Rushed pension reform will hurt businesses, residents

Last month, the Illinois General Assembly passed a $53.1 billion budget, the state’s largest ever and $400 million higher than Gov. J.B. Pritzker pushed for in February.

This Fiscal Year 2025 budget hits businesses with nearly $1 billion in tax hikes. These include a $526 million tax hike by capping the net operating loss deduction, a $200 million tax hike on sports betting operators, a $186 million tax hike on retailers, a $200 million tax hike on Illinois’ Managed Care Organizations, a $60 million “re-renters” tax hike on third-party companies that sell hotel reservations, and a $35 million tax hike from increasing the state’s video gambling tax.

When the state starts looking for new revenue, it’s clear lawmakers start with businesses. So, businesses: be warned. Lawmakers are tinkering with enacting sweeping changes to Illinois’ public pension system — and the money to fund these changes will have to come from somewhere.

While it didn’t pass this legislative session, Illinois lawmakers floated several bills looking to reform Tier 2 pensions, the program for those hired after 2011. Tier 2 has many structural issues, providing benefits that could be illegal if worth less than Social Security. However, the proposed Tier 2 pension bills went beyond what is necessary to make retirees whole or the system compliant with Safe Harbor provisions put forth by the Social Security Administration and the IRS. Instead, it would have added unknown budgetary costs.

The plans had no actuarial analysis available to detail what the proposed benefit cost increases could be. If businesses are supposed to pick up the tab on unknown, added expenses, it could limit their ability to invest, expand operations and create new jobs — ultimately hampering economic growth across Illinois.

It’s likely lawmakers will try to revive these bills and reforms in their fall session. When they do, they need to know what the changes will cost and how they will impact taxpayers and businesses.

Illinois has been here before, hastily making changes to pension benefits without knowing the costs. Even since the implementation of the current pension funding formula, benefit increases, missed returns on investments and misguided math have left taxpayers with more than $142 billion in unfunded public pension liabilities. That’s cost the state rising taxes and declining services during the past 20 years.

To protect all Illinoisans — and especially businesses — lawmakers need to ensure any proposed changes will help address the long-running problem, not exacerbate it.

Pensions already are the largest line item in the state’s budget, with the state contributing $10.5 billion from general funds, which is about 20%. It contributes $11.6 billion across all state funds.

The simplest fix is to peg the Tier 2 salary cap to the Social Security wage base, which will make Tier 2 “Safe Harbor” compliant. This could add $285 million to the state’s unfunded liabilities and $5.6 billion in additional pension contributions for the state through 2045, according to the state Commission on Government Forecasting and Accountability.

The next step is to adopt constitutional pension reform. Without a constitutional amendment, Illinois won’t achieve a sustainable pension system or become a business-friendly state.

Any other changes will result in more of the same — more tax dollars diverted from services to pensions and more Illinoisans fleeing for more economically viable states.

When policymakers try to enact reforms, it should come after meaningful dialogue with businesses, labor representatives and other stakeholders to develop pension reform strategies that prioritize fiscal responsibility, transparency and economic growth.

Matt Paprocki is president and CEO of the Illinois Policy Institute.

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