In short: This amendment will make it more difficult for legislators to turn Illinois into Greece. The Amendment will deter any further growth in unfunded future liabilities from direct benefit pensions and other benefits to public employees. Finally for those in public service (including myself) let me make clear that it will NOT affect current pension promises.
Traditionally, workers in government and most of the private sector did not need to plan for their retirement. They were members of professionally managed funds call direct benefit pensions (DB pensions). Their benefits upon retiring were defined by their plan based of their final salary, rather than how much they contributed during their career. This worked fine during the roaring fifties and sixties as stocks rose at an average of 8% annually.
Then almost as bad as the rise of disco, the 1970s brought recessions. In fact, much of the 1970s, 1980s, and early 1990s were marked by economic stagnation, and those great returns on stocks and bonds fell sharply. Nevertheless, pension accountants continued to project unrealistically high returns (called discount rates) throughout this period. This practice continues on to today. So the state kept promising large pension payments to workers long after they became unrealistic.
Enter Unfunded Future Liabilities:
They promised these workers certain benefits, EVEN though these workers were not investing enough, and ALSO EVEN though it was clear the stock market wasn’t performing as projected. Just as credit card debt adds up really quickly once you fall behind, state debt does the same exact thing. It is largely for this reason (along with paying medical benefits to retirees) that the state is in debt. It has to keep paying those benefits even as it goes further into the red. Already it is tied for the lowest credit rating of any state. This only worsens the situation as they must pay higher interest rates on their debt than any other state (even California pays less to finance its debt).
So you ask, does this end direct benefit pensions in Illinois?
The private sector largely abandoned DB pensions for all new employees by the mid-1990s. Even the Federal government eliminated the traditional pension. This is neither the end of direct benefit pensions nor even the beginning of the end – however, just maybe it is the end of the beginning. It is a first (small) step towards fiscal responsibility.
This past spring legislators voted for this referendum to the Illinois Constitution in a rare bipartisan fashion. Most legislators including Speaker Madigan and President of the Senate Cullerton signed on. It says that future pension increases must be approved by 3/5 of each Illinois assembly. Furthermore, it will require
The Big Picture: The Bontemps lasted for quite a while in Illinois but they must come to end. To be clear, this referendum does nothing to fix our current jam. This a Churchillian situation where we are not seeing the end, nor the beginning of the end, but perhaps passage of this legislation will be the end of the beginning. This is a first step towards the sort of fiscal discipline that everyone is averse to.
However, the consequences are far too high to vote no. The road Illinois is currently on is either to Greece or the Northern Mariana Islands. In a Greek scenario, outlandishly high spending relative to pension contributions will lead to years of austerity budgets that will slash pension benefits and several hurt retirees who had been expecting larger payments. Believe it or not but the Northern Mariana Islands scenario might be even worse. The pension there is attempting to file bankruptcy. If it is successful, it could immediately cut its payments. Pensioners might receive half or even less of their promised benefits!
As a public employee, I understand the desire for a secure future. Continuing pension benefit increases will not, so vote yes.