CHICAGO — Illinois is facing one of the worst fiscal crises of any state in recent decades, largely because it has mismanaged its pension system.
The shortfalls could potentially mean sharply higher taxes and cuts in spending. And even though the state’s highest court just this month threw out a landmark plan to cut worker and retiree benefits, some lawmakers say they may have to find another way to make those reductions as well.
New York Times Article by Monica Davey and Mary Williams Walsh, March 25, 2015. Picture by Antonio Perez, Chicago Tribune via Associated Press
Illinois’s problems resonate well beyond its borders. Pennsylvania, New Jersey and Kentucky are among the states confronting similar problems, and to them, Illinois is a model of what can go wrong — with political intransigence, mounting costs and a complicated legal terrain.
So elected officials, union leaders, investors, fiscal hawks and even bankruptcy lawyers across the country are watching Illinois closely to see how it addresses the crisis. In Washington, some Republicans have even raised pointed concerns that President Obama’s home state might someday seek federal help.
The state faces a range of problems. Illinois has one of the worst-funded pension systems in the nation. Chicago also has a pension crisis, leading Moody’s Investors Service to downgrade its credit rating to junk status on May 12, potentially threatening the city’s ability to borrow.
And the state faces an expected budget deficit of $6 billion, which it needs to address quickly. With just days before a legislative deadline, the new Republican governor, who ran on cutting costs and holding down taxes, is at odds with Democrats who hold a veto-proof supermajority in the legislature.
“Really, it’s not a clear road map at this point,” the governor, Bruce Rauner, said of solving the pension crisis.
“We have to make big decisions,” Mr. Rauner told reporters. “The state is in dire financial straits. Chicago is in big, big challenges. And everybody’s a little bit on edge.”
Courts in other states, including Colorado and Minnesota, have sometimes approved measured pension cuts for public workers, especially for the benefits that current workers have not yet earned. And in Detroit and Stockton, Calif., federal judges have said pensions could be cut in a bankruptcy.
But Illinois has one of the most explicit constitutional pension guarantees of any state. The State Supreme Court found that the landmark plan was unconstitutional, and interpreted the clause in a way that protects even benefits that current public workers have not yet earned, as well as cost-of-living adjustments for retirees.
That has made a dire situation worse and raised the possibility that Illinois, its biggest city and Chicago’s schools must all simultaneously find a way to keep running pension systems that are already unsustainable.
“What has happened is the loudest wake-up call possible,” said Laurence J. Msall, president of the Civic Federation, a watchdog group. “This is a financial tsunami for the City of Chicago and the State of Illinois that will not be fixed without politically painful changes.”
But the Illinois public pension system is at or near the bottom of national rankings. Standard & Poor’s Rating Services said in 2014 that the Illinois system was last among state systems, with just 40 cents available for every dollar of promised benefits.
The system sank over decades, as officials promised pensions without setting aside enough to pay them. In its unanimous opinion on May 8, the State Supreme Court cited commissions dating to 1917 that had warned of a crisis as more retired workers started drawing benefits.
Warnings were ignored, though, and shortfalls accumulated. It was easy for officials to let that happen because actuarial calculations can understate the true cost of a pension plan, and Illinois had some of the biggest actuarial distortions of any state. In 2013, Illinois became the second state in history, after New Jersey, to be accused of fraud by the Securities and Exchange Commission, which found that it had misled the public about the condition of its pension system.
In recent years, with the system estimated to be more than $100 billion short and Illinois’s yearly pension payments consuming more and more of the state’s budget, Democratic leaders broke with unions that had traditionally been their allies.
In late 2013, Gov. Pat Quinn signed what was considered a landmark bill that claimed to bring the pensions up to full funding, in part by curtailing cost-of-living increases for workers, capping salary levels used to calculate pension benefits and raising the retirement age for some.
The state argued that the changes did not violate the provision in the State Constitution banning the reduction of pensions because a financial emergency had taken hold. But the Illinois Supreme Court said that any emergency was of the state’s own making and that the cuts could not stand.
That has left officials scrambling at a moment when the state has a divided government for the first time in a decade and the political differences between Mr. Rauner and the Democratic-controlled legislature make compromise difficult. A splintered set of political leaders is now debating options including tax increases, large spending cuts, new pension reductions, changes to the State Constitution and even legislation to permit Illinois municipalities to file for bankruptcy.
Some in Illinois assert that changes to pension benefits remain possible under certain conditions, and various deals are being discussed in the State Capitol in Springfield, though cuts are all but certain to draw more legal challenges.