Budget Negotiations Heat Up: $64.5 Billion Pension Costs on the Table
As state lawmakers scramble to finalize the 2026 budget, a significant turning point emerges: public sector unions are fiercely advocating for substantial benefit increases for Tier 2 pensioners. The clock is ticking, and the stakes couldn’t be higher.
The Countdown to Budget Approval
With a deadline of May 31 looming, **Illinois lawmakers** are racing against time to approve the state’s 2026 budget before the end of their spring session. This urgency escalates discussions surrounding the fate of **Tier 2 pension benefits**, which apply to employees hired after 2011. What is the outcome of this fast-paced negotiation? Let’s delve into the details.
Proposed Legislative Changes: SB1937 and HB3657
In a bold move, active legislation being discussed in Springfield aims to fundamentally reshape Tier 2 pensions, potentially adding more than $64.5 billion in new costs to the state. A detailed actuarial analysis commissioned by the Commission on Government Forecasting and Accountability underscores the financial implications of these proposals, posing significant risks to taxpayers.
- **Lower retirement age**: The proposed changes would lower the normal retirement age from 67 to **65** for those with **20 years** of service, or even **62** if pension benefits are fully vested.
- **Reduced penalties for early retirement**: Workers could retire as early as **57** with penalties adjusted for reduced benefits.
- **Enhanced Cost-of-Living Adjustments (COLA)**: Senate Bill 1937 proposes a **3% compounded COLA** for the General Assembly and Judges’ Retirement Systems.
- **Non-compounding COLA**: All other Tier 2 pensioners would receive a **3% non-compounding COLA** annually.
- **Revised salary calculations**: Benefits would be calculated based on **six years of salary** instead of eight.
- **Increased pensionable salary cap**: The salary cap would see noteworthy increases.
- **More favorable conditions for downstate police and fire personnel**: Retirement age would be lowered from **55 to 52** with provisions for early retirement.
Furthermore, House Bill 3657 specifically targets local government employees in Chicago, introducing more favorable parameters:
- **Generous final average salary formula**: The highest four of the last five years or eight of the last ten years would be utilized.
- **Increased salary cap**: The cap for Tier 2 employees in Chicago would increase to **$141,407.74**.
- **Annual increments**: The salary cap would increase annually by the lesser of **3% or inflation**.
The Local Funding Dilemma
As these expansive benefits are proposed, local governments find themselves in a precarious situation, forced to fund these new commitments without state support. The legislation explicitly states: “no reimbursement by the State is required for the implementation of any mandate created by this amendatory Act of the 104th General Assembly.”
The Consequences of Promised Benefits Without Funding Plans
Illinoisans already **shoulder the heaviest property tax burden** in the nation. This scenario is a product of **unsustainable promises**: new benefits are being offered without a viable plan for funding them. How did we get here?
A New Funding Plan: Will It Resolve the Crisis?
Senate Bill 1937 proposes a new funding schedule targeting **100% funding by 2049** while retaining the 90% target for 2045. While achieving full funding is crucial, extending the ramp for payments only deepens Illinois’ pension crisis, transferring burdens to future generations.
Unfunded Pension Liabilities: A Growing Concern
By layering billions in new benefits on an already precarious funding schedule, Illinois’ **unfunded pension liabilities** are poised to inflate exponentially. Actuarial analyses reveal that the current funding ramp is underfunded by over $5 billion annually, resulting in an accumulated **$59 billion** in debt since its inception.
What’s more, an additional $66 billion in debt has been incurred due to benefit enhancements, subpar investment returns, and evolving demographics—highlighting the inherent dangers of defined benefit pension systems.
Shifting the Burden to Future Generations
The new “20-year layered amortization approach” for contributions starting in **2036** is another layer of complexity, likely extending the recovery costs far beyond the 2049 endpoint established in the funding ramp. This strategy adds yet another layer of responsibility for future Illinois residents.
A Call for Caution and Measured Responses
Instead of racing towards a comprehensive pension overhaul in the final hours of the legislative session, lawmakers should take a step back. Keeping the current structure of Illinois’ **Tier 2 pension system** while addressing existing issues methodically would yield better outcomes. Suggested actions include:
- Conduct a comprehensive actuarial analysis, assessing risks and individual impacts to ensure a responsible approach.
- If any issues are uncovered, craft targeted solutions rather than broad-based benefit boosts. Legislative efforts like House Bill 5798 could serve as a model.
- Expand access to defined contribution plans for all employees, bringing flexibility and portability to the pension landscape.
It’s time for Illinois to tread carefully, ensuring that future generations aren’t shackled by the burdens of poorly planned financial obligations.
