There’s a clear pathway to addressing the state and city pension crisis that will neither bust the budget nor require major tax increases. Pensions will only be fixed if the management of the pension systems and its investment decisions are completely insulated from politics
The financial crisis gripping Illinois’ state and local governments is, at its core, a pension funding crisis. Pensions now consume an ever-larger share of state and local budgets. The problem is straightforward: Politicians have repeatedly expanded benefits without adding sufficient revenue to cover future obligations while politicizing pension investments which have produced some of the worst returns in the nation. Addressing both problems is part of the solution.
Understanding the severity of the problem
The Equable Institute reported Illinois retirement shortfalls rank Illinois among the states with the lowest pension funded ratios (the percentage of promised benefits that are actually covered by assets). In July 2025, its funded ratio was 50.6 percent, ranking it as the second worst in the nation, just behind New Jersey. This is significantly below the 60 percent threshold that many experts consider to be deeply troubled.
The state reported pension debt is $212 billion, while Moody’s estimates it to be much greater at $380 million. This includes retiree health care. This is by far the worst in the nation. Meanwhile, Chicago public employee pension debt when teachers and park district pensions and retiree heath insurance is included its government reported debt is over $54 billion. However Moody’s estimates it much higher at $95 million. Chicago city employee pensions have a combined funding ratio of 23.5 percent. If Chicago were a state, it would rank 7th in pension debt.
Several individual statewide pension systems in Illinois also rank among the nation's worst-funded, according to an Equable Institute study of 225 statewide pension systems in 2023. Three of Illinois' five state-run retirement systems were among the 10 worst-funded systems nationwide. Chicago’s individual public employee pension funds do not fare any better. None have funding ratios over 50 percent and Police and Fire pensions are now only 18 percent funded. New York City has a combined funded ratio of 88.3 percent.
The adverse impact on state and local finances is significant. This pension crisis contributes to a strained state budget, high property taxes, and a less attractive business climate, potentially driving residents and businesses away from the state. State-level public pensions exceed 11 percent of Illinois' total operational expenditures, while 22 percent of the city's net appropriations of local funds go to fund pensions. The situation highlights the need for significant reforms before Illinois ended being run principally as a grand retirement plan.
Expanding benefits without providing funding
Expanding benefits without dedicated funding is a recurring theme in Illinois financial history, most demonstrated by its public pension crisis as well as the states and chronically underfunded Medicaid expansions. Because the state constitution legally protects promised public retirement benefits, expanding these benefits without setting aside cash has left the state with a massive structural debt.
The most recent example was Governor JB Pritzker’s cowardly signing on to the flawed changes to the Tier 2 system to the benefit of Chicago Police and Fire pensioners will add $11 billion to Chicago’s $36 billion pension debt. It will drop pension funding levels of both Police and Fire pensions from 25 percent to 18 percent. The "Tier 2" pension problem in Illinois centered on concerns that benefits for public employees hired since 2011 will eventually fall below Social Security levels.
This would violate the federal "Safe Harbor" provisions which require compliance with federal law that essentially requires benefits at least equal to what Social Security provides, potentially triggering significant financial repercussions for the state and its pension systems. The problem that might arise in the future was purely theoretical, as no Illinois Tier 2 state or local pensioner has ever been identified whose benefits are too low under federal law.
There was no need for immediate action today beyond a minor, inexpensive safeguard. John Glennon of Wirepoints pointed to state legislation authorizing a $75 million reserve fund to cover additional benefits that might be required for particular pensioners if their benefits ever fell short of federal requirements. That was the common sense approach ignored by State Senator and Democratic Party Co-Chairman Rob Martwick who was eager to curry short term favor from the unions.
A history of poor investment returns
Illinois and Chicago have struggled with a combination of chronically low funding ratios and persistent underperformance in investment returns compared to national averages, to go along with the delayed or inadequate contributions by state and city governments. Despite periodic market upturns, Illinois state pensions have historically underperformed the preliminary national average by over a full percentage point. Illinois Policy estimates sub-par investment returns have contributed to the massive Illinois pension debt — accounting for roughly 11 percent of the shortfall.
Employees do not own or control their own retirement funds under a pension system, nor do they have their own accounts. Instead, state officials and politicians control the pool of funds, allowing them to use workers’ retirement dollars as a political slush fund. This of course involves the historic practice of "kicking the can down the road," including pension holidays to free up money for other needs. It also includes the multiple pension funds politicizing pension fund investors.
Public pension funds in general — and the city’s pension funds even more so — underperformed basic investment approaches frequently used by individual investors in their 401(k) plans. The Bloomberg proxy for a conventional portfolio made up 60 percent of indexed U.S. stocks and 40 percent indexed bonds returned 8.48 percent annually over those 10 years. And the S&P’s 500 index returned a whopping 13.1 percent annually in that time frame.
Addressing the pension contribution shortfall
There are two most substantive proposals to tackle the funding gap: First, the Chicago Civic Committee recommends a .5 percent on individuals and a 0.7 percent surcharge, raising $28.5 billion over a decade — directly to pension payments with an aim to reach 90 percent funded status by 2045. Second, the Center for Tax and Budget Accountability (CTBA) proposal avoids new taxes and instead calls for issuing pension obligation bonds — $6.7 billion over seven years — to make large up-front payments and hit a lower target of 80 percent funding by 2045.
The Civic Committees is an abandonment of the group’s traditional call for an amendment to the state constitution that would eliminate language forbidding any reduction to an employee’s retirement benefits from the day they are hired. The committee has brought itself more in line with the labor side’s focus on pension funding, not benefits. While the CTBA approach is less painful for taxpayers in the short term, reliance on pension bonds is always risky and could result in greater long-term costs if returns don’t outpace borrowing costs.
There are steps that neither require a tax increase, the state taking on new debt, nore a change to the state constitution that can significantly improve the financial health of both state and city of Chicago pensions.
1. Expand the state pension buyout program
This allows government workers to take out a portion of the “net present value” of their pension — the amount needed today to fund a retiree’s lifetime benefit. After voluntarily “cashing out” all or a portion of their benefits at a 30-40 percent discounted rate, workers can roll the money into an IRA or 401(k)-style plan and control their money forever. The discount equals savings for taxpayers. The state buyout program has been extended and has been expanded to include Chicago pension funds.
2. Use surplus revenues to pay down pension debt
Unfunded pension liabilities are like high-interest debt. Applying unexpected surpluses to that obligation is fiscally responsible and cost-effective. Directing surplus funds to the pension systems reduces long-term costs, lowers risk and strengthens the systems without raising taxes or relying on budget gimmicks. It’s the responsible thing to do and an excellent recommendation from the governor.
3. Protecting Tier 2
Tier 2 will go a long way to addressing the pension funding gap long term. Its benefits are already far more generous than what most people receive on Social Security. Illinois should not commit to costly structural changes without evidence they’re necessary. Lawmakers should leave Tier 2 alone, Illinois and the “SSWB Reserve Fund” to funds to address only those workers whose annuity has been affected, sparing taxpayers billions in new debt and making the state pension crisis significantly worse.
4. Redirect expiring bond payments
Illinois is paying down bonds that expire in 2030 and 2033. Once those debts are paid off, Pritzker recommends dedicating “a portion of the resulting savings to increased pension contributions” and accelerate debt reduction. Once bond obligations are retired, it shouldn’t be an excuse for new spending. Every available dollar should go toward either reducing existing pension liabilities. There’s a legitimate concern new money could be used to fund benefit enhancements.
5. Fixed-length amortization
Fixed-length amortization strips are a technical but important improvement. They help smooth pension contributions as the systems approach full funding. Without this change, market volatility could trigger sharp year-to-year swings in required payments, destabilizing the state budget just as Illinois nears sustainability. This proposal strengthens predictability and long-term planning which has been noticeably absent from both city and most state investment funds.
6. Reform pension fund investment practices
To strengthen returns and depoliticize investments, the state and the city should consolidate its funds under a single or separate (state and city) independent “Public Employee Retirement Investment Boards”, free from ESG requirements and insulated from local political influence. This is absolutely essential for ensuring investments are made strictly on merit and fiduciary duty, rather than political agendas.
Additional measures might include the states offering workers the option of a 401(k)-style plan that provides portability, predictability and reduced risk for taxpayers. Lawmakers should also consider constitutional reform that would allow Illinois to make modest benefit adjustments to not-yet-accrued pension benefits similar to what states like Michigan, Arizona, Pennsylvania and Utah have done to improve the health of their pension systems.
Immediate action to address Chicago’s pension funding crisis
Any serious pension reform must address the teacher pension equity issue. Chicago’s pension crisis is made worse by disparities in state funding. City leaders must press the state to fund the Chicago Teachers’ Pension Fund (CTPF) at the same level as it does the Teachers’ Retirement System (TRS) for downstate and suburban districts. Currently, Illinois covers 98 percent of TRS employer contributions, but just 32 percent to 35 percent for Chicago’s CTPF in FY 2024.
Funding parity would let the city redirect the almost $600 million special property tax levy to other city employee retirement plans significantly improving the health of those funds and free up $170 million now earmarked for Chicago Public Schools’ teacher pensions to cover the non-teacher employee pension contributions that the city had been coveting prior to last year. As part of the equity treatment the CTPF could be consolidated with the TRS.
Insulating pension funding from politics
Above all, pension funding must be shielded from political interference. A permanent Pension Oversight Committee, led by a non-partisan expert — a “Pension Tsar” — could protect dedicated revenues and insulate investment decisions from politics. History offers clear warnings: Governor Rod Blagojevich’s diversion of a third of the $10 billion raised from the 2003 pension bond issue for purposes other than pension funding, or Senator Robert Martwick’s questionable stewardship of Tier 2 reforms, have made a bad situation worse
Since Martwick first became Chair of Illinois’ House and Senate Pension Committees, the state’s unfunded pension liability has soared — from $94.5 billion in 2012 to over $142 billion in 2023 — making Illinois home to the nation’s worst-funded pension system. His current reform efforts, timed with election cycles, do not address the structural problems at the root of the crisis and make things much worse.
State and local public employee pension costs are bleeding the state and local governments like Chicago financially. These costs threaten to transform government's primary role from protecting the public and providing for the public good into subsidizing state and local government pensioners.
Illinois needs responsible, fair, and sustainable pension reform now -- not another round of costly political brinkmanship.
