension systems. The reason corporations are dumpiung them is because they skipped payments and ran up debt just like the state did. The DC system costs more and provides a minimal benefit. Also remember, teachers do not receive Social Security. They pay 9 percent, 9 percent of their salary for their pension. Thats the highest rate in the nation.

Alaska teacher wrote at 5/8/2007 9:39:40 AM

Based on faulty audit information about Alaska's retirement system for state and municipal employees and educators, our legislature changes from a defined benefit pension system to a 401K system for new employees starting last July. This has left a huge deficit of payments for the former system owed by the state, municipal governments and school districts. Already there is talk of losing newly hired people who can take their 401K's and find employment elsewere after a five or eight year vesting period. Hiring new police, state troopers and teachers has become more challenging because the new retirement program is so unattractive.

taxactivist wrote at 5/8/2007 9:44:22 AM

Follow the money. Martire's group is bought and paid for by government employee unions. This same group says there are no budget cuts that could be made in Illinois. When school administrators are retiring with $300,000/yr pensions and sucking out more than $6 million in 15 years, pension reform should be on the table before any tax increase. Republicans aren't ramrodding anything in Springfield. Blame the Dems for ramrodding pensions sweeteners through if you wanna go that route.

Thanks to the crooks... wrote at 5/8/2007 9:51:19 AM

to john Terwilliger. Illinois pension funds have a DEBT problem because the crooked politicians continue to STEAL from them! And Illinois pension funds would also be self-sustaining from contributions and investment earnings, such as you describe, but we have had to contend with the crooked friends of the crooked politicians making million dollar commissions from shady investments into controversial and risky HEDGE FUNDS! We state employees did not break this system. The crooks did!

NO NEW SPENDING wrote at 5/8/2007 9:53:04 AM

Raise taxes to pay off debt, not for new spending. We owe billions to pensions, health care providors,and vendors. Do not allow any new spending until all debts are paid.

To: The national Average of what wrote at 5/8/2007 10:02:11 AM

You should find out all the facts before you make blanket statements. Some can retire at age 55 with 20 years. Some can go at age 50! if they have at least 25 years of service, that is not a full pension that takes 32 years and that is not full, just maximum benefit. The benefits are figured on a percent for each year of service. I also know that the life expectancy for worker in the prison systems are greatly reduced from stress. Maybe the state law makers should stop steeling the pension funds and pay their bills before they make new ones. Underfunding not the paying out of benefits has caused the problem! Maybe we should look at the politicians retirement benefits could it be they are to generous? My pension payment is taken out of every paycheck without fail. Is that you G. Rod?

To National Average wrote at 5/8/2007 10:08:52 AM

Uh..many of the employees who retire at age 55 aren't just getting a free-for-all you know. Many of them have to BUY years of service.

Davos wrote at 5/8/2007 10:12:16 AM

To Anonymous 9:22 - State employees have much better benefits than the private sector, plus you have the benefit of working in an unaccountable environment while AFSCME protects you.

Skip cosgrove wrote at 5/8/2007 10:18:47 AM

I wonder if we will find the answer to the debt problem at the bottom of the hole if we keep our heads in the sand long enough.

Promise Broken wrote at 5/8/2007 10:26:59 AM

The problem is not the retirement system it is the failure of the state to own up to its contractual obligations. The failure of the state to fund the system means the system is selling assets daily to pay its bills and the problem is getting worse. The state has to live within its means and stop robbing Peter to pay Paul.

Poor Big Business ahhhhhh wrote at 5/8/2007 10:27:18 AM

Finally some common sense on this issue. The message is clear, switch to DC and investment managers get rich at the expense of taxpayers with lower benefits for public employees. As far as national average keep in mind Illinois is in competition with other states for teachers and lower benefits will impact the recruitment of these teachers. Finally some logic.

SURS Retiree wrote at 5/8/2007 10:43:39 AM

I am a community college retiree in the State Universities Retirement system. Here are a few facts. 69% of SURS retirees receive a monthly annuity of $2600 or less, or $31,200 a year -- some "golden parachute." Community college retirees are not permitted to contribute to social security, so the SURS pension is "it" unless one worked a second job and, even then, SS benefits will be reduced due to the Windfall Elimination Provision -- up to 40%. Community college retirees did not have a state health plan until around 1997 and it's already set to go broke. The premiums are fairly expensive, but enormously costly if one has any dependents. The recent two year "pension holiday" applied only to state employees, teachers, and SURS pension systems. The legislators' and judges' pension systems received full funding. The Chicago Public Schools pension systmem received millions. What do those that tell you?

retire at 55? wrote at 5/8/2007 10:54:38 AM

State retirement in IL is based on the "Rule of 85" so when your age plus years of service equal 85, you can retire. Theoretically, someone who started at 20 and is now 55 has 30 years of service, and can retire. But that is the exception in the state. Many of us have professional jobs that required college, so we started later. And yes, there are ofen incentive programs for early retirement to push out the high earners, but these are rarely a good deal for the worker.

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