ISSUE BRIEF:
ANALYSIS OF THE GOVERNOR’S OFFICE OF MANAGEMENT
AND BUDGET’S PENSION STABILIZATION SUMMARY
AUGUST 2012
I.
INTRODUCTION
Facing an aggregate $83 billion unfunded liability in the five state pension systems, Governor Pat Quinn
unveiled his Pension Stabilization Plan (“Stabilization Proposal”) in April of 2012. The Stabilization
Proposal outlined changes to the Illinois state pension systems designed to generate savings—primarily
through either reducing worker benefits or increasing worker contributions. The Governor argued these
difficult changes were necessary to ensure the future fiscal stability of the retirement systems.
Subsequently, lawmakers introduced legislation that largely drew from Governor Quinn’s plan, notably in
amendments to Senate Bill (SB) 1673 and House Bill (HB) 1447. SB 1673 affects all state retirement
systems except the Judges Retirement System (JRS), so it covers the Teachers Retirement System (TRS),
State Employees Retirement System (SERS), State Universities Retirement System (SURS), and General
Assembly Retirement System (GARS). HB 1447 affects only GARS and SERS.
Prior to the end of the spring legislative session, which ended on May 31, 2012, the Governor’s Office of
Management and Budget (GOMB) provided lawmakers with the Pension Stabilization Summary
(“Stabilization Summary”). The Stabilization Summary provides an overview of the potential cost savings
the state could gain by implementing many of the ideas presented in the Stabilization Proposal. While
lawmakers debated pension reform legislation throughout May, neither bill passed the full General
Assembly by May 31, 2012, which is the end of the spring legislative session.
In July 2012, Governor Quinn called a special legislative session for August 17, 2012, which will focus
squarely on generating substantial cost savings in the retirement systems by cutting benefits along the
lines suggested in the Stabilization Proposal. This Issue Brief provides a synopsis of the core changes the
Quinn administration proposes for the state pension systems and an analysis of the cost savings estimates
contained in the Stabilization Summary.
II.
CURRENT BENEFITS
Presently, the state pension systems provide two distinctly different benefit levels, known as Tier-I and
Tier-II. Tier-I pension benefits were the standard until lawmakers passed SB 1946 and SB 3538 in 2010.
Tier-I pension benefits are calculated using a person’s final average salary, years of service, and a formula
multiplier. In addition, Tier-I retirees have a 3 percent compounded cost-of-living adjustment (COLA).
© 2012, Center for Tax and Budget Accountability
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With the passage of SB 1946 and SB 3538, all individuals hired on or after January 1, 2011, are
automatically enrolled in Tier-II. Key changes for those in Tier-II include an increase in the age at which
a person can retire with full benefits; a reduced COLA; and increasing the time used to determine the final
average salary. The Tier-II COLA is the lesser of 3 percent or ½ of the previous year’s consumer price
index and uses simple inflation (“simple COLA”). With a simple COLA, the benefit increase is
determined solely on the original pension benefit. In contrast, a compounded COLA is one in which the
annual pension benefit increase is calculated using both an individual’s original pension benefit and all
the previous benefit increases. While lawmakers reduced benefits for future hires in 2010, the Governor’s
Stabilization Proposal aims to generate savings by reducing current employees and retirees benefits
Members of the state retirement systems also have access to retiree insurance programs managed by the
Illinois Department of Central Management Services (CMS). Members of GARS, SERS, JRS, and SURS
are in the State Employees’ Group Insurance Program; members of TRS are in the Teachers’ Retirement
Insurance Program (TRIP); and SURS members employed by a community college are in the College
Insurance Program (CIP). Prior to the passage of SB 1313 (discussed in further detail in Section IV of this
Issue Brief) retirees in the State Employees’ Group Insurance Program that had twenty years or more of
service did not pay a monthly premium for their health insurance. Those in CIP and TRIP pay monthly
premiums for health insurance and contribute to the programs during their employment. While retiree
healthcare is not directly tied to pension benefits, under the Stabilization Proposal the choices individuals
would make regarding their pension benefit would impact their access to the CMS managed programs.
III.
GOVERNOR PAT QUINN’S PROPOSED CHANGES
Governor Quinn’s Stabilization Proposal primarily reduces the state government’s annual contributions to
the five retirement systems by reducing pension benefits for Tier-I employees and retirees. The proposal
provides Tier-I employees and retirees with a “choice” about which benefits they want to lose, by
allowing them to select one of the following two options:

Option 1: Keep Current COLA. Under this option, individuals keep their existing COLA (3
percent compounded annually). However, existing workers and retirees would lose access to their
respective retiree healthcare programs. In addition, future pension benefits for current employees
who select this option would be determined using their salary as it existed at the time they made
this choice. In other words, future salary increases would not count towards the calculation of
their ultimate pension benefit, which would decrease their overall pension.

Option 2: Accept a Reduced COLA. Individuals who elect this option would have their COLA
reduced to the lesser of 3 percent or ½ of the previous year’s consumer price index, and it would
be computed on a simple, rather than compounded basis. In exchange for accepting a reduced
COLA, individuals would maintain access to the CMS managed healthcare programs. Last,
current employees’ future salary increases would be included in their ultimate pension benefit
calculation.
In addition to the benefit changes outlined above, further modifications to the Illinois Pension Code have
been included in various amendments to SB1673 and HB1447. The Stabilization Summary produced by
GOMB is not specific to one piece or aspect of disparate legislation, but rather assumes the purported
savings generated by all aspects of the pieces of legislation that reduce pension benefits. Such other
measures include:
 Revising the pension systems funding target. The current target is to have each of the five
systems 90 percent funded by FY2045. If 50 percent or more of individuals choose the reduced
COLA option, then the funding target will increase to 100 percent by 2043.
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 Shifting a portion of the state’s annual pension contributions to universities, school districts, and
community colleges (the “cost shift”).
IV.
ANALYSIS OF PROPOSED CHANGES
According to the Stabilization Summary, without any changes to the pension systems, the state’s
aggregate General Fund contributions for FY2013-FY2045 will total $309.9 billion. The Stabilization
Summary provides two different sets of cost savings projections. One set of projections (“Total State
Savings”) provides four estimates of total savings to the state using a best- and worst-case scenario, as
well as with and without a cost shift. Under the best-case scenario, 100 percent of individuals elect the
reduced COLA option.1 In the worst-case scenario, 50 percent of individuals accept the reduced COLA
option. The other set of projections (“General Fund Savings”) provides a summary of the state’s General
Fund contributions to the pension systems under the current funding schedule, an estimation of the
contributions with benefit reductions, and an estimation of the contributions with both benefit reductions
and a cost shift. General Fund Savings assumes only the worst-case scenario of 50 percent accepting the
reduced COLA option. Figures 1 and 2 provide the range of cost savings produced by Total State Savings
and General Fund Savings, and the impact those savings would have on aggregate General Fund
contributions.
Figure 1
Total State Savings Estimates for FY2013 – FY2045 ($ in Billions)
Best-Case
Scenario
Worst-Case
Scenario
$ Savings WITH
Cost Shift
% Decline in General
Fund Pension
Contributions
$ Savings
WITHOUT Cost
Shift
% Decline in General
Fund Pension
Contributions
$115.96
37.42%
$88.93
28.70%
$95.59
30.84%
$66.53
21.47%
Source: Calculations on percent decline in General Fund contributions done by CTBA using data contained in the
Stabilization Summary.
Figure 2
General Fund Savings Estimates for FY2013 – FY2045 ($ in Billions)
% Decline in General Fund
$ Savings
Pension Contributions
WITH Cost Shift
$82.79
26.72%
WITHOUT Cost
$66.53
21.47%
Shift
Source: Calculations on dollar savings and total decline in General Fund contributions done by CTBA
using data contained in the Stabilization Summary.
In summary, GOMB estimates that
a. The state’s General Fund pension contributions would decline by anywhere from 21.5 percent to
37.4 percent if the Governor’s pension reform plan were enacted; and
b. The total cost savings will be somewhere between $66.53 to $115.96 billion.
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A. UNDERLYING PROBLEMS WITH SAVINGS ESTIMATES
The cost savings shown in Figures 1 and 2 are likely to be overestimated for several reasons. First, the
minimum cost savings estimate assumes that 50 percent of plan members will elect the reduced COLA
option. However, it is highly unlikely that so many individuals will choose the reduced COLA option.
This is because the monetary value of the existing, 3 percent compounded COLA is significantly greater.
Indeed, since the reduced simple COLA applies solely to the base pension payable upon retirement, a
retiree who chooses this option is guaranteeing that his or her pension benefit will not keep pace with
inflation over time. It is doubtful that 50 percent of plan members would choose an option that ensures
their annual retirement income—and hence purchasing power—will decline every year. Figure 3 provides
an example of how an original pension benefit of $50,000 would change over time under the three
different COLA scenarios.2
Figure 3
COLA Example
$80,000
$75,000
$70,000
$65,000
$60,000
$55,000
$50,000
3% Compounded COLA
3% Simple COLA
1/2 CPI, Simple COLA
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15
Years of Retirement
Since an inflation rate above 6 percent is a rare occurrence,3 it is likely that those with the reduced COLA
option would see their pension benefit adjusted by ½ CPI-U.
Second, the healthcare benefit lost by those who keep their superior, 3 percent compounded COLA and
granted as an inducement to those who choose the significantly reduced COLA, is not really much of a
benefit at all. Indeed, those who select the reduced COLA option are guaranteed only that they will
maintain access to the healthcare programs; it does not provide any guarantee as to what individuals will
have to pay for the privilege of maintaining that access to health insurance. Given the value of the 3
percent compounded COLA compared to that of keeping access to the healthcare programs, it is probable
that far fewer than 50 percent of individuals will choose the reduced COLA option. This is especially so
since, after the passage into law of SB 1313 premium-free health insurance for retirees has been
eliminated. Moreover, that legislation mandated that effective July 1, 2012, CMS will set monthly
premium rates for retirees who have health insurance through the State Employees' Group Insurance
Program. Under SB 1313 the premium rates are not a fixed amount, so it will be hard for individuals to
ascertain what value keeping access to the State Employees' Group Insurance Program will provide, if at
all. (As of August 1, CMS had still not determined the premium rates.)
Since TRS is much larger than the other systems, the choices its members make are extremely impactful
on savings estimates for the state. It is unlikely that most members of TRS will select the reduced COLA
option, and therefore the estimated savings for the state through reduced pension benefits will be lower
overall. As shown in Figure 4, TRS has by far the largest membership of the five retirement systems, and
it accounts for over half of all current liabilities.
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Figure 4
State Retirement System Memberships & Finances ($ in millions)
TRS
SURS4
# of Active
Employees
166,013
71,888
SERS
66,363
System
90,967
42,682
$81,299.7
$31,514.3
Actuarial
Assets
$37,769.8
$13,945.7
47,002
$31,395.0
$11,159.8
# of Retirees
Liabilities
Unfunded
Liability
$43,529.9
$17,568.6
$20,235.2
JRS
968
720
$1,952.5
$614.6
GARS
180
291
$298.4
$63.2
Source: Each systems’ Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2011
$1,337.9
$235.2
According to the Stabilization Summary, 40 percent of current TRS retirees do not get their healthcare
through TRIP. That means roughly 85 percent of TRS retirees in TRIP would have to choose the reduced
COLA option in order for 50 percent of all TRS retirees to have selected the reduced COLA option. That
is highly improbable given the small value the healthcare benefit provides for TRS members, and
highlights the unlikelihood that the majority of individuals will give up their 3 percent compounded
COLA in order to keep access to the retiree healthcare programs CMS manages.
Last, the recent Supreme Court decision regarding the Affordable Care Act may provide individuals with
viable and affordable health insurance alternatives, increasing the likelihood that most people would keep
the 3 percent compounded COLA and forgo access to the CMS managed programs. The Stabilization
Summary fails to discuss what savings the state would gain if the majority of people kept their current
COLA.
B. IMPACT ON GENERAL FUND
According to the Stabilization Summary, the maximum savings the state could realize is $115.96 billion,
and the minimum estimated savings is $66.53 billion. If the cost savings estimates in the Stabilization
Summary proved to be accurate, the state’s FY2013-FY2045 General Fund pension contributions would
nevertheless total between $194 and $243 billion.
Part of the potential savings identified in the Stabilization Summary come from transferring the state’s
contributions for current employees’ benefit accruals to their respective employers (i.e. school districts,
universities and community colleges). It is important to note, this cost shift would reduce the state’s
yearly contributions to only TRS and SURS because the state is the employer for members of the other
three systems. The cost of current benefit accruals paid by an employer is known as the employer normal
cost, and is typically presented as a percentage of payroll. For example, the employer normal cost for TRS
in FY2011 was 8.77 percent of its payroll, which amounted to a required contribution for benefit accruals
of $849.72 million.5 However, the employer normal cost is just one component of the state's statutorily
required contribution, and its total FY2011 contribution to TRS was $2.1 billion.6 This is because the
majority of the state’s annual contribution to TRS is to repay the debt owed from past underfunding—not
to cover the cost of providing benefits.
Under the cost shift plan outlined in the Stabilization Summary, school districts, universities, and
community colleges contribution rates would increase by 1 percent per year, up to 6 percent. Once they
were contributing 6 percent of payroll to the retirement systems, the shift would decrease to 0.5 percent
per year until they were paying the entire employer normal cost. This cost shift, however, only affects the
portion of the state’s contribution that goes towards current employees’ benefit accruals, and does not
minimize the portion of the contribution that goes towards paying down the debt due to past
underfunding. Moreover, because of the creation of Tier-II, the employer normal cost is actually
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decreasing over time. Put simply, this aspect of the state’s yearly pension contribution is already a
diminishing financial obligation.
Even with the maximum possible savings estimated by GOMB, the state’s pension contributions would
continue to increase from year-to-year. Figures 5 and 6 compare the state’s current schedule for General
Fund contributions to the pension systems with the contribution schedules detailed in General Fund
Savings.7 The drop-offs that occur in both Figures 5 and 6 would only happen if at least half of all
individuals chose the reduced COLA option, otherwise the increase would continue through 2045, similar
to the current schedule shown in blue.
Figure 5
General Fund Contributions to IL State Pension Systems (FY2013 – FY2045)
$16
$14
$12
($ i n bi llions)
$10
$8
$6
$4
$2
$0
2013
2014
2015
2016
2017
Current Schedule
2018
2019
2020
2025
Without Cost Shift
2030
2035
2040
2045
2040
2045
With Cost Shift
Figure 6
State Pension Contributions as Percentages of Revenue8
25%
20%
15%
10%
5%
0%
2013
2014
2015
2016
2017
2018
% of Revenue under Current Schedule
2019
2020
2025
2030
2035
% of Revenue WITHOUT Cost Shft
% of Revenue WITH Cost Shift
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It is evident that despite proposed pension reform, the state’s required contributions will nevertheless
increase significantly for the next thirty years. As shown in Figure 6, even if 50 percent of people
accepted a reduced COLA and a cost shift took place, the state’s contributions to the pension systems
would grow to nearly 20 percent of revenue. Given the overly optimistic assumptions used to produce
both sets of cost savings projections, it is likely that the real savings generated by the Governor’s pension
reform measures would be less than anticipated.
V.
CONCLUSION
Even if lawmakers pass legislation to reduce pension benefits for current employees and retirees, the
state’s annual pension contributions will remain a fiscal pressure on the state budget. This is because
pension benefits are not the source of the problem. Indeed, the growth in the state’s annual pension
contributions has nothing to do with benefits. The ever-ballooning pension contributions are, instead, the
result of an unattainable pension-funding plan, known as the pension ramp, put in place by Public Act
(PA) 88-0593.
At the end of FY1994, Illinois lawmakers had borrowed so much against the pension systems to cover the
cost of services that, combined, the systems had less than half of the assets needed to cover liabilities.9
Ostensibly, to rectify this situation in FY1995 the General Assembly passed and Governor Edgar signed
PA 88-0593. The legislation established a repayment schedule for the debt owed to the pension systems
with the goal of having each of the five systems have a funded ratio of 90 percent by 2045. However, the
schedule was designed so that repayment was heavily back-loaded. Figure 7 shows projections of the
state’s required pension contributions when the pension ramp first became law.
Figure 7
1994 Projection of State’s Estimated Pension for FY1996 – FY2045
$18,000
$16,000
($ i n mIllions)
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
1996 2000 2004 2008 2012 2016 2020 2024 2028 2032 2036 2040 2044
Required Contribution
Source: COGFA, Report on the 90% Funding Target of Public Act 88-0593 (Springfield, IL: COGFA, 2006), 14-15.
Even though PA 88-0593 was designed to repay the debt owed to the pension systems—by law—the
state’s contributions have continued to underfund the systems. In fact, it is not until FY2030 that the
state’s contributions will be enough that the unfunded liabilities will begin to shrink.10
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Proof that debt is driving current increases in annual pension payments is easy to establish. Of the state’s
FY2012 pension contribution to all five systems, 61 percent went toward repayment of debt, while the
remaining 39 percent went toward current employees’ benefits.11 For FY2013, this ratio shifts to 69
percent for debt repayment and 31 percent for employee pensions.12 That means all of the year-to-year
growth in the pension contribution from FY2012 to FY2013 is due to the repayment schedule.
While reducing benefits for current employees and retirees could reduce existing unfunded liabilities it
will not change the back-loaded repayment plan implemented by PA 88-0593. Similarly, while the cost
shift would generate moderate savings for the state, it would not affect the required debt repayment
contributions. Without addressing the back-loaded repayment schedule, the state’s pension contributions
will continue to be an issue, even if Governor Quinn’s pension reform measures are enacted.
###
If you would like more information about this topic, or to schedule an interview with Amanda Kass,
please call 312-332-1103 or email Amanda at akass@ctbaonline.org.
Center for Tax and Budget Accountability
70 E. Lake Street, Suite 1700
Chicago Il, 60601
www.ctbaonline.org
© 2012, Center for Tax and Budget Accountability
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ENDNOTES
1
The Stabilization Summary specifies that even in the best-case scenario, not all TRS retirees would elect the
reduced COLA option.
2
One-half CPI-U in this example is 1.75 percent, which is one-half TRS’ inflation rate assumption. This assumption
was used per CTBA communication with TRS.
3
Out of the past ninety-eight years, there have only been nineteen years in which inflation was at least 6 percent.
Source: U.S. Department of Labor: Bureau of Labor Statistics, Consumer Price Index (Washington, DC: 2012).
4
Figures for are for the defined benefit only, and do not include members of the self-managed plan.
5
Buck Consultants, Teachers’ Retirement System of the State of Illinois: June 30, 2011 Actuarial Valuation of
Pension Benefits (IL: Buck Consultants, December 2011). School districts and federal funds also contribute small
amounts towards the employer normal cost; however, the vast majority is paid by the state.
6
Ibid.
7
Equivalent figures could not be generated using the information in Total State Savings.
8
Percentages for current schedule were estimated by CTBA, and are based on assuming revenue growth of 2.5
percent per year and current legislation regarding both personal and corporate income tax rates.
9
Illinois Economic and Fiscal Commission, Fiscal Year 1996 Pension Funding Requirements (Springfield, IL:
Illinois Economic and Fiscal Commission, March 1995).
10
COGFA, A Report on the Financial Condition of the State Retirement Systems: Financial Condition as of June
30, 2011 (Springfield, IL: COGFA, March 2012), 95.
11
CTBA, Analysis of Proposed Illinois FY2013 General Fund Budgets (Chicago: CTBA, April 2012), 32.
12
Ibid.
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