Tuesday, December 03, 2013

Legislators approve changes
to state's public pension systems

By Jamey Dunn

After years of debate and several failed attempts, the Illinois General Assembly passed changes today to the state’s pension systems for public employees.

After holding simultaneous floor debates, the Illinois House and Senate voted within minutes of each other to approve a new version of Senate Bill 1. The plan is the product of a special conference committee on pensions and negotiations among legislative leaders. Gov. Pat Quinn said he plans to sign the bill, which he called a “bipartisan victory for the people of Illinois.” Quinn, who voluntarily stopped taking pay until the bill was passed, said that after he signs it, he will look into picking up his back checks. “Today, this day, will always go down in history as the day that the people of Illinois through their elected representatives and senators took action for the future. The people have won. We have all won.”

The proposal is projected to save $160 billion over 30 years and fully fund the pension systems, which are currently underfunded by an estimated $100 billion, by 2043. It would reduce annual cost of living adjustments (COLAs) for current and future retirees. The bill would apply differently to employees and retirees, depending on how long they worked and which retirement system they belong to. The current COLAs are 3 percent compounding interest. Under the new SB1, the COLA would be determined by 3 percent of pension benefits or 3 percent of the product of years served multiplied by $800 for state employees or $1,000 for teachers and university employees. The COLA would be based on whichever number result is smaller. The numbers used in the formula, $800 and $1,000, would increase along with the Consumer Price Index. Some annual COLAs would be deferred for current employees upon retirement. The number of years an employee must skip the COLA is contingent of years of service.

Employees younger than 46 also would have to retire later. For each year an employee is younger than 46, an additional four months would be tacked onto the time he or she would have to work to receive full benefits. The proposal would also cap pensionable salary at $109,971, but that number would increase annually based on inflation.

The bill would reduce the employee contribution toward retirement benefits by one percentage point and allow the systems to sue the state if it does not make its required payment. However, lawmakers could vote to change the payment schedule and reduce the annual payment. The state would contribute 10 percent of the savings from the plan toward the unfunded liability starting in 2015. The state would also contribute an additional $1 billion after borrowing that was used to make pension payments in the past is paid off.

House Speaker Michael Madigan made his goals for pension changes clear during floor debate today. “We’re here today discussing the issue because of the cost, and what we want to do is get cost savings as a result of this bill.” Madigan said he did not call a union-backed proposal, Senate Bill 2404, for a floor vote in the House because it would not have produced enough savings. He said that the House had set the “high bar of achievement” when it passed an earlier version of SB 1 last spring. That proposal would have saved an estimated $163 billion. The plan failed to gain the needed votes to pass in the Senate. Madigan said that he was “severely criticized” for not allowing the SB 2404 to to be called in the House after it passed in the Senate. But he said today that he did not call it because he wanted to “shape the issue” and give people time to understand the difference in cost savings between the bills. He also wanted lawmakers “to understand that our goal is to achieve the most cost savings feasible as a result of the legislation.”

Madigan said that pensions had become “too rich” to be sustained, and that he and Republican leaders hoped to keep the savings from any new proposal near to those that would have been achieved by the previous SB 1. Madigan also said today that he believes COLAs, the biggest cost driver among the pension benefits, are not protected by the state’s Constitution. The speaker said that a smaller portion of the savings in the new version of SB 1 would be derived from benefit cuts. Under the old bill, almost two thirds of the savings were reductions, but under the new plan, the unfunded liability reduction would be split about half and half between cuts and additional funding.

Opponents argued that the issue is about more than the bottom line. “If this were only about picking the bill that saves the most money, we’d all pick the bill that saves the most money,” said Sen. Toi Hutchinson, an Olympia Fields Democrat. “It’s about taking people’s retirement benefits right when they need them the most, after they’ve worked hard and earned those benefits.”

Aurora Democratic Sen. Linda Holmes, the only member of the conference committee who did not support the bill, said that the plan was akin to theft. “I don’t know how there’s one person here with any understanding of business, with any understanding of contracts, who can sit there and say what we’re doing is right. This is wrong.” Homes and Hutchinson both said that the bill violates the state’s constitutional protection of pension benefits. That provision says: “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Hutchinson said of the constitutionality of SB 1: “I’m not a constitutional lawyer. I’m really not. But I can read, and it’s in the Constitution.”

Supporters of the bill say that the reduction in employee contributions and the funding guarantee offer a consideration in exchange for the benefits that would be reduced. The idea behind their argument is that under contract law, a benefit could be reduced if something else of value is offered as a consideration for the reduction. However many argue — including Senate President John Cullerton at one time — that employees would have to agree to the swap for it to pass muster. Cullerton’s SB 2404 would have offered employees choices between COLA reductions or state-subsidized health care in retirement.

Not all who voted in favor of the law today say they are certain that the bill is constitutional. However, they say that the crisis is too big to ignore. “The legislative process involves compromise. When it comes to pension reform, a compromise was found at the intersection of policy and political feasibility. The General Assembly stumbled at this intersection for years. Now, it’s time to move forward and allow the courts to rule on the constitutionality of our approach,” Cullerton said in a prepared statement. 

Chicago Democratic Sen. Kwame Raoul, who was chair of the conference committee, said that if the Illinois Supreme Court did strike down the bill, the justices would likely give some indication in their opinion of what steps they think lawmakers could take on pension changes. “We have the worst unfunded liability in the United States of America, and we can’t continue to be cemented into a stalemate,” he said. “We cannot continue to be the embarrassment of the nation. We must act to steer our ship in the right direction.”

Madigan said he thinks the courts will uphold the bill. “Something’s got to be done. Something’s got to be done. We can’t go on dedicating so much of our resources to this one sector of pensions,” he said. The changes will apply to four of the five state pension systems: teachers, university employees, legislators and state government employees. Judges' pensions will not be affected under SB 1.  

Union officials say SB 1 goes too far and is unconstitutional. They maintain that SB 2404 was the best choice. “There’s no victory in a bill that will get tied up in court, no victory in harming the lives of teachers and firefighters and nurses to a far greater degree than is just and necessary,” said Dan Montgomery, president of the Illinois Federation of Teachers. “We feel it's blatantly unconstitutional, and so claiming it saves $160 billion is a disturbing illusion. It will save no money at all.” There is some debate about whether opponents will have to wait until the law goes into effect in June before they can file suit. But at least one union leader indicated today that a suit could come sooner than June. “We would have to wait until the governor signs it, and then we can file a suit at any time. And then we’ll do it when we’re ready and when it’s most appropriate,” Montgomery said.

Other opponents said that the state should completely scrap its defined benefits system and move employees to a 401(k)-type plan for future benefits. Advocates for such plans argue that only employee benefits earned to date are protected by the Constitution. Rep. Thomas Morrison, a Palatine Republican, said that because the state has the worst-funded pension system in the nation, lawmakers have go to “go big” on reforms to solve the problem.

Senate Minority Leader Christine Radogno said she is aware of the human toll that cutting pensions would take. “We very cognizant of the fact that this is not just a numbers issue but it’s a people issue as well.” During negotiations, she pushed for a provision that would allow low-income retirees to keep their current COLAs until their pensions reached $30,000. But she said that that the changes must be made to address the state’s fiscal problems. She said that if the pension issue is addressed, other concerns such as the state’s overdue bills, will be easier to tackle. She also said that making the systems solvent should provide employees and retirees some piece of mind, even if they are upset that their pensions will be reduced. “They will be able to count on the benefits once we pass this bill,” she said on the Senate floor.

Several opponents on the Republican side argued only that lawmakers should slow down the process. They said there was not enough time for them to fully understand the more-than-300-page bill or for the public to grasp what was at stake. Republican gubernatorial candidate Sen. Kirk Dillard of Hinsdale was among them.

The proposal has the support of all four legislative leaders and Gov. Pat Quinn. Nonetheless. speculation that it might not pass was still floating around earlier today. (Those assessments may have been caution from supporters and wishful thinking from opponents.) Two other Republican candidates for governor, Illinois Treasurer Dan Rutherford and venture capitalist Bruce Rauner, both opposed the measure in the lead-up to the vote. Republican U.S. Sen. Mark Kirk also panned the bill, dismissing it as gimmicks that would not solve the problem.

Republican legislative leaders acknowledged that the political hubbub made their attempts to get votes for SB 1 more difficult. Radogno said she was glad that 10 members of her 18-member caucus voted in favor of the bill. “That’s more than half. I’m very pleased with it. It was a contentious vote,” Radogno said. “The caucus was a microcosm of the opposition that we heard outside. You had the folks that were very much from the union districts and were not going to be for the pension reform no matter what. And then you had people that were very ideological, saying that this isn’t good enough; we ought to just not do anything and let chaos reign and then we can come in and do something better.” New House Minority Leader Jim Durkin said that his vote count changed throughout the day. He said that the influence from people such as Rauner, as well as lobbying from union members, probably played a role. But he said that getting the vote done now was likely key to its passage. “I quite frankly believed that if we did not pass a bill today, that we would not see one next year because then it would get caught up in the governor’s election and all the drama that goes into it every four years.”

Madigan, who is known for delivering votes at crunch time, said it wasn’t easy. “Well, this was difficult because of the strength of the opposition and the intensity of the calls and contacts generated by organized labor among the Democrats. On the Republican side, their problem apparently was some of the gubernatorial candidates thinking about the campaign rather than the seriousness of the issue.” 

Northbrook Democratic Rep. Elaine Nekritz, who has been working on the pension issue for more than two years, said that today’s vote might be the first in a series of bills to address underfunded pension systems. “I think that this will free up a lot of energy and capacity in the General Assembly to start focusing on the needs of the city [of Chicago] and they are significant and in may ways more immediate than the state’s need in terms of addressing the shortfalls in their pensions systems.”

Chicago Mayor Rahm Emanuel came to Springfield in 2012 and appealed to lawmakers for changes to the city’s pension systems. Many other municipalities are also struggling with underfunded pension systems. “There are police and fire pension systems around this state that are funded in the 10 [percent] to 20[percent] to 25 percent range that are very much at risk of being insolvent. Our work on pensions is by no means done. But this [vote] will let a lot of air back in the room to start addressing the other systems,” Nekritz said. Cullerton agreed. “Pension reform isn’t done. I am committed to building on our momentum and providing relief for our local communities facing similar problems. Specifically, it is critical that we turn our focus to the financial crisis facing the Chicago Public Schools’ pension system. I look forward to working with all leaders on this critical issue.”

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