Senator Kyle
McCarter unveiled new hybrid pension reform plan: Comprehensive answer to
pension crisis
Springfield,
IL. – With progress on wide-ranging solution for Illinois’ massive public
pension debt crisis stalling out, State Sen. Kyle McCarter (R-Lebanon) offered
his own proposal on August 17, a special session day for the General Assembly.
McCarter said it’s a hybrid plan that offers a comprehensive approach affecting all five public pension systems, not just one or two systems that previously announced legislation included. In fact, some of the reforms approved at the end of the spring legislative session, May 31, have lost legislative support.
“My plan, in Senate Bill 3932, incorporates across-the-board improvements, more than any other proposal that has been discussed up to this point, and I invite the interested parties to work together to make it better,” said McCarter. “The legislation currently on the table, which is limited in scope, is simply not sufficient to properly address our growing pension crisis.”
Recent assessments put Illinois’ public pension debt at a staggering $83 billion, but Sen. McCarter said new rules that are to take effect in 2014 requires tougher assessment standards and under those pending rules, the true extent of Illinois’ public pension could top $120 billion.
“We are well past the point of further delay,” said McCarter. “My reform plan is pro-taxpayer; it relieves the next generation of the expensive pension burdens that have been placed on them by poor decisions in recent and past years, and it brings new ideas to what so far has been an imperfect pension debate.”
Under McCarter’s plan, all five public pension systems would be reformed. It leaves no category of state employee out of the reform. Estimated savings, based on a Senate GOP staff review, are projected to be from $125 to $150 billion over the next 30 years.
Provisions in the McCarter proposal include –
1) Benefit changes apply to all five state pension systems (JRS, GARS, SERS, SURS, TRS):
• Age 62 retirement age standard across all 5 state pension systems.
**For those SERS alternative formula workers in public safety classifications (Illinois Department of Corrections and Illinois State Police) may retire at age 55 but must pay for the 7 years of service up to age 62. Payment would be calculated and processed by SERS.
• Suspends Cost-of-Living Adjustments until the pension systems are 85% funded.
• If system(s) attain 85% level on Jan 1, Tier 2 COLA applies that given year to retirees.
• $110,000 pensionable salary cap – similar to the maximum allowed under Social Security ($100,000).
• All current Defined-Benefit (DB) participants’ benefits would be frozen at the effective date of the bill. Participants would then participate in a 401k plan going forward. Employee contribution 6% and employer contribution is 6% in the new 401k plan. The “freeze” and shift to Defined Compensation
• (DC) plan applies to Tier 1, Tier 2, and new hires. Each state pension system would set up its own DC plan.
• Increased employee pension contribution would be 6% on the DC side. Current DB employee contribution rates remain the same and go to the participant’s DB benefit.
• Newly-elected General Assembly members after 2012: no more GA pension system. New members go into the Defined-Compensation plan. Current Tier 1/Tier 2 members would participate in a new DC plan going forward. Current Tier 1/Tier 2 members would have their existing Defined-Benefit credit rolled into the DC plan. No required employer contribution in the General Assembly Retirement System DC plan. Plan would be set up by the General Assembly Retirement System (GARS).
2) TRS “Normal Cost” Shift to local school districts:
• 10 yr. phase-in.
• Years 1 and 2 would be ½% shift; years 3-10 would be 1% shift until the employer covers normal cost.
• No more local school district pension “pick up.”
• This can happen without a property tax hike if schools are allowed to lower the cost of operations.
3) Education Mandate Relief (K-12):
• Provide school district mandate flexibility-- language from HB 4711 filed in the 96th GA.
• Change Illinois law to meet the special education federal minimum; don’t go beyond it.
• Fully fund mandated categorical at Fiscal Year 2010 levels-- this funding is tied to cost shift. If no funding in given year, the cost shift stops.
• Repeal driver’s education mandate (See SFA#1 to SB 3022).
4) Education Outsourcing & other revisions (K-12):
• Competitive bidding process for all outsourced services for K-12 downstate/suburban school districts.
• Repeal P.A. 95-0241 – third party contracting notices.
• Allow districts to opt-out of Prevailing Wage and Project Labor Agreements (PLA’s) by vote of the local school board (See SB 2880 and SB 2881).
“This is a comprehensive plan but if we’re serious about reforming pensions, and I believe Illinois taxpayers who pay the bills want us to be serious, we need to act in a comprehensive way,” said McCarter. “This is sacrifice but it is also fiscally responsible; it’s fair, and it's common sense…
McCarter said it’s a hybrid plan that offers a comprehensive approach affecting all five public pension systems, not just one or two systems that previously announced legislation included. In fact, some of the reforms approved at the end of the spring legislative session, May 31, have lost legislative support.
“My plan, in Senate Bill 3932, incorporates across-the-board improvements, more than any other proposal that has been discussed up to this point, and I invite the interested parties to work together to make it better,” said McCarter. “The legislation currently on the table, which is limited in scope, is simply not sufficient to properly address our growing pension crisis.”
Recent assessments put Illinois’ public pension debt at a staggering $83 billion, but Sen. McCarter said new rules that are to take effect in 2014 requires tougher assessment standards and under those pending rules, the true extent of Illinois’ public pension could top $120 billion.
“We are well past the point of further delay,” said McCarter. “My reform plan is pro-taxpayer; it relieves the next generation of the expensive pension burdens that have been placed on them by poor decisions in recent and past years, and it brings new ideas to what so far has been an imperfect pension debate.”
Under McCarter’s plan, all five public pension systems would be reformed. It leaves no category of state employee out of the reform. Estimated savings, based on a Senate GOP staff review, are projected to be from $125 to $150 billion over the next 30 years.
Provisions in the McCarter proposal include –
1) Benefit changes apply to all five state pension systems (JRS, GARS, SERS, SURS, TRS):
• Age 62 retirement age standard across all 5 state pension systems.
**For those SERS alternative formula workers in public safety classifications (Illinois Department of Corrections and Illinois State Police) may retire at age 55 but must pay for the 7 years of service up to age 62. Payment would be calculated and processed by SERS.
• Suspends Cost-of-Living Adjustments until the pension systems are 85% funded.
• If system(s) attain 85% level on Jan 1, Tier 2 COLA applies that given year to retirees.
• $110,000 pensionable salary cap – similar to the maximum allowed under Social Security ($100,000).
• All current Defined-Benefit (DB) participants’ benefits would be frozen at the effective date of the bill. Participants would then participate in a 401k plan going forward. Employee contribution 6% and employer contribution is 6% in the new 401k plan. The “freeze” and shift to Defined Compensation
• (DC) plan applies to Tier 1, Tier 2, and new hires. Each state pension system would set up its own DC plan.
• Increased employee pension contribution would be 6% on the DC side. Current DB employee contribution rates remain the same and go to the participant’s DB benefit.
• Newly-elected General Assembly members after 2012: no more GA pension system. New members go into the Defined-Compensation plan. Current Tier 1/Tier 2 members would participate in a new DC plan going forward. Current Tier 1/Tier 2 members would have their existing Defined-Benefit credit rolled into the DC plan. No required employer contribution in the General Assembly Retirement System DC plan. Plan would be set up by the General Assembly Retirement System (GARS).
2) TRS “Normal Cost” Shift to local school districts:
• 10 yr. phase-in.
• Years 1 and 2 would be ½% shift; years 3-10 would be 1% shift until the employer covers normal cost.
• No more local school district pension “pick up.”
• This can happen without a property tax hike if schools are allowed to lower the cost of operations.
3) Education Mandate Relief (K-12):
• Provide school district mandate flexibility-- language from HB 4711 filed in the 96th GA.
• Change Illinois law to meet the special education federal minimum; don’t go beyond it.
• Fully fund mandated categorical at Fiscal Year 2010 levels-- this funding is tied to cost shift. If no funding in given year, the cost shift stops.
• Repeal driver’s education mandate (See SFA#1 to SB 3022).
4) Education Outsourcing & other revisions (K-12):
• Competitive bidding process for all outsourced services for K-12 downstate/suburban school districts.
• Repeal P.A. 95-0241 – third party contracting notices.
• Allow districts to opt-out of Prevailing Wage and Project Labor Agreements (PLA’s) by vote of the local school board (See SB 2880 and SB 2881).
“This is a comprehensive plan but if we’re serious about reforming pensions, and I believe Illinois taxpayers who pay the bills want us to be serious, we need to act in a comprehensive way,” said McCarter. “This is sacrifice but it is also fiscally responsible; it’s fair, and it's common sense…
Commentary:
“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” (Article XIII, Section 5 of the Illinois Constitution).
“The
Pension Clause not only makes a public employee’s participation in a pension
system an enforceable contractual relationship, but also constitutionally
protects the pension benefit rights contained in the Illinois Pension Code when
an employee joins a pension system... While the Clause bars
the General Assembly from adversely changing the benefit rights of current
employees via unilateral action, these rights are “contractual” in nature and
may be modified through contractual principles. In sum, while welching on
public pension promises is not an option for Illinois as some legal and civic
commentators have suggested, legitimate contract principles provide a solution
to mitigate this crisis” (Eric M. Madiar is the Chief Legal Counsel to Illinois
Senate President John J. Cullerton and Parliamentarian of the Illinois Senate.
B.A. Truman State University; J.D. Chicago-Kent College of Law).
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