Illinois Pension Reform: You Were Expecting Consensus?

Unloved and unwanted pension-reform negotiations slip between the deadline. It was probably inevitable, given the general assembly’s problems keeping its own pension fund in order—the worst in the state. On the other hand, it’s probably for the best to keep the bill in the air for awhile.


Governor’s budget-office director Jerry Stermer

 

Over the past couple days pension reforms got passed around like hot rocks in the legislature, as reforms were introduced bright and early in the morning by House Democrats; then Michael Madigan was like, here, you take it, passing off sponsorship to Tom Cross shortly after going at it over pensions. This was probably the most important thing written about the whole mess:

No one seems to like the bill, including Cross who opposed it on Wednesday.

“There will never be anybody jumping up and down [over it],” Cross told reporters. “This is a bill drafted by the Speaker. I was handed this bill last night.”

So, yeah, it died.

This leads us back to a good piece by Jason Grotto and Ray Long on Illinois legislative pensions, which are both very generous and very underfunded.

[Emil] Jones’ good fortune comes courtesy of legislation he sponsored in 1989. Under that law, members of the General Assembly who worked long enough to hit their limit on pension benefits — a generous 85 percent of their final salary after just 20 years — would get an extra reward.

For every additional year they stayed on, 3 percent of their initial pension would be added to their retirement checks. For Jones, working an extra 16 years netted him a $41,000 pension boost in 2009; he drew $126,004 last year.

The 3 percent deal, available to no one in state government outside of the General Assembly Retirement System, or GARS, is another in a long line of pension provisions written by lawmakers for lawmakers, a Tribune investigation found. It also stands as a glaring example of how the legislature repeatedly passed benefit increases with little or no concern for the costs.

How’s GARS doing? It’s a mess, 21.2 percent funded as of fiscal year 2011: $63 million in assets, $298.4 million in liabilities. It has 410 annuitants, 86 “inactive participants entitled to benefits but not yet receiving them"… and 180 total particpants. Since the fund is supported in part by employee contributions, it’s a terribly unhealthy ratio. (In 2006, assets were over $82 million and liabilities were under $222 million).

It’s the worst-funded retirement system in the state. Jones, as the piece notes, would have had to double his contributions over his tenure to fully fund his pension.

Of course, you’re supposed to get more than you put in, via investment returns and risk-sharing. But the returns have to be balanced against the risk-sharing purpose of the fund, which is why Jones’s explanation for the legislation is so concerning:

Today Jones still says the “accrual” provision for longtime lawmakers was fair, noting that legislators were required to pay 11 percent of their salary into the system even after they had reached their maximum pension benefit.

“I understood what it did,” he said. “You’re still paying a large percentage of your salary, and you get nothing for it.”

But it’s not nothing: the future health of the fund, stability in retirement for those who served less or made less money than Jones, not to mention a more reasonable replacement rate, i.e. under 100 percent. Pensions aren’t just about financial risk, they’re about societal risk, which is why some have suggested capping defined benefits, at, say, average state incomes.

Keep it in context, however: there aren’t vast populations of legislators pulling down six-figure pensions. In 2011, GARS was paying out monthly benefits of $8,001 and up to 35 people. The average was $4,349 per month, and the biggest cohort is the $1,001-2000 range. The problem isn’t that legislator pensions are going to sink the state—GARS paid out about $17 million in 2011, most of that at comparable rates to other public servants. It’s the most screwed-up pension fund in the state, but it’s also small, and thus easier to fix.

The concern, as I described it before, is broken-windows pension policing: the people in charge of the pension rules have the worst pension fund, and if Jones is any indication, an entirely wrongheaded understanding of what pension funds are for and how they work. It’s another reason that the implosion of the pension-fund reform bill is no surprise.

But it’s not entirely a bad thing. Whatever changes are made are sure to be challenged, though there’s a sweetner there, of course: “the major exception is judges, who were left out to increase the plan’s chance of withstanding a court challenge.” It was also hastily and clumsily handled; Rich Miller acknowledged that Tom Cross and even Mike Bost had a point about a lack of due diligence in negotiations. The uncertain future of the pension-reform bill should be less worrisome than the uncertain future of GARS.

 

Photograph: Chicago Tribune

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2 years ago
Posted by ChicagoGal

It's time for the Civic Committee of the Commercial Club to save the State by proposing cutbacks of business loopholes and incentives. And proposing a graduated income tax.
That's what a civic-minded prestigious organization would do.

2 years ago
Posted by Al Moncrief

ILLINOIS RETIREMENT SECURITY INITIATIVE PUBLISHES PAPER DEFENDING PENSION RIGHTS: “IN SUM, WELCHING IS NOT A LEGAL OPTION AVAILABLE TO THE STATE.”

The Illinois Retirement Security Initiative has published a very well-crafted and thorough legal analysis of the pension rights of Illinois’s public employees.

The paper, written by Eric M. Madir, notes that the Illinois Supreme Court has invalidated the taking of vested pension benefits from public employees based on both the Pension Clause and the Contracts Clause of the Illinois Constitution. “The court’s principal holding that the Pension Clause (and the Contracts Clause in the public pension context) is an absolute bar to legislative impairments or reductions in pension benefits” cannot be ignored.

The paper addresses the development of pension law in Illinois and other states, focuses on Illinois’s historical underfunding of its pension systems, and summarizes the past campaign for a constitutional pension protection provision in Illinois.

Here is an introduction to the paper by the Illinois Retirement Security Initiative:

http://www.ilretirementsecurity.org/reports?id=0059

Here is a PDF (76 pages) of the paper:

http://www.ilretirementsecurity.org/admin/reports/files/Pension-Clause-Article-Final.pdf


I gave the paper a quick read last night and was struck by the fact that it exclusively addresses the pension rights of current workers. The idea of taking of fully-vested benefits from retirees (Colorado’s pension theft target) is so far beyond the pale that it is not even contemplated.

Below are some excerpts from the paper (in no particular order) that I found interesting:

First a quotation:

“There is no moral exemption for any man or body of men that breaks contracts. Nor is there any hope of public or private respect for a contract breaker. A contract breaker is an utter misfit as a citizen or a business man.”

—Franklin MacVeagh, former President of the Commercial Club of Chicago and U.S. Secretary of Treasury.

Particularly relevant to the current Illinois Governor’s pension reform proposal is the following statement:

“An Illinois Appellate Court has explained that “the [government] cannot whipsaw citizens into ‘voluntarily’ choosing one of two means by which they will be divested of an existing property interest.”

“Public employees have paid their required fair share of pension costs; it is incumbent on the State to meet its end of the bargain.”

“These unfunded liabilities, though, are not the fault of public employees. Public employees have historically paid their fair share of the normal cost of benefits through payroll deductions. Rather, the liabilities principally stem from the State’s decades-long failure to make its required contributions to the five pension systems.”

“Illinois courts have long held that the General Assembly lacks the power to amend or repeal legislation that affects vested rights.”

“The Legislature and various governors chose for decades to use the pension system as a credit card to fund public services and stave off the need for tax increases or service cuts.”

“In sum, welching is not a legal option available to the State.”

From the case Felt v. Judges Retirement System: “The court ‘found that a contract clause violation was not defensible as a reasonable exercise of police power.’”

“These are the ill effects of decades of skipping pension contributions to avoid tax increases and service cuts—a circumstance Illinois Governor John Peter Altgeld described long ago as the “cost of [getting] something for nothing.”

From an Illinois Appellate Court decision in: Sklodowski v. State: “Once rights are created by the constitution or statute, ‘It is within the realm of judicial authority to assure that the action of members of the executive branch do not deprive [individuals] of an institution of rights conferred by statute or by the Constitution.’”

The paper includes a concept from the case Ziebell v. Forest Park Pension Fund that adds clarity to public employee pension rights where employee pension benefits have increased over time. An employee’s right to a pension benefit is protected where the employee made contributions to the pension system after an increase in a pension benefit takes effect (for example, Colorado PERA members have continued their pension contributions after past increases in the COLA benefit took effect, and therefore have a vested right to that statutory benefit.)

The paper cites an Arizona Supreme Court decision in Yeazell v. Capins. In that case, the court held that since pension benefit rights of public employees became “vested” upon accepting employment, the legislature could not later change those rights retroactively without the mutual assent of the employee. The court also held that the fact that the employee continued to work after the statutory change took effect could not be construed as employee acquiescence or a waiver of rights.

The Madir paper notes that even if Illinois’s pension funds were to default, pension recipients would have a cause of action to receive their pension benefits. “Pension recipients will receive their pension payments when due even if a pension fund defaults or is on the verge of default. Any state pension participant placed in such a position would have a cause of action in circuit court to enforce this guarantee and obtain payment directly from the State’s General Fund. A participant need not pursue payment before the Illinois Court of Claims and depend upon the largesse of the General Assembly.” The Illinois Supreme Court has held that “where a constitutional or statutory provision categorically commands the performance of an act, so much money as is necessary to obey the command may be disbursed without any explicit appropriation.”

Can legislatures breach contracts and blame it on a recession?

“Courts, though, “sit to determine questions on stormy as well as calm days,” and the Constitution was upheld during the Great Depression.”

“As the Oregon Supreme Court stated in a similar context, “Once offered and accepted, a pension promise made by the state is not a mirage (something seen in the distance that disappears before the employee reaches retirement).”

Call your public employee union representatives and ask them how they can support the tehfet of fully-vested retiree benefits in Colorado. Colleagues of our public sector union officials across the country are aggressively defending the pension rights of their union members. What has happened in Colorado is truly bizarre.

To follow developments in the Colorado pension theft lawsuit sign up as a Friend of Save Pera Cola on Facebook.

Have your friends sign up as Friends of Save Pera Cola. Copy this post and e-mail it to PERA members and retirees you know.

2 years ago
Posted by old and scared

The vast majority of these pensions are less than 35,000. Now remember we are not allowed to put in to social security. In addintion, the state often took holidays or put in lesser amounts as their share. Most state employees are not those with the bumps in later years gining them higher pensions. I also paid in 1/2% of salary each year for 22 years for a reduced health insurance option and now even an option to purchase a state supplemental health insurance is on the table. Where is the honestly and ethical treatment.

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