Thursday, May 26, 2011

Pension changes 'tough vote' for lawmakers

By Lauren N. Johnson with Jamey Dunn contributing 

Current state employees may pay more for retirement benefits or be forced to change them if enough lawmakers can bring themselves to cast a vote that even supporters agree will be politically difficult.

“Pension reform is a very uncomfortable conversation,” said House Minority Leader Tom Cross of Oswego, noting that the issue would affect the future of many Illinois residents.“Over the last five to six years, Illinois has either not made a full pension payment or has had to borrow to make the payment,” he added, highlighting that this year, lawmakers voted to make the payment.

House Speaker Mike Madigan, who co-sponsors the bill in the House, agreed, “I don’t think there’s any dispute on the facts and the figures. All of these systems are severely underfunded. They all cry for change, for better funding, and this is like a lot of other programs. When you’re out of balance you have two choices: put more money in or reduce the benefit level.”

Madigan said the bill would address both of those issues and would call for dramatic changes to the system. Both leaders stressed the importance of addressing Illinois’ roughly $80 billion unfunded pension liability.

Under Senate Bill 512, employees could pay more to keep their current benefits, move to the “second tier” of the system with a lower level of benefits created last year for employees hired after January 1 or invest in a self-managed option similar to a 401k plan. (See yesterday's blog for a breakdown on what employees would have to pay to stay in "tier one.")

Cross said the five state pension systems – the State Employees’ Retirement System, Teachers’ Retirement System, State University Retirement System, General Assembly Retirement System and the Judges Retirement System – have a funding level at or below 40 percent. His proposal, he said, would reflect the “actual” cost of employee benefits and would stabilize the pension system through the amount employees would contribute, along with the state’s contribution of about 6 percent of pay for employees who will not collect Social Security and about 4 percent of pay for those who will  The percentage of their salaries that employees would have to contribute to maintain their current benefits would be recalculated every three years to reflect the real cost of “tier one.”

Assuming no state employees leave the “tier one,” system, Dick Ingram, executive director of the Teachers’ Retirement System, said over time, that population will age and retire, increasing the cost of benefits paid out. And no new members will be allowed to enter the system and make payments that would help to supplement the benefits of those retirees “The numbers can only go up. They can’t go down,” he said.

Tyrone Fahner, president of the Chicago-based Civic Committee of the Commercial Club, said Illinois’ pension liability and the challenges it presents when trying to balance the state budget has a negative affect on the business climate. “The root of the problem in Illinois is the unfunded obligations that have accumulated in our state pension funds,” said Fahner, a former Illinois attorney general. The present pension liabilities once the obligations for retiree health care were included would amount to $30,000 per Illinois household.

“It is the single most important issue facing the state. It dwarfs all other issues because we cannot talk about school funding, we cannot talk about social services … unless until we’ve addressed this problem,” said Fahner, whose group’s proposed solution was the basis for Cross’ bill.

Opponents say the Illinois Constitution guarantees pension benefits for current employees. “These workers have made their contributions that have paid in, and deserve and adequate retirement,” said Michael Carrigan, president of the AFL-CIO. “To make these workers the scapegoats to bring forth so-called reform is unconscionable and unconstitutional.”

Carrigan, who represents at least 900,000 union workers in the public sector, said the fault for the current condition of the pension system lies with the state and not with individual workers. “Whether it’s a corporate tax break or new programs for decades and decades, these tax breaks and programs have been paid in part by putting off or ignoring pension payments due to the workers,” Carrigan said.

Ken Swanson, president of the Illinois Education Association, said that since 1990, members of TRS contributed $12.7 billion to the system. "It has been said that 95 percent [of the public] are paying for five percent [of state employees]. It should be remembered that in the 30 some years of periodic underfunding of the pensions, the state has used our pension systems as a credit card. One hundred percent of those 95 percent actually received that benefit because they got more state government services then they were paying for in taxes. So our pension systems have been used as a credit card, and everyone benefited from that," said Swanson, who added that 97 percent of Illinois students are educated by his members.

Dan Montgomery, president of the Illinois Federation of Teachers, said a further reduction of pension benefits would make it more difficult for schools to recruit new teachers and hang onto the staff they have now. “At a time when the General Assembly has made bold steps in the area of education reform, you’re considering a policy that would a profound negative impact on the ability of school districts to attract and retain the best and brightest of the teaching profession.”

University of Illinois President Michael Hogan said he would also face problems recruiting employees, and he expects that many of the 20 percent of U of I employees who are eligible for retirement would likely retire to avoid the change. “There’s a high probability if this goes through, they’ll get the hell out as fast as they can.”
Hogan said a reduction in pension benefits would come on the heels of furlough days, which resulted in reduced pay for employees. “ A pension cut like this, a change like this, would amount to another pay cut, and a substantial pay cut.”

Last year, lawmakers passed in one day changes to retirement benefits of employees hired after January 1 this year. Kent Redfield, an emeritus political science professor at the University of Illinois Springfield, said the proposed changes for current employees would be a more difficult vote because the plan has received more media coverage, and members of both parties are feeling pressure from teachers and state workers in their districts. “It’s a tough vote politically because it’s a lot easier to say my opponent is anti-teachers than it is to drag out the actuarial tables and talk about long-term pension funding,” Redfield said.

Cross’ plan did not include judges' pensions. He said members on both side of the aisle have asked him to include judges and that he plans to add the judges' pension system to the legislation with an amendment when the bill comes to the floor. It will be judges who will likely decide the fate of the plan if it is signed into law because unions will challenge its constitutionality in court. Cross said he is unsure if he has the votes to pass the bill and could not predict if when it would be called for a floor vote. “That’s going to be up to the speaker,” he said. Madigan declined to comment about the bill after this morning’s committee hearing.

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