Dec. 5, 2012
By Jayette Bolinski
SPRINGFIELD — Two Illinois pension experts are divided on the merits of a new reform proposal that seeks to cut pension costs but does little to address the state’s pension borrowing issues.
The plan is either a dramatic step toward rescuing the state from financial ruin or a potentially unconstitutional failure that lacks teeth, depending on who you ask.
“We question why so much time and political capital is being expended on a policy initiative that doesn’t address or solve the problem,” said Ralph Martire, executive director of the Chicago-based Center for Tax and Budget Accountability. “It doesn’t solve the problem created by the unfunded liability. In fact, it’s sort of more of the same. It’s a mishmash of some of the proposals that have been on the table.”
But Laurence Msall, president of the Chicago-based Civic Federation, said the proposal is reasonable, sensitive to lower-paid employees and those close to retirement, and shares the pain of digging the state out of debt among all stakeholders — the government, state employees and taxpayers.
“The greatest concern for most employees is they want to know they are going to receive the benefit they’ve been promised,” Msall said.
The plan, put forth by Rep. Elaine Nekritz, D-Northbrook, and Rep. Dan Biss, D-Evanston, has bipartisan support from 21 other lawmakers — an early show of solidarity that other pension plans have not enjoyed.
It is unclear if enough other lawmakers will be willing to move it through the Legislature by Jan. 9, the final day of the General Assembly’s “lame-duck” session and the date Gov. Pat Quinn set as the deadline for comprehensive pension reform. Nekritz and Biss said it’s a framework that’s up for discussion.
Illinois has a $94.6-billion in unfunded pension liability, the worst of any state in the nation. The Teachers’ Retirement System alone has unfunded liabilities of $52.1 billion. Investment houses are watching Illinois and may lower its credit rating if the Legislature takes no meaningful action soon.
Cost savings from the latest proposal are unknown because the pension systems’ actuaries have not analyzed it, officials said.
Illinois Watchdog spoke with Msall and pension expert Amanda Kass from the Center for Tax and Budget Accountability and asked them to weigh in on some of the main points of the Nekritz-Biss plan, which is in House Bill 6258.
Increases the pension contribution of workers hired before 2011 by 1 percent the first year, 2 percent after that.
Msall: “We’re glad to see that. All of the changes that are proposed in this have a financial impact on the state’s unfunded liability and the cost of the pension program going forward. So it’s good they’re including that. What we don’t know is how significant that savings is, and until you see the actuarial study and calculation you can’t say whether the state can actually afford to continue to make those contributions.”
Kass: “It would generate savings for the state because the employees and the state share in the cost of the benefits, so if you increase employees’ contribution rates you generate savings for the state. But I don’t think it’s constitutional. Arizona passed legislation a few years ago increasing employee contributions, but it was overturned a year after it was passed. The state then had to refund all the money back to the employees from their over-contribution.”
Increases the retirement age for employee as follows: no increase for those 46 and older, one year for those 40 to 45, three years for those 35 to 39 and five years for those 34 and younger.
Msall: “I think their proposal to not impact the people closest to retirement age right now at the state of Illinois (who) have less time to adjust their savings and planning for their retirement is a sensitivity to what the impact these changes might be on future retirees. I think it’s positive.”
Kass: “I think it’s probably unconstitutional. You generate savings because essentially you’re reducing people’s benefits and making them pay more by requiring them to work longer.”
Cost-of-living adjustments will apply only to the first $25,000 of a worker’s pension ($20,000 for those eligible for Social Security). And they’re delayed until the worker turns 67, or five years after retirement, whichever comes first.
Msall: “Tying it to only the first $25,000 of someone’s retirement benefit is something they’ve done in Rhode Island. It is something that has been discussed,” he said. “I think it certainly shows a sensitivity of this coalition and of the legislators to try and protect the people who are the most vulnerable, the people with the lowest pensions, the people with the most difficult situations in terms of reliance on a pension that’s already been earned.”
Kass: “I think it’s problematic for a couple different reasons. I first wonder why they picked $25,000 because that’s not the average benefits for the majority of people in the five systems,” she said, noting that changing the COLA also may be considered unconstitutional because it affects retirees. “For the five state systems, about 80 percent of the people aren’t coordinated with Social Security, so their state benefit is kind of their sole source of retirement income. The cost of living adjustment’s really important to ensure the benefit keeps pace with inflation over time.”
Shifts pension costs from the state back to local school districts at a rate of a half percent of payroll each year.
Msall: “It’s not so much the politics of the cost shift, it’s the fiscal reality of the state having $8 billion in unpaid bills and paying such a large portion of its operating budget to the pension. Having raised the income tax and all of the money going into the pension and not significantly reducing the unpaid bills makes it a financial and mathematical reality that the state is going to continue to look for ways to shed its responsibilities and obligations.”
Kass: “You have to look at what the state contributes to education overall. In Illinois, the state contributes about 27.6 percent of education funding from the state. The national average is at 46.7 percent. So Illinois’ education funding is predominantly reliant on property taxes, and doing that cost shift wouldn’t change that. It probably would just exacerbate it.”
The proposal also includes a guarantee that the state could be sued if it fails to make its required pension payments, and it plans for the state to achieve 100-percent funding of its pension systems in 30 years. It also would require that money used to pay off pension obligation bonds would be used to pay down the unfunded liability once the bonds are paid off.
What’s missing from the plan?
Msall: “There’s nothing in that right now for city of Chicago, County of Cook, the downstate police and fire pension funds, all of which leaders have been asking to be included as part of the pension reform. That should be included. The same challenges and the same problems all were created by the Illinois Legislature when they created these pension funds, so they’re creating enormous financial pressures on our local governments.”
Kass: “I think the real aspect that needs to be fixed is the debt repayment, how they’re amortizing the unfunded liabilities. This legislation doesn’t flatten that out, so every year the state’s contribution increases significantly. It’s a back-loaded repayment schedule. This isn’t fundamentally redoing that. Instead, it cuts benefits for retirees and current employees. That ostensibly makes it possible to reduce payments, but without seeing the data it’s unclear what kinds of savings are actually generated.”
Does the plan appear to be constitutionally sound?
Msall: “Basically the constitutionality of any pension change or any significant employment benefit is always the likely subject to a lawsuit. This will certainly be litigated if it is enacted, but the hope would be that the courts would recognize the dire financial condition of the State of Illinois.”
Kass: “I don’t think the majority of it is constitutional.”
What are the chances of the proposal making it through the Legislature in January?
Msall: “If this type of reform does not make it through the legislature, two things are at great risk: one, the state’s financial stability going forward, its credit rating and its credit worthiness, and two, the solvency of the major pension funds. I can’t predict how they will get to 60 votes. This appears to be a larger group and more diverse group of state representatives than have ever spoken out jointly in support for a package and a comprehensive approach for the pension changes that need to occur.”
Kass: “I’m not sure. I know there’s a lot of talk that some pension legislation is going to have to pass this year. I know there’s a lot of pressure from bond rating agencies. I’m not sure if it’s going to be this piece of legislation or another piece of legislation, but I wouldn’t be too surprised if a piece of legislation gets passed this year. If it’s January or this spring, I’m not sure.”