While Illinois Gov. Pat Quinn’s proposed pension reforms would help stabilize the state’s pension system, according to Moody’s Investors Service, analysts warned of the negative effects it would have on some local governments, since it requires school districts to start shouldering some of the burden for funding their teachers’ pensions.
Currently, Chicago Public Schools is the only system required to cover the employer’s share of pension funding. Quinn’s pension overhaul calls for other districts to also begin contributing to teachers’ pensions. He has said the change could be phased in over several years to give districts time to adjust their budgets.
School district contributions would be comprised of the annual normal cost, which is a portion of the annual actuarially required contributions, according to Moody’s. If implemented immediately, it said, local governments would see an average increase of roughly 4% in their total fiscal 2010 general fund revenues.
“The added costs to their expenses will be a challenge for many Illinois districts which have already faced several consecutive years of tight budgets,” Moody’s said. “Many districts now have fewer options to cut expenditures, as most of the 'easy’ cuts have already been made.”
Many districts also face state property tax caps, limiting their ability to raise revenue to offset the increased pension costs. The proposed reforms do not include any measures giving districts additional revenue-raising capacity or shifting some of the burden to employees.
Fitch Ratings, in a special commentary, said the reforms, aimed at lowering the state’s unfunded liabilities of more than $80 billion, would help the state’s credit.
In addition to requiring schools to contribute to teachers’ pensions, the reforms ask state employees to use a new plan that calls for increased contributions, raises the retirement age and restricts cost-of-living increases. In exchange, employees would keep certain perks, such as subsidized health care in retirement.
“Although pension funding would continue to be a significant and above-average burden on the Illinois budget, even with pension reform, action to lower the liability and manage the ongoing costs could be a significant stabilizing factor for the state,” Fitch analysts wrote.
Lawmakers also recently passed legislation to give the public a say in future pension benefit increases. Voters in November will be asked whether the state constitution should be amended to require a three-fifths majority vote of the General Assembly to approve pension perks. Currently, only a simple majority is needed.
