Part 2: A look at pension reform across the country

By Jamey Dunn

All four legislative leaders and Gov. Pat Quinn have said that pension reform is a priority in the upcoming legislative session, but their opinions differ on what would be best for the state and legal under the Illinois Constitution. Recent reforms in other states could provide models as lawmakers move forward. This is the second installment of a three-part series that looks at different aspects of reform in other states. 

While Gov. Pat Quinn has been coy in the past about his stance on pension changes, he has voiced strong support for passing pension reform legislation in 2012. “For all the beneficiaries in the system, it’s important that we maintain the integrity the stability of the system, otherwise there won’t be any pensions for anybody,” Quinn said earlier this month.

The governor created a special working group of legislators headed up by close adviser and former chief of staff Jerry Stermer to take on the issue and come up with recommendations for change. Quinn has not addressed whether he supports changing benefits for employees hired before a previous round of reforms went into effect last year. He has only said he does not want to make any changes that are unconstitutional.

However, the governor’s top budget adviser, David Vaught, said that reductions to cost of living adjustments given to retirees would likely be part of the discussion. “Some people say the [cost of living adjustment] is not protected constitutionally.”

Two recent court cases may have opened the door to more states considering reducing or outright eliminating cost of living adjustments for retirees.

According to the National Conference of State Legislatures, 17 states have taken actions in the last two years that would reduce COLA benefits. Most states making such changes, including Illinois, have reduced COLAs for future employees. However, in 2010, Colorado, Minnesota and South Dakota all reduced the cost of living increases given to their current retirees, and other states are taking notice. “It was new news in 2010 when three states made changes to their COLA that affected existing retired members," said Keith Brainard, research director for National Association of State Retirement Administrators. Since then, New Jersey and Rhode Island have both put a freeze on COLA benefits until their pension systems get on sound financial footing.

Last summer, judges in Colorado and Minnesota tossed out court challenges from retired state workers, allowing the COLA reductions to stand. The states said that the COLAs were not part of contractually guaranteed benefits, while the workers argued that reducing them would violate both state and federal protections for contracts. “The big legal question that has resulted in these court cases is to what extent are future COLAs … promised and protected benefits,” said David Draine, senior researcher for Pew Center on the States.

Denver District Judge Robert Hyatt ruled that lawmakers could not touch the base pension benefits promised to retirees but that cost of living increases were not a protected by contract law. One reason that states with budget problems or underfunded pensions might be quick to jump on the COLA cutting bandwagon is that cuts to COLA increases for current retirees produce almost immediate savings, while other pension changes can take years to produce substantial savings.

Social Security benefits and pension benefits for federal workers contain a cost of living increase that is tied to inflation. But with deficit reduction talks taking place on the national level, they too are under fire. There are proposals to link them to a more conservative inflation projection, which would effectively cut the size of future increases.

The rulings in Colorado and Minnesota do not apply to other states, and judges elsewhere, including California and West Virginia, have ruled that COLAs cannot be reduced. However, Brainard said the rulings do indicate that some judges are willing to take into consideration the dire situation that some pension systems are in and may allow lawmakers to use more discretion if they are “making a reasonable effort to share the burden equally — that is you’re not taking it out on only one group.” In the case of Denver, the money saved from COLA reductions is slated to go back into the pension system to help shore it up, instead of being spent in areas that lawmakers might consider more popular with voters. “You’ll see this wiggle room that the judges seem to have found,” Brainard said.

Quinn has also proposed calling on universities and school boards to pay a portion of the retirement costs for the workers they employ. “Our pension payment this year looks like about $5.2 billion, and of that, about a fifth, 20 percent, is actually state employees. More than half are school teachers in school districts and also the university employees, as well. So we’re going to come up with a good program that makes sure that everyone who is involved in this program has some investment in it,” Quinn said at a recent news conference.

Skeptics of the plan say it would lead to detrimental cuts to education and potentially spur property tax  increases as local governments look for a way to cover the cost of teachers’ pensions. Quinn said that the employers that negotiate the salaries on which pensions are based should bear some of the responsibility of the costs. “I think we have to be very prudent that we don’t hurt any of our current education efforts. But at the same time, you don’t want to have a system where those who are negotiating with employees don’t have a stake in the outcome. If they just want to shift the burden onto the state, then sometimes, they don’t maybe negotiate as well as they should. … Everyone who has employees in the pension system should contribute something to the pensions.”

House Minority Leader Tom Cross said such a proposal would not do enough to address the state’s pension problems. “The pro might be that they have some skin in the game, but the reality is, we’re going to have to address what people contribute. That is a component that you cannot escape. It is a very real part of the solution,” Cross said at a recent news conference. “It can’t be just an issue of cost shifting or nibbling around the edges. This thing is beyond nibbling around the edges.”

Maryland Gov. Martin O’Malley pitched a proposal this month that follows in the lines of Quinn’s statements. Under O’Malley’s plan, local governments would pick up half of the cost of teachers' retirement benefits, including Social Security contributions. Currently, districts pay about one third of the cost. If O’Malley’s plan were approved, local governments would pay almost $240 million more, but they would get some funding — from the proposed elimination of a tax break for top earners — to help with the transition.

“It sounds a little bit like taking money out of one pocket and paying it to another, … although, there is something to be said for linking the benefit obligation [to bargaining decisions],” Brainard said. “From the outside perspective, it’s all sort of coming from the same pot, and that is the taxpayers.” He said that the share that local public entities pay for their worker’s retirement costs vary from state to state. However, he said that the split is more an issue of cost sharing between state and local governments than it is a component of pension reform.

Yesterday's post explores so-called hybrid pension systems. 

Check back tomorrow for a look at a state that achieved pension changes by working with unions.