House Bill 6258

Reforms for Tier 1 Members (current Public Employees and Retirees hired before 2011)

·         Cost-of-living adjustments apply only to the first $25,000 of the employees’ pension

·         That limit is reduced to the first $20,000 for employees eligible for Social Security

·         COLAs are delayed until the employee turns 67 or five years after retirement, whichever comes first

·         This applies to ALL Employees and Retirees who are currently receiving COLAs

Retirement age is increased by:

·         No increase for employees age 46 and older

·         One year for employees age 40 to 45

·         Three years for employees age 35 to 39

·         Five years for employees age 34 and younger

Employees would be required to contribute more toward their pensions by:

·         One percent during the first year the legislation is in effect (not before Fiscal Year 2014)

·         Two percent thereafter

·         Pensionable salary – the amount of salary that counts toward a pension – is limited to the higher of the Social Security wage base or the participant’s salary when the legislation becomes law

Reforms for Tier 2 Members (public employees hired since 2011)

·         All new employees in the Teachers Retirement System and State University Retirement System are placed in a cash balance plan

·         Employees are guaranteed a minimum defined benefit but employers have predictable costs and are protected from investment risk -- this combines the [so-called] “best” features of defined-contribution (or 401(k)) plans and defined-benefit plans

·         Local school districts can negotiate the generosity and cost of the benefit with employees

·         TRS and SURS employees hired before the effective date can choose to remain in Tier 2 or join the cash balance plan*

·         COLAs for General Assembly Retirement System members will match those of Tier 2 members in the other pension systems

Ensuring the Benefit Will Be There: Employer Contributions and Funding Guarantees

·         Schools and colleges/universities will assume employer costs at a rate of 0.5 percent of payroll per year, with the state still responsible for all previously incurred costs

·         Employer contributions will be on a 30-year level-funding plan to achieve 100 percent funding

·         Employer contributions will be enforced through court action or intercept of other state funds [but isn’t the employer (the state) shifting the normal costs to schools and colleges?]

·         Revenue currently being used to repay pension obligation bonds will be used to pay down unfunded liability once the pension obligation bonds are paid off

·         This amounts to $693.5 million per year beginning in Fiscal Year 2016, plus an additional $900 million per year beginning in FY 2020, plus $1.1 billion per year beginning in FY 2034

Sponsors of the 228-page House Bill 6258:  Elaine Nekritz - Daniel Biss - David Harris - Chris Nybo, Kelly Burke, Kelly M. Cassidy, William Cunningham, Robyn Gabel, Ann Williams, Linda Chapa LaVia, William Davis, Sara Feigenholtz, Jehan A. Gordon, Greg Harris, Elizabeth Hernandez, Charles W. Krezwick, Karen May, Deborah Mell, Cynthia Soto, Michael J. Zalewski and Cory Foster.

A Commentary (reprise):

The theft of the public employees’ pension

Many Illinois citizens are aware that state legislators have not fully funded the public pension systems throughout the years; that instead of paying into the pension systems, they have used that money to pay for other services. Thus, without having to pay for services, state legislators have created an enormous pension debt or unfunded liability for the public pension systems in Illinois.

The “Pension Ramp” (Public Act 88-0593), or the repayment schedule of 1995, has also greatly increased the total pension debt or unfunded liability and needs to be re-amortized, though legislators continue to ignore this most significant issue...

“If retirement benefits and salary increases were the only drivers of the unfunded liability, the state retirement systems would be about 94 percent funded today [because public employees’ benefits are not overly generous]” (Ralph Martire, Center for Tax and Budget Accountability).

Approximately one-third of the total pension payment each year is for “normal costs” to the system; the other two-thirds of the payment is the interest owed on the debt the state incurred for not fully funding the pension systems.

To transfer the “normal costs” of the Teachers’ Retirement System to school districts is to eliminate the state’s role in providing income retirement security for its public employees. Because “the State has the primary responsibility for financing the system of public education” (Article X, Section 1 of the Illinois State Constitution), one might ask whether teachers are considered part of that “system of public education?”

Though state legislators appear to be quite focused like salivating pit bulls attached to the pension legs of public employees, state legislators continue to ignore the essential fact that current revenue growth does not match the state’s need for public services and for payment of debts.

The State of Illinois uses a “flat, low-rate income tax that does not adequately capture income growth, and income tax revenues thus routinely lag behind economic growth. The state relies heavily on a state and local sales tax that is almost exclusively applied to goods and excludes almost all services…

“Because Illinois is chronically short of the revenues it needs to cover its expenses, it has engaged in a number of poor fiscal practices over the years. It has postponed payments to vendors, failed to make adequate pension contributions or borrowed money to make the contributions, securitized [sic] or sold assets, and taken other dubious actions” (the Center on Budget and Policy Priorities).

Besides the Center for Tax and Budget Accountability and the Center on Budget and Policy Priorities, Illinois revenue restructuring and not "pension reform" (or breaking a contract) is recommended by the Chicago Metropolitan Agency for Planning, the Institute on Taxation and Economic Policy, the National Council of State Legislatures, the Economic Policy Institute, the Center for Policy and Economic Research, the National Association of State Retirement Administrators, the National Institute on Retirement, and United for a Fair Economy.

The Illinois General Assembly (GA) apparently does not listen to the aforementioned reputable organizations; however, the GA does listen to the Civic Committee of the Commercial Club of Chicago (Illinois Is Broke), the Civic Federation, the Chicago Tribune, the Illinois Policy Institute, Americans for Prosperity, and their breed.

Cutting pension benefits for public employees, through so-called “pension reform,” will not solve the state’s budget deficits. Creating and passing any bill that diminishes “promised” benefits, such as the compounded cost-of-living adjustment that is already in place for retired and current teachers, is a breach of contract and trust. It’s a discriminating and unjust forfeiture and theft of one particular group of people in Illinois, and it’s legally and morally wrong.

Though the State of Illinois has a serious pension debt and revenue problem that must be rectified, legal and moral sense dictates that the Illinois General Assembly must align with the U.S. and State Constitutions and sanction the vested rights of its middle-class public employees. Policymakers must also understand the economic impact on Illinois if so-called “pension reform” should pass.

The state’s constitutional provision, Article XIII Section 5, protects current employees and retirees. This latest “pension reform” bill proposal is an attempt to break a constitutional contract.

It is a matter of moral and legal concern for every citizen of Illinois to pay attention to any proposed violations of rights and benefits of the state’s 693,000 public employees. It should be of vital concern for all citizens that the government of Illinois would want to prove its contracts are worthless, especially when the “most basic purposes of the impairment [of the contract] clause [Article XIII, Section 5] as well as notions of fairness that transcend the clause itself, point to a simple constitutional principle: government must keep its word” (Laurence H. Tribe, American Constitutional Law).

HB 6258 is just another pilfering reform. Most everyone realizes this, perhaps even some of the liars and thieves who continue to propose irresponsible, illegal and unethical legislation.

*P.S.  A Cash Balance Plan is a 401 (k) scheme that is profitable for pension-consulting companies and employers, contract and pension lawyers and actuaries, but is not as profitable and cost-effective as the current traditional defined-benefit pension plan.   For an analysis of Cash Balance Plans, please read John Dillon’s Cash Balance Plans.