Wednesday, July 03, 2013

Legislature's pension committee will miss governor's deadline

By Jamey Dunn

A committee trying to craft a compromise plan to change public employee pensions will not meet its deadline set by Gov. Pat Quinn.

Quinn gave the legislative conference committee, which lawmakers voted to create during a special session in June, until July 9 to come up with comprehensive changes to the state’s pensions systems. But committee chair Sen. Kwame Raoul, a Chicago Democrat, said during a Chicago hearing today that the group will not be done with its work by next week. He said that it would take longer than that for actuaries from the state’s pensions systems to complete analyses done on the plans and determine how much they would save. “We take serious the governor urging for us to get this down as soon as possible, but based on our conversation with the actuaries ... there’s no way to get them done by July 9.” Quinn's office did not respond to a request for comment about Raoul's statement.

Illinois faces a nearly $100 billion unfunded pension liability, and lawmakers from both chambers reached an impasse about how to best address the problem. Public employee retirement benefits are protected by the state’s Constitution, and lawmakers are looking for a proposal that can hold up in court but also can create the savings they say are needed to stabilize the system. The committee is taking testimony on various proposals. Today it heard from groups whose stances on the issue are at the opposite ends of the spectrum.

Ralph Martire, executive director of the Center for Tax and Budget Accountability, said that lawmakers should look at the pension liability in the same way they would consider any other debt the state owes. The money is owed to the systems because General Assemblies in essence borrowed from pension funds — by not making the needed payments — to cover the operating costs of the state instead of cutting the budget or raising the needed revenue. Martire said that the state’s system of raising revenue, which includes a flat tax on income and taxes very few services, has lead to years of budget gaps. “It’s that structural deficit that has in fact very much created the unfunded liability,” he told the committee today.

Martire’s plan for getting the pension systems back on track involves no reductions in employee benefits. “There’s actually a path available to the state that is clearly constitutional [and] will work.” Instead he wants to change the way the state pays off its pension obligation. Currently, the Illinois is working under what is known as the “ramp,” a back-loaded payment schedule intended to fund the systems at 90 percent by 2045. The center argues that the state should instead shoot for a goal of 80 percent funded and make flat payments over a longer period of time. “This is one of those situations where we’ve run up this debt by not following actuarial procedures for 60 or 70 years. It’s very hard to try to cram a repayment of it into 30 years.”

Those payments would still be pretty steep, so Martire and others suggest deferring some of the cost by changing the tax structure, such as extending the sales tax to some services or putting a graduated income tax into place. The state’s flat income tax in also built into the Constitution, so that last option could be very difficult politically. Ron Baiman, an economist representing the Chicago Political Economy Group, called for ending some corporate tax breaks, such as oil subsidies and credits for manufacturing within the country. He also proposed imposing a tax on certain financial transactions. Baiman said lawmakers should view the benefits promised to public workers in the same way it does making payments to bondholders. “Why are contracts for bondholders sacrosanct but contracts for workers are not?”

While Baiman and Martire argued that the state’s revenue structure is the root cause for the pension problem, Ted Dabrowski, vice president of policy for the Illinois Policy Institute, said that the state’s retirement benefits structure is unsustainable. He said cutting benefits would only be a temporary fix, and the system instead needs a complete overhaul. “This is not just about cutting costs. If it was, we would just cut like crazy and more on. This is about cutting costs but [also] solving a problem,” he said. Dabrowski proposed moving employees to 401(k)-like defined contributions plan, much like the one currently offered as an option to employees of state universities.

He said retirement plans such as the state’s current system, which pays out guaranteed benefits to employees from the time of retirement until their deaths, have been imploding in recent years in both the public sector and the private sector. “Politicians and private corporations have not been able to control defined benefits,” he said. “At some point, we should wake up and say something is wrong with the plan.”

The institute argues that all benefits that employees have earned to date are protected by the state Constitution, but future benefits are up for grabs. Dabrowski said that going forward, employees should contribute 8 percent of their pay, and the employer would chip in 7 percent of pay. The money would be invested and benefits would be determined by how well those investments did. Unlike the current structure, which leaves the investment choices up to the various pension systems, employees would have a say in controlling their portfolios. “We believe that all workers should have retirement freedom by controlling their retirement accounts.”

The proposal does include some cuts for immediate cost savings. The retirement age would be increased based on sliding scale based on years of employment. New employees would have to wait until age 67 to retire. Cost of living adjustments [COLAs] for retirees would be frozen until the system was fully funded, which the institute projects would happen by 2045. “COLAs are very important to get under control because it’s the young teachers of today that are not going to get a pension because of the [COLAs] that are being paid out [to retirees] today,” Dabrowski said.


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