Illinois Passes Landmark Pension Reform


The Governor of Illinois last week signed into law legislation involving significant overhauls to the state’s pension system. The reform is intended to help stabilize both the pension system and the state's financial health in light of unfunded state pension liabilities exceeding $100 billion, a recent charge of securities fraud by the U.S. Securities and Exchange Commission for misleading pension disclosures, and the lowest credit rating of all 50 states.

Under the new law, which takes effect June 1, 2014, Illinois hopes to reach fully funded status in 30 years by cutting benefits and adding supplemental state contributions to the required state annual payments. The state’s pension plans are currently only 39.3 percent funded. State annual contributions have risen steadily over the past four years, consuming 20 percent of the state’s budget in fiscal year 2014—up from only 12 percent of the state’s budget in fiscal year 2010.

The reform program implements a new funding schedule that would raise the contribution percentage to 26 percent by fiscal year 2045 and cut approximately $160 billion from state payments owed to the pension system. The changes in the funding schedule also are expected to eliminate approximately $21 billion from the state’s unfunded liability. Changes to the pension benefits include lowering annual increases in pensions to retired individuals and basing the pension benefits on the number of years worked.

While the overhaul plan passed the Illinois General Assembly with bipartisan approval, it nevertheless has critics from both parties. Some argue that the plan’s deep cuts into retiree and union benefits went too far; others argue the overhaul does not go far enough to truly repair the pension system and Illinois’ finances. A coalition of unions opposed to the bill is expected to file suit in state court challenging the law’s constitutionality, and it is likely that the courts will have to decide whether the law stands. The new law also failed to address the critical need to shore up distressed local pension trusts, including Chicago’s, which was recently reported to be only 35.2 percent funded.

Illinois follows in the footsteps of several other states implementing pension reform, most recently Rhode Island. It remains to be seen whether Illinois’ overhaul will be enough to set the state’s pension system back on sound financial ground and improve the state’s credit rating and market spreads.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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