Illinois public pensions reforms

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Illinois has five public pension plans with over $99 billion in unfunded liability.[1] Reforming the state's pensions remains one of the top priorities of the legislature. The following information documents some of the legislative actions taken over the past two years.

2012

In April the Illinois House overwhelmingly approved a proposal to make it more difficult to approve government worker pension increases. The measure, proposed by Michael Madigan will likely be considered by voters in the fall. The proposed Constitutional Amendment would require a three-fifths vote by state lawmakers, city councils and school districts around the state to sweeten any employee pension perks. The bill is now in the hands of the Senate, but is expected to be approved.[2]

To shore up teacher pension plans, Madigan proposed a plan to divert revenue from corporate personal property replacement taxes to bolster pension funding. However school districts and local governments, which receive millions in funding from the tax, are opposed to the plan. Madigan has introduced three amendments to House Bill 3637. One would divert about $536 million, another would divert $982 million, and the third would divert $1.4 billion. The tax brings in $1.4 billion for local governments.[3]

Public unions are gearing up to oppose proposed pension changes, including increasing employee contributions by 3 percentage points, reducing pensioners’ annual cost-of-living increases from 3 percent compounded to the lesser of 3 percent or half the rate of inflation, and increasing the retirement age to 67. Fearing those reforms will be "rammed through" the legislature, the IFT, IEA and AFSCME say they have offered concessions at the negotiating table, although they decline to detail them or offer an overall union plan to address the state’s $85 billion in debt. The IFT said labor’s ideas would cost members more money and save the state billions of dollars.[4]

The Illinois Senate passed a bill to repeal a provision in a 2007 pension law that would have allowed the former Oak Brook Chief of Police to collect a $750,000 annual pension, much higher than his final salary. The 2007 law included a one-time, six-month window that allowed former Oak Brook Police Chief Thomas Sheahan to transfer credits from a Municipal Employees’ Annuity and Benefit Fund of Chicago (MEABF) into the Sheriff's Law Enforcement Personnel program within the Illinois Municipal Retirement Fund (IMRF). Sheahan was to receive benefits based on one $77,000 pension, instead of two pensions that add up to $45,000 a year. Sheahan was the only person in the state to benefit from the provision.[5] Gov. Pat Quinn said he will work with legislative leaders to come up with an agreement on the $83 billion problem and call lawmakers back to the Capitol.[6]

SB1673 Debate

Legislation intended to curb the rising cost of public pensions in Illinois would reduce the benefits for recipients, except for the judges. Judges receive the highest average annual pension of any public employee, yet their benefits would remain untouched, according to legislation introduced by Illinois House Speaker Michael Madigan. The nearly 1,000 retired judges earn an average annual pension of more than $112,000. The average public employee retiree draws an average annual pension of about $40,000.[7]

During a debate over shifting teacher and university pensions to local districts on May 29 Madigan dismissed Republican concerns that shifting financial responsibility for pensions will result in local property tax increases. However, on May 30 he shifted course after a talk with Gov. Pat Quinn, who asked him to drop the provision of shifting the burden from the state to local school districts.[8]

Pension reform came to a halt in the legislature despite having the issue of shifting financial responsibility for teacher pensions to local boards removed. Sponsorship for the bill was shifted to Republican House leader Tom Cross so the provision could be removed. After the provision was removed Madigan announced he was a "no" vote and the bill lost support from Democrats. Cross said the bill will be revisited over the summer.[9]

What's in the Bill:[10]

  • Employees and retirees would be offered two choices: have access to a state-sponsored health care plan upon retirement, have their raises count toward their pensions and a lesser cost-of-living adjustment; or keep the 3 percent compounded annual COLA that they have today.
  • If they keep retiree health care and pensionable raises, their COLA will be one-half of the urban consumer price index or 3 percent, whichever is less. The COLA will not be compounded; instead, each COLA increase will be based on an employee’s original pension.
  • Employees and retirees would have from Jan. 1, 2013 to May 31, 2013 to make their choices.
  • If employees and retirees choose the lesser COLA, they will receive no boosts in their pensions until age 67 or 5 years after they retire, whichever comes first. This will affect some employees who have already retired. For example, if an employee retired at age 55, is now 58 and chooses the new COLA, the new COLA will not kick in until the retiree reaches age 60. That employee will receive no COLA for the next two years.
  • The bill would phase in a shift of the “normal” pension costs for teachers and university employees to school districts, state universities and community colleges. The normal cost is the total benefit accrued by active employees for the current fiscal year. The shift would start in fiscal year 2014. Each district, university and college would pay 1 percent of their employees’ payroll each year for the first six years, then one-half of 1 percent in subsequent years until the cost of funding each system’s pension benefits is fully funded at the local level.
  • If the state is more than 90 days late in making a payment to the pension systems, they can go to court to recover the money. Unions believe this is not an adequate guarantee of future funding by the state.
  • Full funding of the pension systems in 30 years.
  • Estimated savings: $65 billion to $115 billion, according to Quinn budget director Jerry Stermer.
  • Some employees have speculated that if they rush to retire now, the courts might strike down provisions that apply to those who have already retired, but uphold them for those who had not yet retired when the governor signs the bill. All provisions concerning the choice employees make will be non-severable, meaning courts will have to either uphold the changes in full or strike them down in full.

2011

In 2011, the Chicago based Civic Federation urged the state to curtail pension benefits for existing state retirees by limiting benefit increases to 3 percent a year or one-half the rate of inflation, whichever is less. It is a "constitutionally questionable maneuver" that would extend 2010 pension reforms that imposed identical limits on workers hired after Jan. 1, 2011. This move, according to the group, would help Illinois avoid a tripling of its backlog of bills.[11]

In March of 2010 the legislature passed a measure to limit the amount of retirement pay a judge or former lawmaker could collect from their state-funded pension plan.The plan caps those pensions at 60 percent of their salary from their last eight years on the job. The proposal would affect pensions from the General Assembly Retirement System and the Judge's Retirement System. The legislation pushes the age for full retirement to 67. It also caps the annual pension amount at $106,800. Lawmakers estimate the reform will save taxpayers about $1.62 billion.[12] Over 35 years the savings are estimated to be nearly $200 billion.[13]

One way lawmakers may seek to fix Illinois' pension plans is to ask current workers to pay more into the plan. Republican House leader Tom Cross proposed to increase contributions for some workers to as much as 20 percent, which would save an estimated $25 billion. House Speaker Michael Madigan, a Democrat, floated an idea to cut pension benefits for current employees, although this would likely face legal challenges.[14] Illinois Senate President John Cullerton, a Democrat, released a legal memo stating retirement benefits cannot be altered unilaterally by the legislature because they would be unconstitutional.[15][16] The Wall Street Journal reports that "critics say these proposals will go only part way in erasing the $82 billion unfunded pensions liability that is projected to grow to $139.8 billion in 2030."[17]

Borrowing the to cover payments

The University of Illinois Institute of Government and Public Affairs released a report that says borrowing to cover Illinois' pension payments is unsustainable and will affect the state's long-term financial health. The report outlines the state's options, which include raising taxes, cutting spending or reneging on its past promises to employees.[18]

Bi-Partisan plan

A bi-partisan plan put forward in the Illinois legislature would require many state employees to pay nearly 17 percent of their salaries into the pension system to keep their current benefits, or keep more of their money but receive fewer benefits at retirement. A third option would be a new 401(k)-style investment plan. Officials said the savings will depend on which options employees choose. But the amount will be billions of dollars in the years to come, with employees contributing hundreds of millions of dollars more. The Illinois Constitution bars reducing retirement benefits for current government employees.[19]

Bipartisan plan provisions:[20]

  • A state worker now having 4 percent of his or her paycheck withheld as a pension contribution would see that amount increase to 9.29 percent.
  • University workers now contribute 8 percent of their paychecks toward their pensions but would have to set aside more than 15 percent to retain that top benefit.
  • For judges, their existing 11 percent withholding for pension would jump to a more than 34-percent pension contribution from their paychecks, and lawmakers would go from 11.5 percent to nearly 25 percent under the plan.

Union response

The bi-partisan plan was not without its opponents. AFSCME and teachers’ unions said they would challenge it in court on the grounds that the Illinois Constitution states that benefits of state-run pensions “shall not be diminished or impaired.”[21]

However, union officials are battling to also include a clause which would change employee pension contributions from being funded roughly 2-1 (state-employee), to being 90 percent funded by the state. The clause would take effect in 2015 and require the state collect an additional $550 million a year in property taxes.[22]

Plan dropped

After receiving a flurry of letters, telephone calls and emails opposing the plan for state employees to pay more into their pensions, House Speaker Michael Madigan and House Minority Leader Tom Cross abruptly pulled the plug on that action.[23]

Pat Quinn rejected a pension reform plan sponsored by Cross that would not change current retirement credits. Cross' plan included three options:

  • They could pay more and keep their current level of pension benefits.
  • Keep payroll deductions the same and earn lower pension benefits.
  • Or have the state match what they pay into a 401K-type retirement fund.

Quinn said the Cross plan "laid an egg."[24]

Madigan and Cross said they plan to revisit the pension reform plan in the fall veto legislative session. In a joint statement they said they would convene hearings over the summer of 2011 in an attempt to hammer out a solution “for both those who are members of the pension systems and those who fund them.”[25] The state’s five pension systems for teachers, college professors, judges, state lawmakers and rank-and-file state employees have a combined shortfall of at least $83 billion. A report by the Pew Center on the States concluded that Illinois is the most underfunded system in the country.[26]

Union officials do not want to see the Cross/ Madigan plan resurface. Public employee unions fought the changes through aggressive lobbying and outreach, and a massive advertising campaign under the banner of the We Are One Illinois Coalition created to fight any diminishing of pensions.[27]

Cullerton believes the pension reform plan offered by Cross and Madigan will not pass Constitutional muster due to the proposed reduction of pensions for current public employees. According to the Chicago Tribune Cullerton said he wants to work closely with unions to negotiate changes to the House plan. Cullerton suggested one path to a constitutional solution would be by following "basic contract law."[28]

Republican reform plan for Chicago

In October 2011 Cross filed a bill to give more accountability to taxpayers by reconstituting the City of Chicago and Cook County pension boards. The bill will require pension boards statewide to refer any suspected fraud to the local authorities.

According to a press release issued by Cross' office House Bill 3827 will "amend the Illinois Pension Code to state that if any board member or employee of any retirement system or pension fund created under the Pension Code or the Illinois State Board of Investment has reasonable suspicion to believe that fraud is being committed or has been committed, then that individual shall either notify the board or the State’s Attorney of the county having jurisdiction of the alleged fraudulent activity."

Additionally the bill will:

  • Standardize the numerous boards of the City of Chicago Pension Funds to have seven members. All current board members’ terms will expire and going forward the board will consist of four Mayoral appointees who are not members of the fund or elected officials, two elected active members and one elected annuitant member.
  • The board of the Cook County Pension Fund will also be reconstituted. The new board will be made up of nine members, including five appointees of theCounty President who are not members of the fund or elected officials, along with two elected active members and two annuitant members.

Combating Double and Triple Pension Dipping

A Chicago Tribune/WGN-TV investigation found at least eight Chicago labor leaders who are eligible for inflated city pensions also stand to receive union pensions covering the same work period, thanks to a charitable interpretation of state law by officials representing two city pension funds. According to the article "one labor leader stands to reap more than $400,000 a year from three pensions — the city laborers fund, a union district council fund and a national union fund — all covering the same time period. During his expected lifetime, he stands to receive approximately $9 million, according to an analysis based on the funds' actuarial assumptions."[29] Union officials are accumulating these benefits even though the state pension code includes language aimed at preventing double dipping.

Gov. Pat Quinn is expected to sign into law a crackdown on public pension abuses that saw top union officials land hefty retirement packages, double dip and substitute teach for one day but win benefits for life, according to the Chicago Tribune. The law will end the practice in which some city of Chicago municipal and labor union workers have taken leaves of absence from their city jobs, moved to full-time positions with their unions and then collected pensions from both. That double-dip possibility will be eliminated for current and future union officials. The reforms also mean some current Chicago-area union leaders will be unable to base their public pensions on hefty union paychecks, but only on work performed as a city employee. The law would also prohibit someone from drawing a teacher's pension after working as a substitute teacher for a day.[30]

Government Pensions for Government Work - Period

Responding to the Chicago investigation Cross filed a bill that would "end the double dipping altogether by blocking union leaders who benefit from city pension funds from receiving any additional pensions for the same work period, regardless of where the pensions come from or how they're structured."[31]

Sen. Matt Murphy, a Palatine Republican, and former gubernatorial candidate Adam Andrejewski, founder of For the Good of Illinois, filed a pension reform bill that would prohibit union leaders who are not government employees from drawing government pensions.[32]

Any major reform entails significant legal risk, given a provision in the state constitution that prohibits diminishing or impairing the pensions earned by state workers.[33] The Illinois Education Association is preparing its members to oppose any pension reform they deem as "unconstitutional."[34] Lawmakers are continuing to discuss pension reforms, but no move to pass legislation has been made since the previous failures.[35] The legislation could be considered during the veto session, although Rep. Raymond Poe of Springfield said he believes election politics would prevent anything from happening until after 2012.[36]

Illinois Treasurer Dan Rutherford wants major changes in the pension system for public employees that would require workers to contribute more of their salary if they want a defined benefit pension. He warned that the unfunded pension liability could result in litigation against the state that would see a federal judge demand cutbacks in state spending or tax increases. He said the state has an unfunded pension liability of $140 billion, the “sleeping giant in the room.” On a recent trip to New York he said he told financiers on Wall Street, “Do not loan my state any more money, they have an addiction to debt.”[37]

Republican leaders said that the pension debt has risen from $54 billion in 2003 ($4,300 per citizen) to $119 billion today ($9,300 per citizen) — a 120 percent increase. This indebtedness, they said, has put Illinois in a shameful spot, with the second largest bond and pension debt of any state.[38]

Teacher pension reform

In order to address unfunded liabilities with the Teachers Retirement System, House Speaker Michael Madigan has not ruled out shifting billions of dollars in teacher retirement costs onto local school districts. Madigan has said there is a need to evaluate Illinois’ practice of funding pensions for local teachers and university employees. Gov. Pat Quinn’s budget office earlier this month said that it’s weighing the idea of shifting pension costs to local government.[39]

Senate President John Cullerton touted the shift idea, saying it s unfair to Chicago because the city finances its own teachers pension fund with no, or minimal state support. But Chicago taxpayers also contribute to the state Teachers’ Retirement System, which funds pensions for suburban and downstate teachers.[40] Madigan and Cullerton argue that teachers are not state employees, but are employed by local school districts. Gov. Quinn said shifting the burden to local districts would save the state more than $1.3 billion a year.[41]

The plan is running into resistance from groups including the Illinois Association of School Boards, which said Tuesday it would force local districts across the state to make an additional $800 million in contributions toward teacher pensions–likely leading to cuts in education spending, hikes in property taxes, or some of both. The Illinois State Board of Education put 94 school districts on two of its financial watch lists last year with another 203 flagged as potentially worrisome. For more than two decades, the state failed to pay its full share into the pension systems. This created an imbalance that now imperils the long-term survival of Illinois’ five pension systems, which serve the state’s teachers, university workers, state employees, judges and General Assembly retirees.[42]

One reform plan calls for university employees to pay 11 percent as opposed to the eight percent they currently pay. Shifting the pension costs away from the state would force universities to look at several options, including boosting the percentage being paid by employees, cutting programs, raising tuition or some combination of each.[43] University officials have been testifying to legislators that a shift in pension costs would cost the universities tens of millions of dollars annually.[44]

TRS Spends Millions on Money Management

Following an analysis of TRS, The Better Government Association revealed the organization paid more than $1.3 billion for money managers and brokerage firms to handle its $30 billion-plus in financial assets during a 10-year period ending in fiscal 2010. According to the report TRS’ 10-year average rate of return was 3.7 percent excluding the cost of fees, far below its 8.5 percent annual target return. Including fees, the pension’s return during that period was 3.3 percent, according to TRS, which which is just below the median of 3.4 percent.[45]

Almost 200 firms received more than $1 million in fees, while the top 10 firms averaged $38 million each during the 10-year period between 2001-2010, the BGA found.[46]

According to the report TRS said its payouts to money managers is in line with other public pensions of similar size and that its return was hurt by “steep losses sustained primarily during the 2008 and 2009 global financial crisis that pulled down the system’s 10-year average rate of return.” TRS added that its investments rebounded with 2011’s 24 percent return.[47]

Municipal pension reform

Like the state funded pensions, pension plans managed by municipal governments in Illinois are also facing severe funding issues. In December 2010 the Illinois legislature passed a pension reform bill that placed new demands on municipalities for funding police and fire pensions. The bill requires municipalities to increase pension funding to bring the retirement plans up to 90 percent solvency over the next 30 years. Chicago Mayor Richard Daley opposes the reform saying the plan will force Chicago leaders to dramatically raise property taxes.[48] The proposals passed by the legislature were also fought by police and fire unions.[49] Gov. Pat Quinn has not said if he would sign the reform bill.[50]

In Galesburg, the city has $715 in a trust fund for retired city workers that needs an estimated $8.5 million to meet future obligations. The city’s police pension fund takes 13 percent of the property tax levy, up from 7 percent just five years ago. The share of property tax revenue has risen from 9 percent to 14 percent over the same period for the fire department pension fund. The bigger bite pensions are taking out of tax revenue has meant less money for the city’s general fund, which has seen its share of the property tax levy fall from 67 percent to 56 percent since 2006.[51]

New worries over the depth of the state's pension hole is also becoming a concern for local officials who are afraid they may have to pick up the tab for some of the state's pension plans. The Teachers' Retirement System, the largest and costliest of Illinois' pension programs, is now almost $40 billion short of what's needed to cover future benefits — the deepest financial hole in 20 years of state records.[52]

References

  1. Illinois Issues, The Pension Chasm, November 15, 2010
  2. Chicago Tribune, House OKs Illinois public pension perk restriction, April 19, 2012
  3. State Journal Register, Madigan proposes diverting local funds to pensions, May 15, 2012
  4. State Journal Register, Unions gear up to oppose state pension changes, May 16, 2012 (dead link)
  5. Daily Herald, Senate targets former Oak Brook chief’s pension, May 26, 2012
  6. CNBC, Pension cuts postponed in Illinois Legislature, June 1, 2012 (dead link)
  7. Quincy Journal, Judges left out of Illinois pension reform plan, May 30, 2012
  8. State Journal Register, http://www.sj-r.com/top-stories/x358809704/Pension-legislation-stalled-in-General-Assembly, may 31, 2012
  9. State Journal Register, No House vote on pension plan; lawmakers to return soon, May 31, 2012
  10. State Journal Register, Cross challenges Madigan on pensions, May 29, 2012 (dead link)
  11. "State action urged to stop pension debt from ballooning," Chicago Sun-TImes, January 30, 2012
  12. 'State House News', Illinois House OKs Judges, Lawmakers Pension Reform, March 19, 2010
  13. 'KWQC'. Illinois Pension Reform Signed into Law, April 20, 2010
  14. Sun Times, Madigan open to discussing cuts in state pensions, Feb. 9, 2011
  15. Wall Street Journal, Illinois' Pension Crisis Eludes Easy Solutions, March 16, 2011
  16. Chicago Sun Times, State worker pension cuts not constitutional, Senate prez says, Feb. 10, 2011
  17. Wall Street Journal, Illinois' Pension Crisis Eludes Easy Solutions, March 16, 2011
  18. Crains Chicago Business, Illinois Plan to Borrow Money for Pension Payment a Bad Idea, U of I Report Says, April 11, 2011
  19. Business Week, Workers face tough pension choices under Ill. plan, May 26, 2011 (dead link)
  20. Sun Times, House Panel OKs Changing Pension System for Current Public Workers, May 27, 2011
  21. Northwest Herald, Pension Bill Advanced by House Panel, May 27, 2011
  22. Cite error: Invalid <ref> tag; no text was provided for refs named hinz
  23. Chicago Sun Times, Unions Win as Illinois Lawmakers Put off Pension Reform Until Fall, May 31, 2011
  24. Fox, Illinois Gov. Pat Quinn Seems to Reject Pension Reform Bill, Aug. 10, 2011 (dead link)
  25. Northwest Herald, House leaders pledge to revisit 
pension reform, June 1, 2011
  26. Northwest Herald, House leaders pledge to revisit 
pension reform, June 1, 2011
  27. Illinois Retirement Security Initiative, House Leaders Pledge to Revisit Pension Reform , June 7, 2011
  28. Cullerton wants shot at a state pension fix, Jan. 4, 2011
  29. Chicago Tribune, State GOP leader files bill to stop union leaders' pension double dipping, Oct. 12, 2011
  30. Chicago Tribune, Quinn to sign landmark pension abuse reforms into law, Jan. 4, 2011
  31. Chicago Tribune, State GOP leader files bill to stop union leaders' pension double dipping, Oct. 12, 2011
  32. For The Good of Illinois, Cracking Open... Corruption, Oct. 15, 2011
  33. Chicago News Cooperative, Greising: Pension inaction blights legislative session, June 8, 2011
  34. Illinois Education Association, Pension talks to resume in Springfield, Aug. 24, 2011
  35. Peoria Journal Star, Finke: House pension plan in works, Aug. 16, 2011 (dead link)
  36. Journal Standard, Illinois House leaders discuss pension benefit changes for state employees, Aug. 17, 2011 (dead link)
  37. Galesburg Register Mail, Illinois Treasurer preaches fiscal restraint, July 12, 2011
  38. South West News Herald, GOP Leaders Say State Has To Quit Spending, Aug. 26, 2011 (dead link)
  39. Daily Herald, Dillard: School pension plan a ‘realistic threat’, Feb. 16, 2012
  40. Southtown Star, Kadner: Cullerton defends state teacher pension shift idea, Feb. 15, 2012
  41. St. Louis Today, Quinn looks to shift teacher pension funding to local school districts, Feb. 2, 2012
  42. Chicago News Cooperative, Schools Say They Can’t Absorb Pension Costs, Feb. 15, 2012
  43. Quad City Times, Quinn pension shift could mean smaller paychecks for university employees, March 1, 2012
  44. Bloomington Pantagraph, University chiefs worry about pension shift, Feb. 29, 2012
  45. Chicago Sun Times, Teachers pension fund paid a whopping $1.3 billion in fees . . . for what?, April 18, 2012
  46. Chicago Sun Times, Teachers pension fund paid a whopping $1.3 billion in fees . . . for what?, April 18, 2012
  47. Chicago Sun Times, Teachers pension fund paid a whopping $1.3 billion in fees . . . for what?, April 18, 2012
  48. 'Bloomberg', Illinois Passes Pension Fix for Cities, $3.7 Billion State Crises Lingers, Dec. 3, 2010
  49. 'Illinois Statehouse News', House Okays Cop, Firefighter Pension Changes, Dec. 3, 2010
  50. 'Illinois Statehouse News', House Okays Cop, Firefighter Pension Changes, Dec. 3, 2010
  51. Galesburg Register-Mail, Sunday Focus: City pension trust woefully lacking, July 10, 2011
  52. Chicago Tribune, Illinois Teacher Pension System Nearly $40 Billion in the Hole, March 22, 2011