Questions remain after passage of pension law

Twenty-dollar bill stuffed in a nestThe Illinois General Assembly passed changes to state employee pension systems Dec. 3, but the constitutionality of the law and exactly how much money it would save the state is in question.

Proponents of the bill, which passed the Senate by a vote of 30-24 and the House by 62-53, say it will address the state’s $100 billion pension shortfall.

But the measure faces challenges in court based on the Illinois Constitution’s mandate that state retirement benefits “shall not be diminished or impaired.”

The Retired State Employees Association of Illinois and the Illinois Retired Teachers Association have filed lawsuits challenging the law.

The pension plan would reduce cost-of-living adjustments, increase the retirement age for some employees and put a cap on pensionable earnings.

The changes would mean less money for university employees and retirees, said David Merriman, professor of economics and public administration.

“It’s potentially a very large cut in benefits,” said Merriman, faculty member in the Institute of Government and Public Affairs. “It’s a very progressive change in the sense that it’s a much larger cut in the pension of those with higher incomes than those with smaller incomes and smaller pensions.”

The constitutional challenges likely will delay the pension plan’s June 1 effective date, said Richard Dye, economist in the Institute of Government and Public Affairs.

“If it passes constitutional muster — and that’s a big if — it might well be delayed for several years because the constitutional challenge is genuine and it could easily get a stay of implementation,” Dye said.

Proponents of the plan said the changes could save the state $160 billion over 30 years. Three national credit-rating agencies — Fitch, Moody’s and Standard & Poor’s — are examining the accuracy of those figures and the potential effect of the pension changes on the state’s pension debt.

“It would certainly improve the funding of the pension plan and move it toward stability, but it’s difficult to tell exactly how much,” Merriman said.

The Illinois Commission on Government Forecasting and Accountability will conduct an independent evaluation of the potential savings from the pension plan after the three credit-rating agencies complete their actuarial estimates, Dye said.

“It just takes time for something this big to get official estimates,” he said.

Still, changing the way the pension system is funded might not be the answer to balancing the state’s budget, Dye said.

“The state has two big fiscal problems: the unfunded liability and the structural mismatch between sustainable revenues and projected spending level,” Dye said.

“The pension plan makes huge strides in solving the first problem and only modest problems in the second, the underlying deficit.”

The Institute of Government and Public Affairs is examining how the pension law fits into the state’s overall fiscal picture, Dye said.

“The big question is, what is the state going to do to raise revenues or cut spending in the non-pension part of the budget?”

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