Tuesday, March 13, 2012

HB 5754 by Representative Mike Fortner (a Rebuttal)

One factor in the budget crisis facing Illinois is the cost of the state pension systems: the cost of our pension systems is growing faster than the revenue we take in, and left as it is cannot be sustained even with new revenue.  A lot of reporting has gone into the unfunded liability of over $80 billion. The unfunded liability is due to both underfunding by legislatures over many decades and changing actuarial assumptions which make existing plans more expensive than when many of the formulas were set in place. But even with no unfunded liability we would still be faced with current costs that grow faster than our revenue can keep up. To address this problem of increasing cost I presented House Bill 5754 to the House Personnel and Pensions Committee last week, and I outlined the three major elements in this proposal that would help create a sustainable pension system.

The first element of the proposal defines a maximum pensionable salary for all employees. Employees hired after January 1, 2011 already have a maximum defined by law which is currently about $110,000 and increases each year based on inflation. This plan would define a maximum for employees hired before that date to be the greater of their current contractual salary when the law is passed or the defined maximum for newer employees. Employees earning below the maximum would not see any change in their benefits at retirement. Higher income employees would qualify for a hybrid plan.  The portion of income earned above the maximum would qualify for a self-managed pension fund (like a 401k) with the employee contributing 6% and the employer contributing 3%.
The next element offers employees covered by all five systems the option of switching to a defined contribution system copied from the plan that has been in place for SURS for over a decade. If employees elect this option they will contribute 8% and the state will contribute 7.1% of salary up to the defined maximum salary into a self-managed plan, and income above the salary maximum is covered as with the hybrid plan above. This could be an attractive option for employees who have earned pensions outside of the state systems or who may want to receive social security benefits on income on other employment that is currently restricted.

The final element addresses changes in the value of the pension benefit for those employees who wish to keep their existing defined benefit plan. Currently the state assumes the entire risk of changes in value of the pension and this is a significant cause of the increased cost of the pension systems. The value is generally measured as the normal cost as a percent of the employee’s salary. As an example the normal cost in SURS has risen from 15.1% to 22.1% over the last 14 years, and since the employee share has remained fixed at 8%, the state has had to assume all of the increase in contribution.  This proposal would share the risk by having the state split the normal cost 50-50 with the employee. For teachers in TRS this would have little impact, since they are already paying 9.4% instead of the 9.5% which is half their normal cost. The employees in SURS would see their contribution increase by about 3%.
Should this proposal become law, a detailed actuarial calculation for SERS estimates a savings to the state of $115 million a year. Extended to all five pension systems, that becomes a savings of roughly $400 million a year. More importantly, the rate of growth of the state’s payments would stabilize to something that better matches our existing revenue. Even though this proposal isn’t designed to address the unfunded liability, it could also decrease our total overall liability by $10 to $20 billion depending on the number of employees who take the optional self-managed plan. This package of proposals would put us well on our way to fixing the state’s pension crisis while also respecting the benefits that are constitutionally guaranteed to current employees.

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