The head of Illinois Teachers' Retirement System strongly suggested that cuts in cost-of-living benefits are inevitable for more than 360,000 teachers and retirees.
Richard Ingram, executive director of Illinois' largest pension fund, said state politicians will have few other options if they want to make meaningful progress on closing the gap between promised pension benefits and the available funding.
“Look at every other state that's done pension reform – what have they done? They've changed the COLA because that's where the cost is,” Mr. Ingram said, noting that 25% of Illinois Teachers' payments are for cost-of-living increases on pension benefits.
Changes in cost-of-living adjustments could be targeted so they have the least impact on the oldest retirees and those with the smallest incomes, he said.
“If that is where we need to go in Illinois, then we can do it in a manner that is targeted and effective and protects those that need it the most and, at least to a large extent, get the job done,” Mr. Ingram said.
While legislative ideas floated earlier this year proposed reducing the COLA benefits in some fashion, legislators and Democratic Gov. Pat Quinn weren't able to reach agreement and are slated to take the issue up again next year. Mr. Ingram says Illinois Teachers' contributed analysis to what he characterized as serious, bipartisan discussions of the COLA change possibilities.
Illinois Teachers' has taken a neutral stance on the proposed legislative solutions. But the pension fund's board earlier this year urged the legislature to take action quickly to avoid the fund becoming insolvent, perhaps as early as 2029. Still, the board asserts, in agreement with unions, that the flow of state government pension contributions can't be interrupted as it has been in the past.
Tyrone Fahner, a partner at Mayer Brown LLP, and the head of a corporate group trying to fix the pension underfunding, said no legislative proposals to date have gone far enough in focusing on the COLAs.
There is not a single proposal “that does anything to recognize that the COLAs are the largest and biggest driver affecting the viability of the pensions,” Mr. Fahner said in an interview.
Mr. Ingram is fairly certain that Illinois Teachers' members, which include about 362,000 Illinois teachers and retirees outside of Chicago, won't get the full $89 billion in pension benefits they've been promised no matter what. (Chicago teachers are covered by a separate pension program funded by the city.) Projections show that Illinois Teachers' has less than half the money it needs to cover future liabilities.
“It's very likely that benefits are impaired today, that we're looking at the possibility in the future of not being able to pay them,” Mr. Ingram said.
Mr. Fahner's group advocates shifting some responsibility for pension contributions to the local school districts that negotiate teacher pay and benefits.
Some legislators, including Illinois House Republican Leader Tom Cross, have opposed such cost-shifting proposals, fearing it would force large tax increases in many jurisdictions.
Mr. Ingram said such a change might give Illinois Teachers' more power to compel pension fund payments than it has now. It can't pursue legal action against the state, but it could against school districts if they fail to make required pension contributions. Part of the reason the pension fund is underfunded is due to the state missing payments in the past.
“It's inappropriate for any school district to set the level of compensation and pensions for one of their teachers and then send it to the rest of the state to pay the bill,” Mr. Fahner said.
Lynne Marek is a writer for Crain's Chicago Business, a sister publication of Pensions & Investments.