April 21 (Bloomberg) -- Illinois Governor Pat Quinn’s proposal that public employees pay more for pensions is the latest in a series of efforts by dozens of states to control escalating retirement burdens.
“Bold action” is required to save the state’s underfunded plans, the Democratic governor told reporters in Chicago yesterday, saying “unsustainable pension costs are squeezing core programs.” In fiscal 2010, Illinois had the worst-funded state pension in the U.S., with assets equal to 45.4 percent of projected obligations, according to data compiled by Bloomberg.
Quinn is among governors nationwide proposing changes to pension programs -- 41 states have reduced benefits, increased contributions or both, according to the National Association of State Budget Officers.
New York’s Legislature approved pension changes backed by Governor Andrew Cuomo on March 15. California Governor Jerry Brown has proposed a hybrid pension, combining elements of a 401(k) savings plan with traditional government benefits.
“States know that their liability numbers will look worse,” said Scott Pattison, executive director of the budget officers group. “A lot of states are going to continue to find ways to increase employee contributions.”
On the Precipice
Nor are governors the only elected officials moving on the issue: In Los Angeles yesterday, Mayor Antonio Villaraigosa proposed rolling back pension benefits for new civilian employees to help balance a $7.2 billion general-fund budget.
Quinn’s plan involves a 3 percent increase in employee contributions and reduced cost-of-living allowances, which he says can survive constitutional challenges by making the provisions voluntary. Those who agree to those terms would still receive state-subsidized retiree health-care coverage. The plan would also raise the retirement age to 67, from 65.
Quinn, who said his plan would provide 100 percent funding for the system by 2042, has additional incentive to act. Standard & Poor’s said in a report yesterday that it might cut the state’s general-obligation rating by multiple levels “if there is no progress on structural budget solutions and if Illinois does not address the significant pension liabilities.”
The retirement plan plays a large part in the fiscal distress in Illinois, which has a rating of A+, fifth-highest, and a negative outlook, the report said. The state is rated the lowest among the states by Moody’s Investors Service, at A2.
“We are risking not only one downgrade but perhaps more than one downgrade,” Quinn said. “This is not what we want to do, now or ever.”
The Quinn plan will add to an evolving pension conversation in Springfield, the state capital.
The proposal is “insensitive and irresponsible,” the labor coalition We Are One Illinois said in a statement.
“It is a clearly illegal attempt to solve the problem caused by past governors and the Legislature solely on the backs of teachers, caregivers and other public workers,” said the group, which says it represents more than 1 million union members including state employees, teachers, police officers and firefighters, and transportation workers.
Legislative leaders offered a qualified embrace. House Minority Leader Tom Cross, a Republican, said there are “some good components here.” Senate President John Cullerton, a Democrat, said he is pleased the governor offered a plan “that will allow the state to control pension costs in a constitutional way.”
In addition to increased contributions, Quinn’s plan would:
-- Reduce cost-of-living raises to 3 percent or half of the Consumer Price Index, whichever is lower.
-- Delay those increases until age 67 or five years after retirement.
-- Phase in a retirement age of 67.
Pattison said a pending rule change by the Governmental Accounting Standards Board is expected to magnify the gaps between assets and obligations to retirees among many pension funds, further pressuring states and cities.
“Now, we have to act,” Quinn said. “I did not create the problem, but I’m going to solve it.”
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