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 email@example.com.