Public Pensions

In August 2025, Illinois enacted Public Act 104-0065, also referred to as the “Pension Sweetener,” to enhance pension benefits for Chicago police officers and firefighters hired after January 1, 2011. The legislation seeks to correct inequities created by the Tier II pension system, which lowered benefits for new employees without addressing the State’s history of underfunding pensions. Because Tier II benefits fall below federal Social Security Safe Harbor standards, Illinois risks being required to enroll affected employees in Social Security—an outcome that could cost more than $800 million annually. The new law adjusts how final average salary is calculated, raises the salary cap used for benefit determinations, enhances cost-of-living adjustments, and improves survivor benefits to bring Tier II benefits closer to Tier I levels and ensure compliance with the Social Security Safe Harbor.

However, while the legislation helps protect retirement security and enhance workforce stability for public safety employees, it does not include a funding source to pay for the enhanced benefits. Instead, it shifts the additional cost—projected at $6.5 billion through 2055—onto the City of Chicago. This cost shift comes as Chicago faces a $1.2 billion Corporate Fund deficit in FY 2026 and experiences declining revenue from the State of Illinois through diversions of the Corporate Personal Property Replacement Tax and the Local Government Distributive Fund, two revenue-sharing mechanisms meant to support cities and municipalities across the state.

These concurrent pressures highlight a broader problem: Illinois has repeatedly enacted pension and revenue policies that exacerbate local fiscal strain. While the Public Safety Tier II Adjustment Act partially remedies one structural flaw regarding the Social Security Safe Harbor, it does so at the expense of the municipal budget. Sustainable reform will require coordinated state-local action to restore historic revenue-sharing practices, re-amortize pension debt, and ensure that benefit adjustments are matched with reliable funding mechanisms.

The City of Chicago is responsible for funding the following four, defined benefit public pension plans: Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund (“LABF”), Municipal Employee’s Annuity and Benefit Fund (“MEABF”), Policemen’s Annuity and Benefit Fund (“PABF”), and Firemen’s Annuity and Benefit Fund (“FABF”).

These four systems have the lowest funded ratios for local pension plans in the country. Considered together, in 2022 Chicago’s four systems had $44.7 billion in liabilities, but only $10.8 billion in assets to cover those liabilities. This means Chicago, and hence its taxpayers, face a significant, $33.9 billion, aggregate unfunded liability. This is effectively debt owed to the city’s pension systems. Frequently, the financial health of a pension system at any point in time is based on its “funded ratio”—which is simply the percentage obtained by dividing a pension system’s assets by its liabilities. Typically, pension systems are deemed to be financially healthy if their funded ratio is above 80%, but the goal is always to get systems 100% funded.  The aggregate funded ratio across all four Chicago pension systems of just 24 percent is decidedly not healthy under any metric.

CTBA's new report, "Understanding and Addressing Chicago's Pension Funding Crisis" details the true causes of Chicago’s pension funding problems, how state law made matters worse, recent attempts to address Chicago’s pension funding crisis, and presents CTBA’s proposal for responsibly re-amortizing the pension debt to generate roughly $11 billion in savings.

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.

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”). But what exactly does “funding” a public pension system entail?

According to the United States Government Accountability Office (“GAO”), to be considered financially healthy, a public pension system should have a “funded ratio” of at least 80 percent.  A “funded ratio” is determined by dividing the current monetary value of a pension system’s total assets by its total liabilities.

As things stand today, the state’s pension systems are decidedly not healthy. 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, or fully 36 percentage points below the standard for healthy set by the GAO.  It also means Illinois state government faces a significant, as in $139 billion, aggregate “unfunded liability”—read that as “debt”—owed to its pension systems. Which begs the question: how did the state get in this predicament?

CTBA's report, “Understanding – and Resolving Illinois’ Pension Funding Challenges” provides some insights into Illinois’ pension crisis by:

1. Providing the historical context of how Illinois pensions became so underfunded;
2. Explaining where the Illinois pension debt stands today;
3. Clarifying that the debt service schedule created under the pension ramp is straining the state’s fiscal system—not the cost of funding benefits; and
4. Providing a template for re-amortizing the pension debt in a responsible manner, that would save billions in taxpayer costs while getting all five pension systems healthy.

The state of Illinois faces a significant structural deficit into the future. The report highlights the nature of the structural deficit and identifies two key causes: the state’s historically flawed  tax policy and the plan devised for repayment of Illinois’ pension debt. CTBA proposes both the adoption of the Fair Tax and a reamortization of the pension debt as described in the report titled: Addressing Illinois’ Pension Debt Crisis With Reamortization. Doing so would allow the State to ensure full funding for the Evidence Based Funding Formula while also improving the status of Illinois’ public employee pension system and eliminating the State’s structural deficit by 2042.

Illinois' five state pension systems face a debt crisis after years of intentional borrowing from state contributions. The crisis is compounded by a backloaded repayment plan that calls for unrealistic, unsustainable state contributions in future years, putting funding for crucial public services at risk. Because the crisis is about debt, rather than benefits being earned by current and future employees, attempts to solve the problem through benefit cuts have failed. CTBA proposes resolving the pension debt crisis by reamortizing our payment schedule, creating a sustainable, level-dollar plan that saves the state $45 billion and gets the pension systems 70 percent funded by 2045. The state of Illinois has foregone $22 billion in savings since CTBA originally proposed to reamortize the debt in 2018. To bridge the higher contributions called for in the first several years of the reamortization plan, CTBA suggests using bonds to ensure current services do not have to be cut.

One idea that has been proposed by a number of observers to repay some of Illinois’ pension debt is an “asset transfer.” Under this proposal, the state (or the City of Chicago, which is also facing a large pension debt problem) would make a contribution to the pension systems in the form of a publicly owned property, such as a tollway or lottery, rather than in the form of cash.

Proponents point to a number of advantages from such a move. First, the value of the asset would be added to the pension systems’ balance sheets, immediately reducing the systems’ debt, or “unfunded liability.” Second, as in the case of a tollway or lottery, the asset might produce its own revenue stream, which would provide an ongoing source of funding for the pension systems into the future. Finally, because annual state contributions to the pension systems are driven largely by the need to repay pension debt, if the asset transfer significantly reduced the amount of that debt, it could also reduce the state’s annual contribution, freeing up revenue for other current services.

This Analysis briefly looks at two recent examples of large pension asset transfers in New Jersey and Queensland, Australia, representing two paradigms: A revenue-generating asset that creates a dedicated funding stream, versus a one-time windfall from privatization.

The Analysis then poses six important questions for any asset transfer in Illinios:

1. What assets can be transferred, and what restrictions woudl the state face in transferring them?

2. Will the asset include a revenue stream currently used for other purposes? If so, how will the state replace that revenue?

3. Will the transfer be an implicit promise to privatize the asset?

4. How will the asset transfer affect the state's overall pension contribution levels?

5. How would an asset transfer affect management of the asset itself?

6. How will the asset transfer affect the pension funds' anticipated investment returns, and how will that affect the size of current liabilities and the state's required contributions?

You can download this Analysis as a PDF below, or read it at the Budget Blog here.

Illinois' five state pension systems face a debt crisis after years of intentional borrowing from state contributions. The crisis is compounded by a backloaded repayment plan that calls for unrealistic, unsustainable state contributions in future years, putting funding for crucial public services at risk. Because the crisis is about debt, rather than benefits being earned by current and future employees, attempts to solve the problem through benefit cuts have failed. CTBA proposes resolving the pension debt crisis by reamortizing our payment schedule, creating a sustainable, level-dollar plan that saves the state $67 billion and gets the pension systems 70 percent funded by 2045. To bridge the higher contributions called for in the first several years of the reamortization plan, CTBA suggests using bonds to ensure current services do not have to be cut.

This week, Gov. Bruce Rauner gave his fiscal year (FY) 2019 budget address, revealing his revenue and expenditure proposals for the upcoming year. The governor’s proposal relies on $1.5 billion in cost reductions to balance the budget, including:

• A shift of 25 percent of the “normal cost” of pension benefits from the state to local governments for employees covered by the Teachers’ Retirement System and State University Retirement System ($363 million), as well as a shift of 100 percent of the normal cost to the Chicago Teachers’ Pension Fund ($228 million); and
• The elimination of healthcare support for retired teachers ($129 million).

In addition, Gov. Rauner suggested he would like the state legislature to implement a “consideration model” to reduce pension costs, a longstanding proposal that would allow state workers to trade off lower pension benefits for some other benefit. The governor’s budget suggests such a move would save $900 million in FY2019, though that is not part of his plan to balance the budget. Rather, it would allow the state to reduce the individual income tax from 4.95 percent to 4.7 percent.

Each of these proposals pose serious problems, however. This brief highlights three of them.