Illinois Budget

CTBA Responds to FY 2027 Budget Proposal

On February 18, 2026, Governor JB Pritzker delivered his 8th State of the State budget address to the 104th General Assembly. He also released his $56.1 billion General Fund budget proposal for FY 2027 (the “Proposed FY 2027 Budget”), which includes a very slight year-to-year increase in spending on services of less than 0.5% in nominal, non-inflation adjusted dollars. But that ignores the impact of inflation, which drives up the cost of funding services in the public sector, just like it increases costs in the private sector. After adjusting for inflation, proposed FY 2027 spending on public services will be about 1% less than FY 2026. Read CTBA's response.

Despite the elimination of the accumulated deficit and a projected FY 2026 General Fund (FY 2026 GF Budget) surplus of $370 million, the enacted budget relies on $1.1 billion in manufactured, one-time, and recurring revenue enhancements to sustain its funding levels. The total net appropriation of $55.2 billion dedicates $15.9 billion (28.7%) to Hard Costs, including the back-loaded $11 billion pension contribution. After adjusting for inflation, the minimal nominal increase in appropriations translates to continued real disinvestment in core current services, with overall real spending on those services projected to be 14.3% less than it was in FY 2000. This fiscal strain, exacerbated by a state tax policy that consistently fails to generate adequate structural revenue growth, leaves the state unable to fund the cost of maintaining current service levels over time. Moreover, without significant tax and pension reform, the long-term structural deficit will be severely widened by federal H.R. 1 ("BBB") legislation, which will impose billions in new costs on the state by reducing federal Medicaid and SNAP support starting in FY 2027.

Volume X of the Fully Funding the EBF series continues CTBA’s modeling of fully funding the EBF to 90% of Adequacy. This continuation uses the shortfall from the ISBE EBF calculations for FY 2025 (released in August of 2024). The new release maintains the four scenarios, including the full funding model based on the current minimum increase of $300 million annually both with and without considering inflation, if the state were to up the funding to $500 million annually, as well as the annual amount to fund the EBF by FY 2027 as the statute requires.

On February 21, 2024, Governor Pritzker announced his proposed General Fund budget for FY 2025 (the “FY 2025 GF Budget Proposal”).  The FY 2025 GF Budget Proposal makes two things clear about the state’s finances.  First, the General Fund is the healthiest fiscal condition it has been in for decades. That’s the good news. Second, the state’s structural fiscal problems, which were somewhat masked by one-time federal financial assistance provided during the pandemic, as well as the strong economic growth that followed, are re-emerging. And that’s the bad news.

Overall, the state’s fiscal condition has definitively changed for the better since Governor Pritzker was first sworn into office in 2019. In 2019, Pritzker inherited an $8 billion backlog of unpaid bills from Governor Rauner’s Administration. A budget hole of that size meant roughly 30 percent of all General Fund expenditures during Rauner’s final year as governor constituted deficit spending. Unfortunately, that deficit under Rauner was also nothing new. For more than two decades prior to Pritzker’s inauguration, Illinois had failed to produce anything close to a balanced budget in its General Fund.

Governor Pritzker changed all that by being a responsible fiscal steward of the state’s finances. Yes, over the past few years Illinois received significant pandemic-related financial support from the federal government, totaling some $4.95 billion, that helped shore up the General Fund during the pandemic. The state also realized around $4.3 billion in unexpected revenue growth in FY 2023. This was primarily due to a combination of factors including the robust economic recovery that followed the pandemic, and corporations taking advantage of a 40‑year high in inflation to price gouge, and thereby generate record profits. The FY 2025 Proposed GF Budget analysis takes an in depth look at Illinois’ revenue and spending in the General Fund for the upcoming fiscal year.

Volume IX of the Fully Funding the EBF series continues CTBA’s modeling of fully funding the EBF to 90% of Adequacy. Volume IX uses the proposed Fiscal Year 2025 General Fund Budget appropriations for the Evidence-Based Funding formula, but uses a projected shortfall based on the ISBE EBF calculated shortfall for FY 2024 (released in August of 2023). The new release maintains the four scenarios, including the full funding model based on an increase of $500 million annually using Scenario 2: Funding the EBF on a Fully Inflation-Adjusted Basis, By Making a Nominal Minimum Target Level Increase Annually.

Illinois state government has the responsibility to fund five public pension systems: the Teachers’ Retirement System (“TRS”); the State Employees’ Retirement System (“SERS”); the Judges’ Retirement System (“JRS”); the State Universities Retirement System (“SURS”); and the General Assembly Retirement System (“GARS”). The state’s pension systems are not in a good place fiscally. As of November 2022, the state’s five pension systems collectively had $248 billion in liabilities, but only $109 billion in assets to cover those liabilities. This results in a funded ratio across all five state systems of just 44 percent.

In a poorly conceived attempt to reduce overall costs for the pension systems, legislators passed Public Act 96–0889 in 2010, which modified the Pension Code by creating a new tier of retirement benefits that were significantly less than the benefits payable under the state’s prior plan. Known as “Tier II,” these lesser benefits were applicable to all workers eligible to participate in any of the state’s five public pension plans that were hired on or after January 1, 2011. The concept of using a lesser benefit level to reduce overall costs in the state’s five pension systems was poorly conceived, because all the data show that plan benefits were not the driver of either the creation of the unfunded liability the state owes to its pensions systems, or the growing financial pressure that the pension systems are putting on the state’s General Fund.

Those lesser Tier II benefits created problems. For instance, it clearly is not equitable for the state to charge public workers the same contribution rate for lesser benefits than their peers receive. Of course, because their benefits are less than provided under Tier I, members of the Tier II system have less retirement security than their Tier I peers have, despite providing the same public services. On top of that, from a purely fiscal perspective, the design of the Tier II system will ultimately put Illinois in violation of the Federal Insurance Contributions Act (“FICA”) exemption. This exemption creates a “Safe Harbor” which allows state governments to be exempt from enrolling public sector employees in Social Security coverage—and hence paying into the Social Security system—but only if those employees are provided a “sufficient” pension package from the state claiming the exemption. There is a growing consensus that the design of Tier II, which charges its members the same contribution rate as Tier I members, but pays a much lower retirement benefit, will be insufficient under the aforesaid federal Safe Harbor standards. This report has been updated to include small efforts that have been made to modify Tier II benefits and allow for Safe Harbor compliance within some pensions systems, though progress thus far has been insufficient.

The policy questions this raises for decision makers are varied, and include, at a minimum: how can Tier II be modified to provide a level of benefits that would satisfy federal Safe Harbor requisites, create retirement security for Tier II members, and help recruit high quality workers to the public sector generally and teaching specifically?

This report analyzes those questions using data from TRS, which is Illinois’ largest pension system by number of enrollees, liabilities, and asset holdings, and will provide:

1. A breakdown of Federal Safe Harbor and Social Security Equivalence standards;
2. An overview of TRS;
3. An explanation of why Tier II benefits exist in Illinois; and
4. A demonstration of how Tier II benefits are in violation of federal standards.

Illinois state government has the responsibility to fund five public pension systems: the Teachers’ Retirement System (“TRS”); the State Employees’ Retirement System (“SERS”); the Judges’ Retirement System (“JRS”); the State Universities Retirement System (“SURS”); and the General Assembly Retirement System (“GARS”). The state’s pension systems are not in a good place fiscally. As of November 2022, which is the most recent data available, the state’s five pension systems collectively had $248 billion in liabilities, but only $109 billion in assets to cover those liabilities. This results in a funded ratio across all five state systems of just 44 percent.

In a poorly conceived attempt to reduce overall costs for the pension systems, legislators passed Public Act 96–0889 in 2010, which modified the Pension Code by creating a new tier of retirement benefits that were significantly less than the benefits payable under the state’s prior plan. Known as “Tier II,” these lesser benefits were applicable to all workers eligible to participate in any of the state’s five public pension plans that were hired on or after January 1, 2011. The concept of using a lesser benefit level to reduce overall costs in the state’s five pension systems was poorly conceived, because all the data show that plan benefits were not the driver of either the creation of the unfunded liability the state owes to its pensions systems, or the growing financial pressure that the pension systems are putting on the state’s General Fund.

Those lesser Tier II benefits created problems. For instance, it clearly is not equitable for the state to charge public workers the same contribution rate for lesser benefits than their peers receive. Of course, because their benefits are less than provided under Tier I, members of the Tier II system have less retirement security than their Tier I peers have, despite providing the same public services. On top of that, from a purely fiscal perspective, the design of the Tier II system will ultimately put Illinois in violation of the Federal Insurance Contributions Act (“FICA”) exemption. This exemption creates a “Safe Harbor” which allows state governments to be exempt from enrolling public sector employees in Social Security coverage—and hence paying into the Social Security system—but only if those employees are provided a “sufficient” pension package from the state claiming the exemption. There is a growing consensus that the design of Tier II, which charges its members the same contribution rate as Tier I members, but pays a much lower retirement benefit, will be insufficient under the aforesaid federal Safe Harbor standards.

The policy questions this raises for decision makers are varied, and include, at a minimum: how can Tier II be modified to provide a level of benefits that would satisfy federal Safe Harbor requisites, create retirement security for Tier II members, and help recruit high quality workers to the public sector generally and teaching specifically?

This report analyzes those questions using data from TRS, which is Illinois’ largest pension system by number of enrollees, liabilities, and asset holdings, and will provide:

1. A breakdown of Federal Safe Harbor and Social Security Equivalence standards;
2. An overview of TRS;
3. An explanation of why Tier II benefits exist in Illinois; and
4. A demonstration of how Tier II benefits are in violation of federal standards.