Illinois Pension Buyout Program Falls over $400 Million Short of Goal

Buyout plans were expected to save $423 million, but only saved $13.1 million.

Two pension buyout plans launched last year by Illinois that were intended save the state an estimated $423 million in fiscal year 2019 have fallen far short of their goal, and created estimated savings of only $13.1 million.

The move was designed to help chip away at the system’s $129 billion pension debt after prior attempts to reduce retirement benefits failed when courts ruled those unconstitutional. The buyouts were intended to reduce state pension costs by allowing workers to give up future benefits in exchange for immediate payouts.

Illinois authorized two voluntary buyout plans that applied to the three largest state retirement systems. One, known as a cost-of-living adjustment (COLA) buyout, was an automatic annual increase buyout plan under which tier 1 members would give up their 3% annual compounded benefit increases in exchange for yearly increases of 1.5% of their base pension amount. Members who elect this buyout plan received a lump-sum payment equal to 70% of the difference between the value of their benefits with the higher and lower annual increases.

The other plan was an inactive member buyout plan under which inactive tier 1 and tier 2 members, who are no longer employed at their state pension-eligible jobs but are qualified for state pensions, would receive 60% of the current value of their pensions as a lump-sum payment.

The COLA buyout plan was expected to save the state $382 million, while the inactive member buyout plan was forecast to save $22 million. The savings estimates were based on the assumption that 25% of retiring tier 1 members would participate in the COLA buyout, and 22% of inactive members would participate in the other buyout plan.

But far fewer members opted for the buyouts than the state had anticipated. According to a monthly briefing from Illinois’ Commission on Government Forecasting and Accountability, the Teachers’ Retirement System of the State of Illinois’ (TRS) actuary noted that “an immaterial number” of members have chosen the two pension buyout programs so far in fiscal 2019, thus “eliminating” the assumption that TRS members will participate in the buyout programs.

At the time the programs were announced last year, Moody’s Investors Service warned that attempts to tackle the state’s pension debt would be futile without making major cuts. It said that “a failure to adopt mitigating strategies soon will greatly increase the state’s risk that these rising costs will become unaffordable” without “severe” reductions.

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