Pension 'holiday' advances in state legislature

Pension 'holiday' advances in state legislature

SPRINGFIELD – An Illinois House committee on Friday advanced legislation to skip $1.1 billion in payments to the state pension systems in each of the next two budget years and enact a scaled-back version of the governor's benefit reform proposal.

The measure, House Amendment 1 to SB 27, was approved on an 8 to 5 party-line vote and now awaits action by the full chamber.

The measure is the centerpiece of a budget deal being worked out between Gov. Rod Blagojevich, House Speaker Michael J. Madigan and Senate President Emil Jones, all Chicago Democrats.

The so-called pension holiday will allow the trio to increase spending on education and health care and bail out the Chicago Transit Authority while closing a budget gap of more than a billion dollars.

But Republicans, who are in the minority in both chambers, warn that the pension holiday is fiscally irresponsible.

"This is no more of a holiday than a cruise on the Titanic was," said state Sen. Bill Brady, R-Bloomington.

House Minority Leader Tom Cross, R-Oswego, said that the way the legislation is currently drafted, it would actually result in smaller pension contributions in the 2008 and 2009 budget years as well, for a total reduction of approximately $3.5 billion over the next four years.

Becky Carroll, a spokeswoman for the Governor's Office of Management and Budget, said she did not understand how Cross arrived at that conclusion.

The Illinois Constitution guarantees pension benefits, so the pension holiday would not affect retirees' payments. It would, however, significantly increase the state's long-term pension debt and would require the retirement systems to sell off more assets in order to make the pension payments they owe to retirees.

The State Universities Retirement System has projected that the approximately $150 million reduction in state support that system would receive in each of the next two budget years would result in a net increased cost to the state of $1.2 billion by 2045, the year in which the systems must meet a goal of having enough assets on hand to cover 90 percent of their liabilities.

"It's a very expensive form of borrowing," SURS Executive Director Jim Hacking said. "It's going to cost them just in interest alone over a billion dollars just for our system."

The benefits changes included in the legislation are expected to save the state some money, but not nearly enough to outweigh the reduction in the state's pension contribution permitted in the bill.

The legislation would cap end-of-career pay hikes for teachers and university workers at 6 percent a year unless their employer offers to pay the resulting difference in pension costs for a higher raise.

Future university workers would lose the money purchase retirement option, and the rate at which interest is credited to current SURS members' accounts under that option could change.

The alternative pension formula for high-risk jobs would be limited to a smaller number of job classifications for new hires, but not as severely as the governor had initially proposed. Unlike his earlier plan, the legislation as currently written would maintain the alternative formula for new prison guards and certain other high-risk Department of Corrections jobs.

The legislation also would extend the early retirement option for teachers, but would require teachers to contribute an extra 0.4 percent of their salary beginning on July 1 to pay for it. They would get a refund if they later opted not to take early retirement.

In addition to those changes, the pension legislation included a requirement that no new benefits may be added without a corresponding way to pay for them, as well as a rule that all new benefits must automatically expire five years after they are enacted.

The provision sets the stage for what could be multitiered pension systems for teachers, state workers, university employees, judges and state lawmakers. Those hired before a specific benefit expired would get to keep it, but anyone hired for the same job afterward would not be eligible to receive it.

Bill would modify university benefits

The existing retirement age requirements and postretirement inflation protection would be preserved for incoming State Universities Retirement System members under the budget deal Democrats plan to push through the General Assembly.

However, end-of-career raises would be capped at 6 percent, unless the university offered to pay the additional pension costs of a larger pay hike, and the way interest is credited to existing members' accounts could be altered.

The interest rate changes will affect the money purchase option, a pension calculation formula that State Universities Retirement System participants may select upon retirement if it provides a better annuity than the regular formula.

Currently, about 60 percent of the system's participants retire under the money purchase formula, which will be eliminated as an option for new hires under the proposed budget deal.

In the money purchase formula, each dollar of that member's contributions, plus interest, are matched by $1.40 from the state. The total is then divided into regular pension payments based on the person's life expectancy and other factors.

The rate of interest credited to members' accounts is determined each year by the SURS board based on factors that have been in state statute for more than 30 years.

But the governor's Office of Management and Budget has complained that the statute was not specific enough and hoped to redefine the way the interest rate was set in a way that would result in significant savings to the state.

SURS officials warned that such a move could be considered an unconstitutional diminishment of benefits.

"No matter how they try and finesse it, if it operates to keep the effective rate lower than it otherwise would be, then it seems to us that that would be an impairment, although ultimately it would be up to the courts to decide," said Dan Slack, general counsel and associate executive director for SURS.

Under the new plan backed by Democratic leaders, the comptroller's office would be responsible for setting the money purchase formula interest rate each year, rather than the SURS board.

It was unclear Friday night how that move would impact the pensions of existing participants, said SURS Executive Director Jim Hacking.

"I just don't know what would happen," he said.

Neither did Becky Carroll, spokeswoman for the Governor's Office of Management and Budget.

"We are going to let the comptroller determine what the mechanism is based on their interpretation of existing state statute," Carroll said.

When asked whether the change was expected to save the state any money, which could indicate a loss of pension potential for SURS participants, Carroll said she did not have those details yet.

What was clear on Friday was that the governor's proposal to increase the age at which newly-hired workers could retire with unreduced benefits had been put off, sent to a task force for further study.

The task force also will be asked to study Blagojevich's proposal to reduce annual cost-of-living increases for yet-to-be hired workers after they retire.

The legislation is House Amendment 1 to SB27. The House may vote on it today

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