SPRINGFIELD, Ill. – After months of inaction, Illinois lawmakers have finally arrived at a  proposal designed to address the state’s unfunded pension liabilities.

But the latest attempt falls far short of reforming state pension plans for the better.  The so-called “solutions” up for debate do little to free Illinois citizens from  the crushing burden of unfunded pension liabilities. Here are three reasons  why:

1. The current proposal offers virtually  nothing in actual savings.
While the state itself wrestles  with what it understands to be a $100 billion unfunded liability, that figure is  based on flawed accounting. Using more realistic assumptions, five of Illinois’s  state pension plans (SERS, GARS, JRS, TRS, and SURS) currently have a $255  billion unfunded liability. Compared to their current assets, these plans  combined are just 20.1 percent funded. $20 billion in savings (including $9.3  billion from TRS, none from JRS, and the remaining $10.7 billion divided amongst  the remaining 3 plans based on their respective shares of their combined total  liability) will only reduce the unfunded liability to $215 billion and raise the  funded ratio a laughable 2.8 percent.

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2. 401(k) option covers only 5 percent of new  employees.
Defined contribution plans are a real solution and  a far better alternative than broken defined benefit plans, but the current  proposal is defined contribution in name only. Just 5 percent of workers whose  employment began in the last 3 years will be eligible. Once that 5 percent of  new employees enroll, the plan will be closed forever. Even worse, unlike a true  defined contribution retirement system, the funds will belong to the state. This  leaves the money ripe for taking whenever the state feels a cash crunch, a  budget gimmick used by Illinois lawmakers in the past and there’s no indication  that they would hesitate to use it again.

Allowing states to eliminate  unfunded liabilities by closing defined benefit plans and simultaneously  removing the influence of politics over retirement security by granting  ownership and control to public employees are cornerstones of defined  contribution plans. Illinois’ plan accomplishes neither.

3. Illinois pensions will still be worst in the  nation, leaving the state’s credit at risk.
Credit ratings  agencies have certainly taken notice of the magnitude of the state’s pension  problem. Illinois has the worst credit rating in the nation. Credit agencies  have downgraded the state more than a dozen times in four years. As Standard & Poor’s said a few months ago, the state is on a “credit precipice”  due to lack of pension reform.

Reducing liabilities by $20 billion, as  explained above, would still leave state pensions just under 23 percent funded  and, by that measure, the worst in the country.

An awful credit rating means more than Illinois being last on a list of  states. It has a serious impact on the state’s citizens. As a result of its  abysmal credit, Illinois faces higher interest rates when it seeks to borrow.  The higher price of borrowing means that citizens are paying the price,  literally, for lawmakers’ inability to address the problem. The additional money  spent on interest is money not going to education and public safety.

Whether or not this latest attempt at pension reform passes, it would be wise  to avoid falling for the hype. “Reform,” as currently understood by Illinois’  leaders, fails to address the threat that unfunded liabilities pose to both  public employee retirement security and funding for the vital services Illinois  residents rely on each and every day.

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Note: Figures updated 12/3/2013 to reflect no savings from JRS and a  reported $9.3 billion in savings from TRS. 

Authored by Cory Eucalitto – State Budget Solutions