Illinois’ pension reform ideas leave something to be desired

I’ve read some well-considered bills. Unfortunately, some pension reforms aren’t.

Illinois legislators seem to appreciate that pension funds and the investments they have for workers are vital, and even Congress occasionally concedes the need for job-related benefits for stable retirements. (In fact, the Biden administration through a federal rule has ensured that investment advisers must prioritize the long-term interests of clients over their own short-term profits by mandating that investment advisers to be fiduciaries, not just salespeople.)

In Springfield, the General Assembly has accepted the reality that the “Tier 2” pension plan foisted on some state employees in 2010 is not just unfair, but destined to be illegal, requiring legislative action.

Acknowledged by Gov. Pritzker in his proposed 2025 budget, “Tier 2” – which provides less for those hired after Jan. 1, 2011 – soon will fail to comply with federal law and needs reform before it’s too late.

State workers who qualify for pensions aren’t eligible to collect Social Security, but by law, their pension plans must provide benefits equivalent to Social Security under the Internal Revenue System’s “safe harbor” test. Illinois’ pension plans – collectively underfunded by more than $140 billion because of lawmakers’ failure over decades to meet required contributions under both Republican and Democratic administrations – eventually won’t be able to meet that obligation.

Some unions, notably AFSCME, want to eliminate “Tier 2” and bring newer workers into the main plans, campaigning to “Undo Tier 2.” While an ideal goal, that ambitious approach may not be financially feasible and probably would hurt the state’s entire pension system and cost Illinois taxpayers billions.

An option advocated by an informal coalition of the Better Government Association, Chicago’s Civic Committee, and the Civic Federation would still need billions of state contributions for more than 20 years to at least achieve compliance with federal law, but it would fall short of making Tier 1 the only tier. It also would be less expensive.

“Anything beyond that [improvement to meet federal mandates] would represent a reversal of recent, responsible pension policies and a return to the irresponsible behavior that has created such a costly mess for the taxpayers of Illinois,” leaders of the three groups wrote.

Meanwhile, the realization that Illinois has made meaningful, positive steps tied to pension funds demonstrated that the state can improve pension.

Illinois was one of just five major pension funds who’ve committed $1 trillion requiring strong labor standards in pensions’ investment with private-equity interests, which have been blamed for their influence in limiting wage growth, job losses and anti-union actions.

Public pensions have up to half of all assets under private-equity management.

Weeks ago, Biden administration officials met with representatives of Illinois’ pension funds – plus CALPERS (California’s public worker pension fund), the International Brotherhood of Electrical Workers union, New York City’s pension funds, and the New York state public-sector workers pension fund – to show other pension funds how to maintain pension benefits while protecting workers.

The five funds meeting in the White House have committed to standards promoting unionization and the power to bargain union contracts, plus the elimination of using of forced labor and child labor, and workplace safety.

“This is very good for the economy,” National Economic Council Director Lael Brainard told The Washington Post. “It is doing what the president has emphasized, which is building the economy from the middle out and the bottom up. And it ensures that workers have careers with family sustaining wages.”

Obstacles range from political will in government outside “Blue” states and cities, and control. The federal government governs only private pension funds, and states administer public pension funds. However, states are swayed by pension policy set by the federal government and are starting to adopt pro-labor policies with support from Washington.

Biden needs allies in pension funds with progressive policies to show positives in enforcing labor standards, to exert pressure to adopt worker-oriented policies, and, of course, willing legislators to ensure they are implemented.

Whether labor-friendly policies, or making different benefits less brutal (or violating federal law), Illinois could be a leader in fulfilling the agreement to pay benefits promised to workers.