The truism goes, “Show me your budget, and I’ll show you what you value.” By that commonsense measure, what the state government of Illinois cares most about could hardly be clearer.
Over the past few decades, Illinois lawmakers have been ramping up spending on public employee pensions even as other budget priorities are crowded out. The trend line is unmistakable: Between 2000 and 2020, spending on pensions increased by over 500%, while outlays for services such as child protection, state police and college resources for poor students fell by a third on an inflation-adjusted basis.
The trade-off cuts deepest inside Illinois’ public education system.
Using newly compiled data linking pension contributions to federal annual school finance surveys, we set out to determine how rising pension costs have reshaped school budgets nationwide. Our new U.S. School Employee Atlas tracks the percentage of K-12 education spending that has gone to worker pensions in roughly 12,800 school districts across the country from 2015 to 2023. What emerges is a worsening crisis as pensions consume an ever-rising share of funding, but with some significant variation across the country.
The results for Illinois were especially stark. In 2023, pension contributions absorbed on average of more than 21% of the portion of expenditures related to employees covered by the pension systems (this is spending on instruction, administration, operations and other categories directly linked to covered employees). That is the second-highest burden in the country. Since 2015, this share has risen by more than five percentage points. Adjusting for inflation, Illinois schools’ pension contributions increased by $1.9 billion over this period, while total associated education expenditures including those contributions grew by only $1.3 billion.
This has put growing pressure on other important education expenditures. If pension spending’s claim on the budget were still at 2015 levels — 15.3% — Illinois school districts would have had an additional $1.72 billion in 2023 to use for educational costs with a direct bearing on student learning — think salaries for new teachers, new classroom resources or additional support services such as counselors or teacher aides.
Worse, these numbers probably understate the actual problem significantly. This is because the funding ratios largely depend on optimistic investment assumptions embedded in pension accounting, with the state mostly assuming long-run returns of roughly 7%. And if actual returns fall short of the rosy assumptions, the state’s required contributions made on behalf of school districts will jump.
In our analysis, we addressed this uncertainty by re-estimating Illinois’ unfunded liabilities using market-based Treasury yields — a relatively conservative benchmark. The resulting change in the projection was substantial. Under this approach, annual pension contributions would need to increase from roughly $7 billion today to more than $15.7 billion. That would push the budgetary burden of pension contributions to nearly 37% of all covered employee spending.
Could Illinois tax its way out of a hole that deep? It may be tempted to try, but such a strategy would require a stable or expanding tax base to have any hope of succeeding. In reality, the state is experiencing the opposite trend. Illinois ranks near the bottom nationally in tax competitiveness, and according to the Tax Foundation, it has consistently posted one of the country’s largest net outflows of residents since 2022.
While its situation is already bleak, the state’s problems do not end there. Illinois is one of several states where pension benefits enjoy strong constitutional protections, limiting the state’s ability to adjust past promises that are proving untenable. Article XIII, Section 5 of the Illinois Constitution makes public pension membership “an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” The Illinois Supreme Court has previously read this as expansively as it possibly could be read. In 2015, the justices unanimously struck down a 2013 reform law signed by then-Gov. Pat Quinn that would have trimmed cost-of-living increases and raised retirement ages, rejecting the state’s argument that a state fiscal emergency justified the reforms.
With that precedent, not only are Illinois pensioners’ earned benefits protected, but so is the formula by which they grow. Unlike the city of Detroit, where federal bankruptcy overrode Michigan’s pension protections, Illinois has no equivalent emergency exit plan. States cannot file for bankruptcy, leaving the Prairie State in an unusually tight bind. Its current obligations are locked, the tax base is shrinking every year and the courts have eliminated a major lever that could quickly help close the gap.
That does not mean politicians and policymakers are completely powerless, however, and the sooner they act to protect the long-term fiscal health of the state, the better.
While constitutional protections make it substantially more difficult to alter existing pension promises, policymakers still control future benefits and the assumptions used to value them. Illinois already attempted to get costs under control in 2011, moving new hires onto a leaner Tier II plan, which means that today’s shortfall traces primarily to legacy Tier I promises and decades of state underfunding rather than new employees. These Tier II employees are charged the same 9% as their Tier I predecessors while paying so much less that new teachers effectively subsidize older ones, and their benefits fall short of the federal “safe harbor” standard that keeps Illinois teachers out of Social Security.
As such, the answer is not to squeeze new hires more but instead to redesign Tier II as a true hybrid with a guaranteed baseline annuity that satisfies federal requirements, paired with an individual account that lets newer teachers keep their own upside rather than finance someone else’s retirement.
Without reforms of this kind, pension obligations will keep eroding education expenditures, leaving school districts with fewer resources for classrooms, taxpayers with fewer options and students bearing the long-term consequences of reduced education quality.
Gregory Kearney is a research associate at the Hoover Institution. Joshua Rauh is the George P. Shultz senior fellow in economics at the Hoover Institution and a finance professor at the Stanford Graduate School of Business.
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