Six Common Sense Ways to Reduce Unsustainable Taxpayer Pension Costs

By Bill Zettler

(Originally posted 11-24-09.)

The Pension Gravy Train Needs to End Before the State Is Bankrupted.

The unfunded taxpayer pension liability in Illinois now approaches $80 billion. The state pension system continues to create thousands of pension millionaires every year while the number of $100,000 state pensions approaches 4,000 and increases by double digits every year. It is obvious to everyone (except politicians) this trend is unsustainable and unfair to taxpayers whose own retirement future is at risk.

Here are six common-sense ways to address the problem:

1. Increase Employee Pension Contributions 

Increase public employee retirement contributions to at least the level of private sector employees or 12% (7.65% Social Security plus 4.4% 401K). Currently state employees pay only 8% (with a few exceptions) for both pensions and retiree health care.  So let’s raise those to 12% to match private sector contributions. What could be fairer than that? Fellow Midwest industrial state Ohio is in the process of raising the employee contribution rate to 12.5%. If Ohio can do it why can’t Illinois?

SAVINGS: $57 billion over 35 years.

2. Reduce Cost Of Living Allowance

Reduce the automatic 3% COLA to 1.5%. While Social Security recipients will receive zero COLA for 2009, Illinois has 4 retirees whose 3% COLA will increase their pensions by more than $10,000/yr.  Many other states are implementing COLA reductions including Ohio, Kentucky, and Rhode Island.

SAVINGS: $115 million per year.

3. Sell State Assets.

If “The Price Is Right” sell state assets including, but not limited to, the Lottery, Toll Way, Thompson Center, and Thomson Correctional Center in Thomson Illinois. The “Right Price” to be determined by disinterested 3rd parties not political hacks like Chicago Mayor Daley had for the Parking Meters Payoff. Use the proceeds to pay down the unfunded pension liability and as a bonus eliminate state employees, pensions, and a long-term source of corruption. Since the state is responsible for the pension shortfall, let the state pay for it rather than the innocent taxpayer.

SAVINGS: $20-30 billion off of the $80 billion unfunded liability.

4. Consolidate Five Pension Systems Into One.

Combine all five state pensions into one not necessarily to save money but to increase transparency and ease oversight. Pension trustees should be disinterested parties not members of the group receiving the benefits. For example, the Teachers Retirement System, with 6 of 13 voting trustees being teachers or former teachers, advocates for the Illinois Federation of Teachers positions on its website when in actuality pension systems are a part of the Dept. of Insurance and should not be advocates for any party.

This approach would also be more likely to result in a reasonable interest rate/ROI estimate since transparency would be more important than showing a theoretical rate that falsely minimizes taxpayer and member contribution requirements. Get rid of politically connected lawyers and teachers and appoint some accountants and actuaries as trustees.

SAVINGS: $30 million over 5 years but anti-corruptive and a huge increase in transparency.

5. Make High-salary School Districts Pay Their Own Pension Costs.

Move pension costs to the local school district based upon salary. For example eliminate the districts current .58% contribution (for 2.2% upgrade) and change it to full contribution for all salaries exceeding Illinois’ median family income, which is about $65,000. So if District 211 wants to pay $150,000 for a Drivers Ed teacher they would pick up the entire Employer Cost for $85,000 ($150,000 – $65,000).

This would eliminate the need for the 6% salary increase limit and allow local districts to pay whatever they want to pay as long as they pick up 100% of the excess pension cost. Under this plan poorer districts such as Cairo District 1 would pay less than they do now thus eliminating the “poor districts shouldn’t be punished” argument. If districts are wealthy enough to pay teachers $150,000/yr then they are wealthy enough to pay the pensions too.

This is not a tax increase but a transfer of tax to a group that can and should control the tax amount by controlling the teacher salaries at the local school district. Controlling teacher salaries at the local level is a function unavailable to state taxpayers and therefore they should not be liable for it.

SAVINGS: 30% of state contribution ($1.6 billion of 2011’s $5.3 billion pension contribution).

6. Use Cash Buyouts To Lower Pension Obligations.

Offer “Cash Buyout” on terms advantageous to the state, say 75% of cash value using an 8.5% interest rate, for any member eligible for a future pension not just those at retirement age. This could get rid of a lot of deadweight and decrease the trust funds UAAL. Bribery, yes but a cost savings too. In most cases these would be employees at the higher end of the pay scale and they would be replaced with less expensive people or better yet not replaced at all.

Any new employee hire would have pension based upon a new and lower cost pension plan. My guess is employees have no idea how valuable their pension is and when they find out will be tempted to take the money and run.

SAVINGS: Unknown but could be substantial and will come right off of the unfunded liability.

If we apply all of these common sense pension cost savings to the 2011 Illinois Budget beginning July 1, 2010, we save $3.1 billion:


All amounts in millions of dollars. 


  Scheduled State Pension Contribution 2011


  Increase public employee contribution to 12%


  Decrease unfunded by selling $20B of state assets.


  Reduce COLA from 3% to 1.5%


  Move pension cost to local district on salaries over $65,000


  Cash buyout $1B value for $750M


  Total Savings in 2011


  Percentage saved


  Projected State Pension Contribution 2011 with savings

Whose Problem Is This Anyway?

If you listen to the political elite and the media you would think this is the taxpayers fault. After all we elected the politicians who supposedly underpaid pension contributions over the years therefore causing the current unsustainable financial problem. But in reality it is a form of legal corruption that has led the Illinois taxpayer being in a trillion dollar hole.

Collusion between politicians of both parties and public employees, mainly educators, has resulted in public employee wage increases in excess of private sector employees (7% for teachers vs. 3.9%) and public employee retirement contributions 1/3 lower than private employees (8% vs 12%). This combination plus bad investment decisions and retirement 10 years earlier than private employees accounts for the entire unfunded liability.

So the way out of this hole is to have the colluders pay up not the innocent taxpayers. Sell every possible state asset and pay down the liability. Then ask that all public employees make the same contribution to their retirement that private employees do.

Without significant changes in the funding formulas, the problem is not solved, just put off into the future. The state will have to revisit the problem every few years because under the current formulas the unsustainability goes to eternity. The political system in Illinois caused the problem and only the political system can solve it.


Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address. Click here to read more by Mr. Zettler.