Illinois plans to borrow $1 billion to buy employees out of their underfunded pension plans, but just how much the state will save depends on how many opt for the buyout.

Illinois state pensioners looking to get more control of their retirement will soon have that option with several pension buyout plans passed by the legislature and enacted by the governor for the coming fiscal year. But it will take time for the state’s pension systems to crunch the numbers and get everything in order.

Illinois’ worst-in-the-nation pension liability stands north of $130 billion. The state's five pension funds range from a 39.3 percent funding level for the Teachers Retirement System down to a 14.4 percent funding level for the General Assembly Retirement System. Funding for the systems are further stressed by the 3 percent compounded annual increase for Tier I pensioners.

For years, lawmakers have proposed various ideas to reduce the liability. In 2011, lawmakers created a Tier II system with less costly benefits for new employees. A 2013 pension reform plan was shot down by the Illinois Supreme Court back in 2015 as an unconstitutional diminishment of benefits.

As a workaround, lawmakers this year brought about three different plans to try to lower the growing liability that is set to take up to a quarter of every tax dollar the state brings in.

One option is an automatic annual increases buyout program that lawmakers said would save $380 million.

“It’s voluntary,” state Sen. Heather Steans, D-Chicago, said. “For retiring Tier I members, they have an option to have their automatic annual increases calculated at 1.5 percent in exchange for an accelerated pension benefit payment equal to 70 percent of what that difference would be in the life of the value of their pension benefit.”

Another plan lawmakers say will help save $40 million is a buyout that state Rep. Mark Batinick, R-Plainfield, said is for eligible members who aren’t old enough to retire or have moved on to another job.

“They might get a small annuity down the road and they can trade that in for a lump sum that they can roll into a 403(b), which is similar to a 401(k), and invest it how they see fit,” Batinick said.

Both options would give annuitants instant control over retirement money, rather than leaving the fiduciary duty to a state government beset by financial problems, including billions in overdue bills.

Wealth management adviser and Phase 3 Advisory Services President John Bever said pension plans have the advantage of lasting a retiree’s entire life, but after that, it’s done, except for what’s due to surviving spouses.

Defined contribution plans, like an IRA, gives the beneficiary more control, even when someone dies, Bever said.

“So it’s legacy money in that it goes onto the next generation,” Bever said. “Even if they don’t name a beneficiary, that money is part of their estate and will be distributed according to their will.”

But the plans are optional, something S&P Global Ratings said this week doesn’t guarantee taxpayer savings.

“The state would finance the buyouts with proceeds from the issuance of up to $1 billion in bonds authorized by the payout legislation,” S&P’s report said. “This follows a familiar pattern in which lawmakers favor the immediate recognition of any potential savings related to pension policy changes while deferring those that result in higher costs.”

Illinois lawmakers have said they based the savings of one pension buyout plan by looking at a state like Missouri, which has offered two rounds of pension buyouts to vested employees that are no longer employed by Missouri state government.

The Missouri State Employee Retirement System communications department said 25 percent of those eligible took the buyout plan that was offered up in October 2017, November 2017 and again in May 2018.

MoSERS’ plan “allows certain members who are no longer employed by the State of Missouri to choose to cash out their future retirement annuity in exchange for a one-time lump-sum payment.”

An example of a buyout MoSERS has on its website: “If the member is currently age 58, he would be 4 years from retirement eligibility, so the present value would be $48,550.68. Multiplied by 60% (0.60), the lump-sum buyout amount would be $29,130.41.”

MoSERS estimates the buyout will save the state $90 million over the next 26 years. Missouri’s unfunded pension liability is $4.3 billion.

There’s no firm timeline of when the buyout plans will be ready as the systems have to do a lot of calculations to make individual offers to eligible members.

“[Teachers Retirement System] is actively working to draft and win legislative approval for the administrative rules necessary to implement the accelerated benefit payments, as well as the changes to our computer systems we need for two programs that didn't exist a week ago,” TRS Communications Director Dave Urbanek said in an email. “But because the act requires the funding for the buyouts to come from $1 billion in state bond proceeds, the program will not start until the bonds have been sold and the money deposited with the comptroller's office. The bond sale is completely out of our hands.”

A third part of pension savings lawmakers approved would change the cap for what the state will cover for salary increases at the end of a worker’s career, a practice known as spiking. The cap goes from 6 percent to 3 percent, so any employer like a local school district would be responsible for the pension contributions required from the salary spiking of more than 3 percent. That’s expected to bring about $22 million in savings.

While calling the overall spending plan last week as bad for taxpayers, state Rep. David McSweeney, R-Barrington Hills, said lawmakers should have taken a different approach to reform pensions.

“We need to do a constitutional amendment like Arizona that’s a negotiated settlement that addresses the fact that we have a 3 percent annual increase of benefits,” McSweeney said. “We have a $130 billion pension liability. That’s using a 7 percent rate of return. If you use a real rate of return, we have a $200 billion problem. We are insolvent.”

Staff Reporter

Greg Bishop reports on Illinois government and other statewide issues for The Center Square. Bishop has years of award-winning broadcast experience, and previously hosted “Bishop On Air,” a morning-drive current events talk show.