Pension Changes in the FY2018 Budget: Short-Term Savings and Long-Term Costs

The changes made to Illinois public pension systems in Public Act (PA) 100-0023 (introduced as Senate Bill 42), the Budget Implementation Act, or BIMP, passed on July 6, 2017, and include two primary elements. First, the BIMP creates a new Tier 3 level of benefits for public sector workers. Second, the BIMP permits the state to smooth out the fiscal impact of the actuarial reduction in the assumed rate of return generated by the state’s five pension systems.

While proponents of the changes suggest they will give the state immediate and long-term fiscal relief from growing pension costs, this analysis of the changes indicates that the hoped for fiscal relief may not materialize.

Tier 3 is a new hybrid defined benefit-defined contribution plan that all Tier 2 and new employees will be able to opt into. The FY2018 budget is predicated on Tier 3 saving $500 million for the state; however, analysis by the State University Retirement System suggests that this number will be lower, and will continue to be slight for the foreseeable future. Moreover, much of the savings result from cost-shifting to local units of government.

The five-year assumption smoothing will result in savings in FY2018 for the state. However, it essentially amounts to additional borrowing against pension liabilities, and therefore will increase long-term costs. The Teachers Retirement System estimates that for each dollar of up-front savings, there will be three dollars of long-term costs.