Thursday, July 4, 2013

Pension committee hears wide range of proposals yesterday

The conference committee on pension reform held its second public meeting Wednesday and heard from people touting dramatically different solutions to the issue ranging from no benefit cuts to scrapping the state's defined benefit plan and indefinitely suspending all cost-of-living adjustments (COLAs) for retirees. Ways to increase revenue, tax policies and changing the pension ramp also were discussed.

Senator Kwame Raoul (D-Chicago), chairman of the conference committee, stated that there is no way for the committee to meet Governor Pat Quinn's deadline of next Tuesday (July 9) to have a plan ready for a vote. Quinn has called a Special Session for Tuesday, when legislators are expected to take action on the governor's amendatory veto of a concealed carry bill. Quinn wanted to pass a pension plan next week, but Raoul said even when there is a plan that a majority of the 10-person committee supports it will take a couple more weeks to get actuarial data regarding the plan.

One concept that appears to be currying favor with the committee is a proposal laid out by university presidents. Southern Illinois University President Glenn Poshard told the committee that the plan has the backing of every university in the state and would provide full funding for the State University Retirement System (SURS) in 30 years. Poshard termed the university plan "shared sacrifice" to stabilize the pension system. Elements of the plan, called the "Six Step Plan," included:

  • Increasing employee contributions by 2 percent (from 8 percent to 10 percent) at a rate of ½ percent per year for four years;
  • Adjusting the compound COLA for retirees to ½ of the Consumer Price Index (CPI);
  • Placing new employees into a hybrid pension system that is a combination of the defined benefit and defined contribution plans;
  • Changing the way to calculate the effective rate of interest used to determine a range of benefits, refunds and service credits set each year by the SURS Board and the State Comptroller;
  • Shifting the normal pension costs from the state to universities at a rate of ½ percent per year; and
  • Ensuring that the state and/or universities make their payments into the pension system

While the plan proposed by the university presidents was specifically for SURS, its main components may provide part of the framework for any possible plan crafted by the committee for the state's other four pension systems, including the Teachers' Retirement System (TRS), the State Employees Retirement System (SERS), the General Assembly Retirement System (GARS), and the Judges Retirement System (JRS), which has been left out of most legislative proposals to date.

Ralph Martire of the Center for Tax and Budget Accountability shows there is a path without benefit cuts

The most interesting discussion centered on the testimony by Martire, the executive director of CTBA. Martire laid out a plan to re-amortize the pension debt by the state using a flat annual payment of about $6.9 billion stretched out over 44 years to reach 80 percent funding of the pension systems.

The current law, known as the Edgar pension ramp, calls for 90 percent funding by 2045 with rapidly escalating annual payments. The Madigan proposal called for 100 percent funding in 30 years. Martire said neither of those ramps was feasible given Illinois' fiscal structure and that 80 percent funding would put the Illinois pension systems in good shape. They currently are funded at about 40 percent.

Rep. Elaine Nekritz (D-Northbrook), who has been the lead person promoting Madigan's plan, challenged Martire, saying that fiduciaries and actuaries of the pension systems want 100 percent funding and that anything less would leave the pension systems in a precarious situation. Martire responded by saying the Congressional Budget Office uses 80 percent as a standard for the funding of a pension system.

"It's not what actuaries would prefer, but it is a path that will work. You can't let perfect be the enemy of good," Martire said. "Extending it out really solves the problem without benefit cuts."

Martire also said the CTBA did not use cuts to pension benefits as part of its formula because their analysis indicated that those cuts would be unconstitutional. He noted that Illinois, along with New York, Arizona and Alaska have the strongest pension protection language in their constitutions, and that Arizona's legislation to require employees to pay 2 percent more was recently ruled unconstitutional. He also said that Illinois cases, including the 1985 Felt v. Board of Trustees case, supported the strong pension protection clause in the Illinois constitution.

The CTBA study showed that through 2045, the cost of Martire's plan would be $111 billion less than the current pension ramp and that even considering the cost of extending the payments another 14 years the state would save $2 billion. He said that under his plan the pension systems would be funded at about 72 percent by 2045 and would be well above 80 percent by 2059.

"This plan is unquestionably constitutional and fits in the context of the state's fiscal system. Debt service is very much the driver," Martire said, noting that 80 percent of the state's unfunded pension liability is from debt service caused by the state's failure to make its payments as opposed to the normal pension costs. "We focused our reform right there on the debt service."

Martire also warned that because of the diminished pension provisions provided for Tier 2 employees (those hired after January 1, 2011), the state likely will have to change that system or run afoul of the federal Social Security requirements. Teachers and many other public employees currently are not eligible for Social Security benefits.

In stark contrast to Martire's testimony, Ted Dabrowski, vice president of policy for the Illinois Policy Institute (IPI), proposed a plan that he said is the only way to address the state's pension problems. He said that Moody's, using a new way of estimating the cost, recently estimated that Illinois' unfunded pension liability is more than $200 billion instead of the current estimate of $95 billion. The IPI plan would:

  • Freeze define benefits going forward and replace the state's defined benefit program with a defined contribution plan whereby the state would contribute 7 percent and an employee would contribute 8 percent into an account that would be managed by the employee similar to a 401k plan.
  • Suspend the pension COLA of retirees indefinitely, or until the pension systems are 100 percent funded, which Dabrowksi said is similar to a plan implemented by Rhode Island.
  • Raise the retirement age to 67 for new employees and incrementally raise the age for current employees based on their years of service and age.
  • Shift the normal pension costs to school districts, colleges and universities.

The committee ended testimony Wednesday and then broke into two caucus groups, one headed by Raoul and the other by Nekritz. The committee is scheduled to hold another public meeting at 3 p.m. Monday (July 8) in Springfield.

Committee holds second public meeting; another set for Monday

from Capitol Watch

Diane L. Hendren
Chief of Staff/Director of Governmental Relations
Illinois Association of School Administrators    

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