Costly fix to public pension
State legislators finally act on a public pension problem.
Members of the Illinois House and Senate last week adjourned their fall veto session without voting on THE pension crisis that's confronting state taxpayers.
But they didn't adjourn without addressing A pension issue, and the action they did take may foreshadow the action they didn't take.
Members of the Illinois Senate gave final approval by a 46-4 vote to a purported pension fix for current and former employees at the Chicago Park District.
Union leaders representing park district employees are opposed to the legislation, but it was overwhelmingly approved thanks to the strong support of Chicago Mayor Rahm Emanuel, Senate President John Cullerton and House Speaker Michael Madigan.
Gov. Pat Quinn has not indicated whether he'll sign the legislation. He has accepted large campaign contributions from the Service Employees International Union, which represents park district employees, but if Quinn is as serious as he claims to be about fixing public pensions, he can hardly avoid signing this legislation. If he doesn't do so, it will severely undermine his credibility in the face of an upcoming election.
The park district pension system is severely underfunded with $421 million in assets and $971 million in liabilities. According to the Illinois Policy Institute, those numbers are just the tip of the iceberg. The institute estimates total park district long-term debt to be $1.4 billion.
The plan approved by legislators requires employees to increase their pension contributions — from 9 percent to 12 percent of their salaries by 2019. It also would reduce their annual cost-of-living increases from either 3 percent or one-half of the increase in the cost-of-living, whatever is less. Finally, it would raise the retirement age from 50 to 58 for employees who are under 45.
In exchange, the park district will make supplemental contributions to the pension system of $12.5 million in 2015 and 2016 and $50 million in 2019. The agreement also calls for a near tripling of the district's annual contributions between 2016 and 2019, which will significantly boost property taxes.
Union leaders have indicated they will file a lawsuit to block the plan, relying on the Illinois Constitution's prohibition of a diminishment of benefits. The question for the courts to resolve is whether the diminishment applies to benefits currently paid or extends to benefits that might be paid in the future.
The free-market based Illinois Policy Institute also objects to the legislation because it said the "pension bill means higher taxes for city residents," "forces workers to keep paying into a failed system" and "keeps the retirement age too low." The IPI favors replacing the current defined benefit system with a 401(k)-style defined contribution plan, a proposal that has been a nonstarter with most elected officials.
We applaud the General Assembly for passing legislation that may help lead to a clarification of the legal issues surrounding public pensions. Legislators have for months been hung up on the issue, unilaterally declaring some proposals as "unconstitutional" because of perceived violations of the diminishment clause.
One of the greatest offenders in that respect has been Senate President Cullerton. Last week, however, Cullerton sang a different tune, stating that "we in the Senate are not the Supreme Court and unless we can pass a bill someone can challenge, we're never going to know."
Raising the pension retirement age is another key issue. Park district workers may not be happy about the increase in the retirement age from 50 to 58. But private-sector workers whose usual retirement age ranges from 65 to 67 won't be too sympathetic.
Retiring so early raises the prospect that pensioners can collect generous benefits for a period longer than what they worked. This kind of foolish generosity by public employers, often motivated by electoral concerns, is one of the reasons the state's public pension systems are underfunded by roughly $100 billion.
After the vote, Mayor Emanuel said the template for the park district legislation could be applied to other underfunded city pensions. There also was speculation that the park district plan might be applied to the state's pension systems.
But there's a big difference. The park district legislation affects about 6,100 current and former employees. In terms of votes, that's hardly enough to matter. But many thousands of current and former state employees will be affected by whatever legislators do, if anything, to address state pension woes, and that's a totally different ballgame for our self-interested legislators.