Pension reform and the conference committee

Pension reform and the conference committee

By Robert Rich

The Illinois General Assembly can not seem to agree on a proposal to address the "pension crisis" facing this state: neither the unfunded pension liability nor the rising normal costs. As the conference committee continues to grapple with potential solutions, it is important to highlight the economic and policy context in which these deliberations are taking place:

1. We have a "crisis" because Illinois government has regularly not met its obligations to fund the five public pension systems. This has been true since 1995 when the Edgar administration developed a proposal (agreed upon by the General Assembly) which would have avoided the current situation. The money used to shortchange the pension system since 1995 was used to benefit all taxpayers by discouraging any tax increases.

2. Over this same time period, employees or members of these public pension systems have met their legal contractual obligations: i.e. members of SURS contributed at least 8 percent of their salaries to the pension systems.

3. Other states ( e.g. Indiana, Ohio, Wisconsin, Minnesota) do not have the same pension problems that we have.

4. Illinois has a growing structural deficit (i.e., we have more expenditures than revenue) and, as a state, we are not able to pay our bills. In other words, we have a major revenue problem which is only partially explained by the "pension crisis."

In other words, it is simply wrong to blame Illinois' economic problems on pension obligations. Even if a pension reform proposal can be agreed upon, this will not solve the overall structural deficit problem. From a moral and/or ethical perspective we should not be blaming our problems on employees when they have always met their contractual obligations AND when they have planned their futures on what they thought were promised as the legal and contractual obligations of the state of Illinois.

Given this background, what principles should be followed by the conference committee in developing a final proposal?

A. It should be fair and reflect mutual sacrifice and not place any one group at a particular disadvantage.

B. It should be constitutional and not violate the non-impairment clause of the Illinois constitution.

C. It should contribute to the overall economic health of Illinois keeping in mind that any solution will be long-term (between 30 and 45 years).

D. It should be attractive to future employees and help to attract and retain businesses.

The University of Illinois Institute of Government and Public Affairs has over the past two years offered a framework for pension reform which meets many of these criteria and represents a very good starting point for reform.

However, it is very discouraging to continue to hear over and over again that the COLA (cost of living adjustment) is the major cause of our continuing pension problems. There are a few facts with respect to the COLA which should be highlighted:

The Consumer Price Index has gone from 97.6 in 1982 to 229.6 in 2012. The cost of living has more than doubled over this 30 year period. In other words, a person receiving a pension of $9,760 in 1982 would need a pension of $22,960 in 2012 to maintain the same purchasing power.

Over this same 30-year period a person in the State Universities Retirement System earning a $10,000 pension is receiving $24,272.62 in 2012 under the current COLA system (a 3 percent compounded annual increase).

If a person is part of the current United States Social Security system or a federal government retiree and received a $10,000 pension in 1982, they would receive $24,175.23 in 2012, reflecting the Social Security system COLA.

However, if this same person was limited to one-half of the consumer price index (the current IGPA proposal), he would be receiving a pension of $15,687.31 in 2012. In other words, this person would have lost about $8,500 in purchasing power at a time when their health insurance and medical expenses would be increasing.

These figures illustrate that the current COLA system almost keeps up with inflation and is not different from the Social Security system which many Americans are entitled to. Significantly limiting the COLA is not fair, just or ethical for state of Illinois retirees.

Finally, the conference committee deliberations need to keep several other points in mind:

A. The foundation for a solution is an iron-clad guarantee that the state will meet its obligations in full every year, which will require fiscal discipline in the executive and legislative branches of state government over many years.

B. As called for in the IGPA proposal, a new set of pension benefits could be introduced for new employees; a hybrid approach consisting of a defined benefit and a defined contribution could be attractive and efficient. This new set of benefits should replace the Tier 2 system adopted in 2011 which makes employment in higher education and elementary and secondary education highly unattractive.

C. The Committee should consider reamortizing the current pension liability.

D. The best way to attract new businesses and highly skilled employees is to show that the state is serious about attending to its businesses AND that the state does keep its promises to its citizens.

The conference committee has an opportunity to craft real pension reform that is fair, just, constitutional, ethical and meets the principles outlined at the beginning of this article. It can and should contribute to the long-term economic health of Illinois. Pension reform should be considered as part of a total economic solution. It cannot be considered as the patch that temporarily fixes our economic hemorrhaging.

Robert F. Rich, director of the University of Illinois Institute of Government and Public Affairs (retired), is a professor of Law, Medicine and Political Science (retired).

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Joe Melugins wrote on July 21, 2013 at 3:07 pm

The author makes a good point that Wisconsin does not have the same pension probems as Illinois.  Wisconsin actually has the best funded state pension system out of all 50 states.  And that is despite the fact that Wisconsin teachers and state employees historically and currently contribute far less out of their paychecks than do their Illinois counterparts.

The Wisconsin legislature last year increased what public employees must pay toward their pensions. Before the law passed, workers paid less than 1 percent of their salaries –in some cases nothing – toward pensions. Under the new law, public employees pay 5.8 percent to 6.65 percent. Pension benefits themselves were not changed.

Most Illinois public employees already pay more than that. Teachers contribute 9.4 percent to their pensions, state university employees pay 8 percent, judges pay 11 percent and legislators pay 11.5 percent. State employees pay 4 percent if they also contribute to the Social Security system and 8 percent if they do not.

The difference is that the State of Wisconsin generates enough revenue to pay its pension bill each year.  And how do they do that?

Individual state income tax rates: 

Illinois: 5% (after being 3% for 20 years)

Wisconsin:
-- 4.6 percent on the first $10,070 of taxable income.
-- 6.15 percent on taxable income between $10,071 and $20,130.
-- 6.5 percent on taxable income between $20,131 and $151,000.
-- 6.75 percent on taxable income between $151,001 and $221,660.
-- 7.75 percent on taxable income of $221,661 and above.

32 states have higher individual state income tax rates than Illinois' 5% rate. 

 

samret wrote on July 21, 2013 at 7:07 pm

Professor Rich has done an admirable job of laying out the facts as they pertain to pension "debacle.". Unfortunately, the politicians, with the assistance of leading media in this State, have successfully sidestepped the facts and have succeeded in vilifying the pensioners as being the sole cause of the pension fund shortfall.  In that context, the general public feels it is absolutely acceptable to enact draconian measures (such as SB 1) to impoverish the pensioners in order to make up the pension fund deficit.  It is one thing to mislead the public...it is quite another matter to have actively participated is the creation of the pension fund shortfall and then be the chief architect of potential legislation to forcibly take money from the pensioners to make up the pension fund shortfall.  Of course, if anyone thinks that money would go directly to the pension fund, they are also oblivious of the fact that the same person signed off on $2 Billion in EXCESS spending in the upcoming budget year.  There are those in the legislature who would consider doing that which is right and just; unfortunately, those voices will get drowned out by the more powerful leading voices who would do that which is expedient. 

urbana_resident wrote on July 24, 2013 at 2:07 am

How about taking the mess to UIUC's Financial Engineering and see if they can come up with a solution?