Everybody takes a hit with pension reform

By Jim Nowlan

Everybody — state employees, teachers, professors, taxpayers — will take a haircut, as they say in financial parlance, when the Legislature enacts pension reform, probably this spring, certainly this year.

We will be paying for sins of the past, and in my view the changes won't be fair to current employees yet are nevertheless necessary.

(The state was particularly remiss during the Blagojevich years, with the Legislature either not making any pension payments or borrowing to make the payments, which only added to the burden later.)

Something has to be done. The state estimates a pension deficit of about $100 billion. But I am told the Moody's rating service may soon place the Illinois deficit at $200 billion.

The Illinois pension systems have been projecting average growth in assets of 8 percent a year, whereas Moody's pegs the annual growth at more like 4.7 percent on average.

A figure of $200 billion represents about $15,000 per person in Illinois.

Over the years, benefits became enriched even as the state in many years paid in less than necessary to develop an asset pool adequate to fund the pensions. As to the first point, I retired from the state university system at age 55 with 11 years of service — and free health care forever.

Other enrichments were going on. In the early 1990s, statewide officers from the governor on down watched quietly while a bill went through the Legislature that changed their pension base.

The base went from that of the salary of the state Senate president to their own much higher salaries, thus doubling their later pensions without commensurate payments to support the higher payouts.

To address the problem, in the early 1990s lawmakers created a staircase of increased required annual state payments, but delayed the steep steps up until now. For example, the annual state payments required by law have jumped from a couple billion dollars early in last decade to $6.8 billion this year, with another $1 billion-plus required to help pay off borrowing to make pension payments a few years back.

This is not sustainable, as this recent sharp growth is crowding out spending for education, which has been cut significantly in the past two years.

Speaker of the House Michael Madigan, D-Chicago, and his former protege, John Cullerton, D-Chicago, president of the state Senate, have each passed markedly different bills in their respective chambers. Madigan's bill cuts deeper, while Cullerton claims his bill is constitutional and Madigan's is not.

Either way, the 455,000 current state employees and retirees will see their overall compensation reduced.

Here are a few of the things that the Madigan bill does.

The present, rich 3 percent annual cost-of-living adjustment is reduced sharply. Retirement ages are increased. Employees will be required to pay more into the pension systems. Pension payouts are capped at about $109,000.

(In addition, the state may in a different bill shift the burden of paying for teacher and professor pensions to school districts and universities, where it should have been all along. This would shave future state government liabilities big time and spread them to schools and universities.)

(With responsibility for their own pension benefits, school districts would have been less likely to spike the final salaries of their administrators, which dramatically increased pension payouts without providing the underlying asset base to support the later pensions.)

Under the Madigan bill, the state will make smaller pension payments than under the stair-step requirements but more than if the pensions had been fully funded all along.

Then the question becomes, "Is the Madigan proposal constitutional?" The Illinois Constitution declares that membership in any pension program "shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired." Pretty clear, I would say.

Madigan has, rather brazenly, declared that he believes there are four votes on the state high court of seven members to declare the bill constitutional. There are four Democrats and three Republicans on the court.

The Illinois Supreme Court has always been considered a "political court," capable of responding to political realities. Its members are elected in partisan contests. One member is the wife of a prominent Chicago alderman.

And Chief Justice Thomas Kilbride of Rock Island was lifted from a small general law practice to the high court in 2000 when Speaker Madigan, who is also the state Democratic Party chair, basically took over Kilbride's lackluster campaign and funneled almost a million dollars into it to surprise the favored GOP candidate in a narrow win.

So this "armchair constitutional lawyer" predicts, going way out on a limb, that a bill closer to Madigan than Cullerton will pass sometime this year, and that the state Supreme Court will swallow hard and declare the underlying defined benefit unimpaired, thus constitutional.

Jim Nowlan is a member of the Executive Ethics Commission in Illinois. He is a retired senior fellow with the University of Illinois Institute of Government and Public Affairs and a former president of the Taxpayers' Federation of Illinois. A former Illinois legislator and aide to three unindicted governors, he is the lead author of "Illinois Politics: A Citizen's Guide" (University of Illinois Press, 2010). He can be contacted at jnowlan3@gmail.com.

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Skepticity wrote on May 19, 2013 at 1:05 pm

First, a question:

Mr. Nolan stated: "As to the first point, I retired from the state university system at age 55 with 11 years of service — and free health care forever."

Mr. Nolan, how did you qualify for free healthcare without 20 years of service?  The formula I know would require that you pay for 9/20ths of the cost.  Just asking...

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Now a comment:

In recent years much of the Illinois media has helped shift blame for this problem to state retirees.  Stories cite isolated  pension benefit excesses received by some politically favored individuals.  This encourages the public to generalize and blame state workers and retirees for the problem,  fostering a willingness in the public to let retirees be robbed.  Many citizens already bear animus toward state workers resulting from their dealings with the state bureaucracy, so this shift of blame is easily achieved. 

Even when the failure in funding pensions is accurately attributed to the politicians, there is an implication that, despite that the cause of the shortfall, pension benefits must be reduced for Illinois government to function.  I disagree.  There are many other government expenditures for projects, services, and benefits that are unearned that should be discontinued or postponed before considering impairing earned worker retirement benefits.  

Mr. Nolan notes that the retirement systems were not adequately funded by the legislature and governors, and indicates that along with taxpayers retirees will need to take a "haircut." 

Mr. Nolan's assessment and predictions seem to accurately reflect the corruption of the Illinois legislature, Illinois governors, and union bosses who benefited from the support of state workers.  In order to cover up their own role in creating this mess politicians will steal benefits that state employees spent decades earning as part of their compensation package. 

Workers took difficult state jobs and remained in them in part due to the promised future retirement pension and healthcare benefits.  These benefits were earned in a contractual relationship over decades.  The constitution is clear that this was a contractual relationship, despite the opinion of a Springfield judge who is not known for his constitutional expertise.  If a state worker works with the constant promise that compensation includes free retiree health care after 20 years of service, then that free health care is part of the compensation for performing the duties of the job.  You cannot modify a contract after the fact. 

If the Illinois Supreme Court finds that state employee retirement benefits are not protected by the constitution, the judges of that court  who allow the impairment of pension benefits will thereby establish their own corruption. 

Mr. Nolan is noted to be a member of the Executive Ethics Commission in Illinois. 

Mr. Nolan, what are the appropriate consequences for those corrupt individuals who steal from others to benefit themselves politically and financially? 

Given the way districts are determined and the way that Illinois politics works, don't you dare suggest voting them out in a "fair" election.  I'd sooner buy the Brooklyn Bridge offered on Craigslist than trust that they can be removed in an election in Illinois. 

If government itself is unethical, and laws and the constitution are circumvented by corrupt officials, what recourse remains for the victims of the involuntary "haircut"? 

Sid Saltfork wrote on May 19, 2013 at 3:05 pm

Thank you, Skepticity.  Nowlan like Laurence Msall is a paid propagandist.  He is deceptive regarding the "free insurance" after 11 years.  You are right on the 20 years with retirement at or, after age 58.  Nowlan must be referring to his political "free insurance" under three unindited governors ( Thompson, Edgar, and ? ).  He knows perfectly well that both Thompson, and Edgar participated in the theft.  He is nothing more than a paid talking head motivated not by truth; but by greed.  

Theft is theft no matter how you justify it.  If the Illinois Supreme Court rules contrary to established cases regarding the pension theft; it sends a message to the corporate, business, and bondholder communities that Illinois is completely corrupt. If an employer steals from it's employees, it will renege on all debts owed. 

bluegrass wrote on May 21, 2013 at 4:05 pm

There is no recourse.  The democrats that have a stranglehold on politics in Illinois, from the union members up to it's leadership, to the state house & senate, and to the governor's office are happy to burn the whole thing down rather than make a choice that will offend the lifesblood of the party.  They would prefer to see it lie in a smoldering ruin, and blame others in the aftermath.  The bottom line is that contract or not, politicians made promises to government employee unions they couldn't keep, and perhaps had no intention of ever keeping, in exchange for union dues.  For their part, government employee unions are happy to believe the lie, even with the stark fiscal reality looming over all of us.  Like the gambler who keeps laying down one more bet, they continue to support the same politicians with the same union dues they've always paid, hoping the outcome might be different this time.  May I suggest it's high time government employee unions walk away from the democrat's rigged blackjack table, and pursue a new course of action.  

Sid Saltfork wrote on May 21, 2013 at 7:05 pm

Why don't you ask the public service employees who they voted for in the last election.  Your assumption is that they all vote democratic.  In my 40 plus years working for the state, there were just as many employees who voted republican as voted democrat.  The majority of state employees are "fair share" union members, not full dues paying members.  Things are not all as they are assumed, or portrayed.

bluegrass wrote on May 21, 2013 at 4:05 pm

Taxpayers have already taken a hit in the form of a 66% tax increase.

Now let's look at the $15,000 per Illinois resident number.  Shouldn't we be talking about taxpayers, not residents?  After all, Illinois has about 12.8 million people, of which probably 23% are under 18 and likley don't file tax returns, so now we're at 9.9 million people.  Another 13% are over 65, and so we can exclude another 1.6 million people, which leaves 8.3 million people.  Of those, roughly half who file returns actually pay income tax.  In Illinois it's probably more than half, but let's figure half, which puts us at 4.15 million people who actually write checks to the Illinois Department of Revenue.  So the $15,000 per resident is more like $50,000 per taxpayer.  And since I didn't adjust for for people who are married filing jointly, I guess it's $100,000 per married couple, right?  Ouch!

Meanwhile, Cullerton and Madigan both put forth competing plans, which means it's likely neither will pass, and have chosen to direct their attention to Lion Meat.

Sid Saltfork wrote on May 21, 2013 at 7:05 pm

Yes, the taxpayers have been abused by Illinois political corruption for years.  The taxpayers are on the hook including the tax paying public employees.  Madigan's "pension plan" includes having downstate school districts responsible for the money stolen by politicians from the teachers pension system.  That means that the downstate taxpayers including current public employees, teachers, and retirees will have property tax increases also while their pensions are stolen.  Both political parties have done it over the years.  The nation has realized finally what Illinois citizens have known for years.  Illinois politics is corrupt from the bottom up.  In the old USSR, the citizens could vote only for one party that was corrupt.  In Illinois, the citizens can vote for two parties that are corrupt.