Illinois Pension Reform Scheme

Illinois politicians needed to come up with something that they could pass off as fully funding the state pension systems before the year 2045.  Ideally they would have wanted to go with:

  1. Eliminate all employee contributions
  2. Eliminate all state contributions
  3. Put in $1 trillion in 2044.

The proposal they put out comes damn close.  Below, in order of importance, is what I see them trying to accomplish based on the points laid out officially:


Collective bargaining: All pension matters, except pension pickups, are removed from collective bargaining.

Presumably this deal, designed to fail, would need to get union approval but next time when the serious Detroit-ish reforms come the unions won’t get a voice.

That’s it for the sequencing by importance.  Getting rid of collective bargaining looks like what they really wanted to get through this round and the remaining proposals are a series of distractions listed in the order of the official release with comments below.

Funding schedule and method for certifying contributions: Establishes an actuarially sound funding schedule to achieve 100% funding no later than the end of FY 2044. Contributions will be certified using the entry age normal actuarial cost method (EAN), which averages costs evenly over the pensioner’s employment and results in level contributions.

EAN with level payments is better than EAN on compensation with a salary scale but still a far cry from straight Unit Credit which private plans have had to use since 2008.  Also, no mention of what actuarial assumptions need to be used.

Supplemental contributions: The State will contribute (i) $364 million in FY 2019, (ii) $1 billion annually thereafter through 2045 or until the system reaches 100% funding, and (iii) 10% of the annual savings resulting from pension reform beginning in FY 2016 until the system reaches 100% funding. These contributions will be “pure add on,” which means State contributions in any year will not be reduced by these amounts.

Apparently Illinois has the worst funded plan in the nation even when including Pension Obligation Bond revenue.  When these bonds are due to be paid off (by taxpayers who don’t realize they’re funding pensions) that revenue item will remain on the books though taxpayers would now see it as funding pensions.

Funding guarantee: If the State fails to make a pension payment or a supplemental contribution, a retirement system may file an action in the Illinois Supreme Court to compel the State to make the required pension payment and/or supplemental contribution set by law each year.

Good luck with that court case.

Employee contribution: Employees will contribute 1% less of their salary toward their pension.

Shameless attempt to court union rank and file support.

Annual annuity adjustment (COLAs): Future COLAs will be based on a retiree’s years of service and the full CPI. The annual increase will be equal to 3% of years of service multiplied by $1,000 ($800 for those coordinated with social security). The $1000/$800 will be adjusted each year by the CPI for everyone (retirees and current employees). Those with an annuity that is less than their years of service multiplied by $1000/$800, or whatever the amount is at the time of retirement, will receive a COLA equal to 3% compounded each year until their annuity reaches that amount.

Additionally, current employees will miss annual adjustments depending on age: employees 50 or over miss 1 adjustment (year 2); 49-47 miss 3 adjustments (years 2, 4, and 6); 46-44 miss 4 adjustments (years 2, 4, 6, and 8); 43 and under miss 5 adjustments (years 2, 4, 6, 8, 10).

It will probably be less than 3% unless someone mis-programs the algorithm for calculating it.

Pensionable salary cap: Applies the Tier II salary cap ($109,971 for 2013), which is annually adjusted by the lesser of 3% or ½ of the annual CPI-U. Salaries that currently exceed the cap or that will exceed the cap based on raises in a collective bargaining agreement would be grandfathered in.

Tweak impacting those who will be retiring so far in the future that they won’t be getting anything anyway.

Retirement age: For those 45 years of age or under, the retirement age will be increased on a graduated scale. For each year a member is under 46, the retirement age will be increased by 4 months (up to 5 years).

Tweak impacting those who will be retiring so far in the future that they won’t be getting anything anyway.

Effective rate of interest (ERI): For all purposes, the ERI for SURS and the rate of regular interest for TRS will be the interest rate paid by 30-year U.S. Treasury bonds plus 75 basis points.

That rate would then be about 4.5% based on current rates but will that really be used for funding?

GARS Tier 2 fix: Brings GARS Tier 2 salary cap and annual adjustment in line with other Tier 2 benefits.

Tweak impacting those who will be retiring so far in the future that they won’t be getting anything anyway.

Pension abuses: Prohibits future members of non-governmental organizations from participating in IMRF, SURS, and TRS. Prohibits new hires from using sick or vacation time toward pensionable salary or years of service (applies to SERS, SURS, TRS, IMRF, Cook County, and Chicago Teachers).

Tweak impacting those who will be retiring so far in the future that they won’t be getting anything anyway.

Defined Contribution plan: Beginning July 1, 2015, up to 5% of Tier 1 active members have the option of joining a defined contribution plan. The plan must be revenue neutral and employee contributions will be equal to those for the defined benefit plan. If a member chooses to opt into the defined contribution plan, benefits previously accrued in the defined benefit plan will be frozen.

If it’s elective then the only ones who would be joining would be those who make out better under the 401(k) or else nobody would join unless they were confused or lied to.

Healthcare payments: Prohibits the State pension systems from using pension funds to pay healthcare costs.

If they’re doing that now then who who will be making those payments henceforth?  So I take it paying salaries out of the pension trust would be OK.

7 responses to this post.

  1. Posted by Tough Love on November 30, 2013 at 5:41 pm

    “Union Credit” = “Unit Credit”

    Reply

  2. John-

    Thank you again, from Illinois! We need all the help we can get!

    Mark Glennon

    Reply

  3. Posted by bpaterson on December 2, 2013 at 11:28 am

    time for the next program to be established: Obamapension. get rid of social security and put EVERYONE under a single payer retirement plan funded at the federal level.

    Can’t wait for the website!

    Reply

  4. Posted by Tough Love on December 2, 2013 at 7:40 pm

    John, Many States and cities are in the dire financial straights DIRECTLY because of the collusion between the Public Sector Unions/workers and our self-serving BOUGHT-OFF elected officials.

    Take a look at this article from Detroit……

    http://www.bloomberg.com/news/2013-12-02/detroit-retirees-strike-pay-dirt-with-city-guaranteed-savings.html

    As a side benefit, Detroit’s workers had a separate “savings” plan whereby workers’ contributions (up to 7% of their pay) were GUARANTEED an annual return of 7.9% during the period from 1999-2011. This is so beyond outrageous that I’m speechless. Is there no “recklessness” standard above which such Board members (or elected officials if they approved it) can be criminally charged (or civilly held accountable)? What if they had guaranteed 10% or even 15%?

    Evidently the Detroit DB Plan Board which administrated BOTH the DB Plans and the savings plan, simply pulled out whatever funds were necessary FROM DB Plan ASSETS to pay out the guaranteed 7.9% while earning FAR FAR less (and having substantial” losses” in several of those years).

    I am not just raising this simply as a “Detroit” issue. Clearly Public Sector Plan “Boards” should simply be administering provisions GIVEN TO THEM by legislators, but in many cases (CalPERS certainly comes to mind), the BOARD’s of these Plans have morphed into becoming the deciders of things that can and do have very substantial financial implications. That’s bad enough and WRONG, but when combined with Board’s that are very often Union-controlled, and we are in the exact position of having the fox guarding the hen house.

    The financial “mugging” of the Taxpayers by this collusion seems to have no bounds……and Taxpayers should find a way to refuse to continue to fund this thievery.

    Reply

    • Posted by Tough Love on December 3, 2013 at 8:13 pm

      And maybe, the Taxpayers were finally handed the tools to do just that.

      From today’s news:

      The judge (Bankruptcy Court Judge Rhodes overseeing the Detroit Bankruptcy) made it clear that public employee pensions are not protected in a federal Chapter 9 bankruptcy — even though the Michigan Constitution expressly does protect them.

      “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” he said.

      Reply

  5. Posted by jorod on December 3, 2013 at 12:11 am

    This is a big charade. The income tax is going to 10%. Everybody knows it. It’s rigged in favor of the unions. The only way to cut pension costs is to end collective bargaining for public unions. The unions conspire with the politicians against the taxpayers. Illinois is going down the toilet.

    Reply

  6. Posted by Legislative and Judicial follower on December 3, 2013 at 2:27 pm

    What about JRS pensionable cap and automatic increases, is this being changed as well as GARS to align with other systems’ Tier 2?

    Reply

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