* Gino L. DiVito and John M. Fitzgerald asked if I’d publish a “short” legal analysis of Eric Madiar’s latest pension reform idea. It ain’t exactly short, but it is interesting…
We were honored to represent Doris Heaton and certain other plaintiffs in Heaton v. Quinn, the litigation that resulted in a unanimous opinion by the Illinois Supreme Court which invalidated Public Act 98-0599 (Senate Bill 1). As attorneys who have a longstanding interest in protecting the pension rights of public sector employees in Illinois, we deeply appreciate the legal scholarship of Eric Madiar. Mr. Madiar is an outstanding lawyer and legal scholar, and his analysis of the Pension Protection Clause of the Illinois Constitution (Art. XIII, § 5) is mandatory reading for anyone who wants to understand that constitutional provision.
Mr. Madiar recently authored an article for the Illinois Public Employee Relations Report with the title, “Illinois Public Pensions: Where To From Here?” The article combines Mr. Madiar’s exhaustive and illuminating legal analysis with bold prescriptions for pension reform. One of those bold ideas, however, gives us pause. Mr. Madiar ascribes a certain pension reform proposal to Illinois Senate President John J. Cullerton and explains it as follows:
The proposal offers Tier 1 employees in the three largest State pension systems—TRS, SURS, and SERS—a choice of either agreeing to a lower annual annuity increase (i.e., “COLA increase”) or rejecting the requested change. Specifically, the legislation provides an election process wherein Tier 1 employees are expressly asked in the legislation to agree to waive their right to the current annual 3 percent compounded COLA increase they would otherwise receive in retirement, and instead receive the Tier 2 COLA increase. The Tier 2 COLA increase would annually increase a participant’s retirement annuity amount by the lesser of 3 percent simple or half the rate of inflation, and delay the receipt of those increases to the earlier of five years after retirement or age 67.
Tier 1 employees who agree to the lower COLA increase will receive, at a minimum, one item of legal consideration for giving up their current compounded 3 percent COLA. In the legislation itself, the State expressly and irrevocably promises, as an employer, to never offer future salary increases on a nonpensionable basis. The waiver of this right creates a new legal detriment on the State, as an employer, that benefits employees who accept the offer.
Tier 1 employees who reject the COLA change will continue to keep their current annual 3 percent compounded COLA increases in retirement. For these employees, however, the State will exercise its legal right as an employer and only offer all future salary increases to these employees on a nonpensionable basis. Put differently, a Tier 1 employee rejecting the COLA change will still be offered salary increases in the future, but only on the express condition that the increases, if accepted, will not apply in the calculation of the employee’s pension at retirement.
While we appreciate that bold and creative ideas are necessary to address the problem of pension system underfunding, this particular idea could not withstand judicial scrutiny. As described in Mr. Madiar’s article, the Cullerton proposal would force upon pension system members a choice between two diminishments of their constitutionally protected pension rights. The fact that a “choice” is offered does not matter. Either “choice” would be a pension diminishment and a violation of the Pension Protection Clause of the Illinois Constitution.
As the Illinois Supreme Court has explained, “once an individual begins work and becomes a member of a public retirement system, any subsequent changes to the Pension Code that would diminish the benefits conferred by membership in the retirement system cannot be applied to that individual.” In re Pension Reform Litigation (Heaton v. Quinn), 2015 IL 118585, ¶ 46; see also Kanerva v. Weems, 2014 IL 115811, ¶ 38; Jones v. Municipal Employees’ Annuity & Benefit Fund of Chicago, 2016 IL 119618, ¶¶ 36-47.
Applying this constitutional rule, our courts have repeatedly invalidated amendments to the Illinois Pension Code that would change the calculation of a pension system member’s pensionable salary so as to diminish that member’s pension benefits. In Heaton, the Illinois Supreme Court invalidated legislation which, among other things, “cap[ped] the maximum salary that may be considered when calculating the amount of a member’s retirement annuity.” Heaton, 2015 IL 118585, ¶ 27 (describing P.A. 98-0599). Likewise, in Felt v. Board of Trustees of Judges Retirement System, our Supreme Court invalidated legislation that changed a judge’s pensionable salary from the “salary of the judge on the last day of judicial service” to “the average salary for the final year of service as a judge.” See Felt, 107 Ill. 2d 158, 161-63 (1985). Likewise, in Kraus v. Board of Trustees of Police Pension Fund of Village of Niles, the Illinois Appellate Court held that a police officer on disability could not constitutionally be denied his right under the Pension Code to “receive a pension of one half the salary attached to his rank for the year preceding his retirement on regular pension.” While the Pension Code had been amended so as to change that formula, that Pension Code amendment could not be applied to the officer because it was enacted after he joined the pension system. See Kraus, 72 Ill. App. 3d 833, 843-51 (1979). In other words, it is clear that variables in the pension formula that are tied to a pension system member’s salary cannot be changed to that member’s detriment after he or she has joined the pension system.
But the Cullerton proposal would do exactly that. In Mr. Madiar’s words, pension system members who choose not to “agree” to a diminishment of their COLAs (or, more accurately, statutory “automatic annual increases” in the pension annuity) would be offered future salary increases only “on the express condition that the increases, if accepted, will not apply in the calculation of the employee’s pension at retirement.”
Under existing law, pension system members’ salary increases are factored into the formula that is used to calculate their pension annuities. By way of example, under section 16-121 of the Pension Code, a TRS member’s salary is defined as the “actual compensation received by a teacher during any school year and recognized by the system in accordance with rules of the board.” That “actual compensation” will incorporate any salary increases a teacher has earned over the course of his career, and that teacher’s “salary” will be a variable in the formula used to determine his pension annuity. The Cullerton proposal would change the formula to freeze a pension system member’s pensionable salary as of the date he refused to “agree” to another pension diminishment. Thus, section 16-121 would presumably be amended to define a TRS member’s “salary” as something less than his or her “actual compensation” if that TRS member refused a COLA reduction. Under the Cullerton proposal, a TRS member’s “salary” would instead be his “actual compensation” as of the date he turned down the COLA-reduction option, not the “actual compensation” he subsequently “received.”
Such a pensionable salary freeze does not stand on any different footing from the pensionable salary changes that were held unconstitutional in Heaton, Felt and Kraus. The principle is simple: One’s pensionable salary is a key variable in the pension formula. A pension system member currently enjoys the right to have any future salary increases factored into his or her pensionable salary. The Cullerton proposal would change that statutory formula so as to freeze pensionable salaries as of a date certain and thereby reduce pensions. That is a violation of the Pension Protection Clause of the Illinois Constitution.
Of course, public sector employers generally may simply decide not to give their employees a raise. But that is beside the point. The Cullerton proposal would diminish pensions by changing the way the Pension Code calculates pension annuities; specifically, by freezing one’s pensionable salary as of a date certain. That is not permitted by the Pension Protection Clause.
Mr. Madiar concedes that Illinois decisions have “invalidated legislation that unilaterally narrowed the statutory definition of pensionable salary,” but he argues that none of those decisions “involved an express offering of future salary increases on a non-pensionable basis” (emphasis in original). To us, that is a distinction without a difference. Changing the law to provide that future salary increases will not count towards one’s pensionable salary constitutes a diminishment of one’s constitutionally protected pension rights. Such a change would suffer the same fate as other changes to the Pension Code’s formulation of one’s pensionable salary.
Nor is the outcome different simply because a pension system member is given a “choice” between two alternative pension diminishments. Mr. Madiar argues that a diminishment of pension rights may be constitutionally valid if it is part of a “bargained-for exchange.” This argument may have persuasive force if a pension system member is being offered some new benefit in exchange for surrendering a pension right. In the Cullerton proposal, however, there is no new benefit. Under that proposal, at best, a pension system member is permitted to keep the current statutory treatment of his or her pensionable salary.
Mr. Madiar relies heavily on Carroll v. Grumet, 281 A.D. 35, 36-38 (N.Y. App. Div. 1952). But in that case, a New York City firefighter was offered a “cost of living bonus” and agreed, apparently from the outset, that this new benefit would never count towards his pensionable salary. We believe Carroll is distinguishable. Unlike the plaintiff in Carroll, who apparently never had a legal right for the “cost of living bonus” to be counted towards his pensionable salary, members of Illinois public sector pension systems have an existing legal right for any salary increases that they may earn between now and their retirement to be factored into their pensionable salary. We should add that Kanerva counsels against overreading the holdings of New York decisions in this area. See Kanerva, 2014 IL 115811, ¶ 52 (agreeing with the Hawaiian Supreme Court’s holding that a certain New York decision interpreting the New York Constitution’s pension protection provision was “distinguishable and unpersuasive”). We see no reason to believe that the Illinois Supreme Court would adopt the expansive reading of Carroll suggested by Mr. Madiar.
Mr. Madiar also argues that the “choice” imposed on pension system members by the Cullerton proposal is not tantamount to duress. Even if true, that point would be irrelevant. If both options presented by the Cullerton proposal are unconstitutional pension diminishments, then the proposal would be invalid regardless of whether it constitutes duress in the legal sense.
In conclusion, we applaud Mr. Madiar for his continued scholarship on this crucial legal subject. We also agree that creative ideas will be necessary to address the chronic problem of pension system underfunding in this State. We strongly believe, however, that this particular proposal is unconstitutional.
About the authors: Gino L. DiVito and John M. Fitzgerald are partners at the Chicago law firm Tabet DiVito & Rothstein LLC. Mr. DiVito is a retired justice of the Illinois Appellate Court.
- Oswego Willy - Monday, Jul 25, 16 @ 2:00 pm:
I guess Rauner’s stopgap deal… where does that leave this?
- Norseman - Monday, Jul 25, 16 @ 2:01 pm:
Does this mean that the plaintiffs get a discount when the lawsuit is filed since a good start on a brief is here?
- RNUG - Monday, Jul 25, 16 @ 2:02 pm:
Pretty much what I’ve been saying, but they added the specific case citations.
- Mama - Monday, Jul 25, 16 @ 2:02 pm:
“Tier 1 employee rejecting the COLA change will still be offered salary increases in the future, but only on the express condition that the increases, if accepted, will not apply in the calculation of the employee’s pension at retirement.”
This is clearly diminishment.
- Amalia - Monday, Jul 25, 16 @ 2:02 pm:
Gino is very good.
- Mama - Monday, Jul 25, 16 @ 2:04 pm:
Anyone would be a fool to agree to diminish one’s pension for a temporary raise.
- Oswego Willy - Monday, Jul 25, 16 @ 2:05 pm:
My Kitchen Cabinet of - AA -, - Norseman -, and I’d hope via Diet Coles and… - RNUG -…
That’s how stuff like this stops getting too far.
Ugh.
- Formerly Known as Frenchie M - Monday, Jul 25, 16 @ 2:05 pm:
I’ve always assumed that the new method Rauner will zero in on will be a kind of benefit extortion.
Something to the effect of: Reduce all vacation days to 10. Doesn’t matter if you’ve just started or you’ve been with the state for 20 years. You get 10 vacation days.
If you go from Tier 1 to Tier 2 — you’ll get additional vacation and additional raises.
If you don’t accept Tier, you’ll stay forever at 10 vacation days and receive no raises.
- m - Monday, Jul 25, 16 @ 2:11 pm:
“Of course, public sector employers generally may simply decide not to give their employees a raise.”
Start with that. Then offer everyone a new job (with same responsibilities) that requires the voluntary acceptance of switching to Tier II. Keep your current job and salary and pension, or terminate that job and accept the new position with raises and Tier II.
- Anonymous - Monday, Jul 25, 16 @ 2:11 pm:
Duh. But glad someone pointed out the obvious.
- Illinidem - Monday, Jul 25, 16 @ 2:12 pm:
Whenever they pass these pension reform bills they need to give original jurisdiction time the IL Supreme Court so we can get everything over and done with and on to the next bill if ruled unconstitutional. At the end of they day they will probably just need to offer pension buyouts.
- Jerry - Monday, Jul 25, 16 @ 2:12 pm:
DiVito and Fitzgerald are exactly right.
Look, Illinois pensions are a liability. But not paying other bills is also a liability.
Hey, if these pensions are so badly funded, then why did the Legislature (and the Governor) reduce income taxes last year? Maybe it’s time to actually pay for the government you purchased.
- Honeybear - Monday, Jul 25, 16 @ 2:14 pm:
RNUG, honestly I don’t know how you do it. I read a paragraph of this stuff and my eyes roll back into my head. I have great admiration for all you legal and financial types that can hold interest and figure this stuff out. I appreciate you.
- formerpro - Monday, Jul 25, 16 @ 2:16 pm:
Thanks for posting this, Rich. Some politicians are still in denial. The Supreme Court order was to pay up. Period. What is even harder for politicians to get their heads around is that paying a higher amount NOW is cheaper than paying less now and taking longer to pay. Finance 101, people!!! The Supreme Court has been pretty clear that they won’t tell the Legislature how to fund the pensions, just so long as the promises made to employees are kept.
- Six Degrees of Separation - Monday, Jul 25, 16 @ 2:16 pm:
- m -, Tempting solution, but don’t think this would fly. Smacks too much of the “fire them all, and re-hire under new terms” that would be a violation of US labor law as well as likely not passing constitutional muster.
- Precinct Captain - Monday, Jul 25, 16 @ 2:17 pm:
Interesting stuff. The Cullerton model of pension reform always tied a legal argument to a political one. If you got buy in from labor and employees, you solve the legal argument by preempting a challenge. But the state plowed ahead the other direction and now there is no reason for unions not to fight for all of what they were promised.
- Anonymous - Monday, Jul 25, 16 @ 2:17 pm:
I am not surprised by this analysis. Hopefully, the Guvna’ will read it.
- Old and In the Way - Monday, Jul 25, 16 @ 2:23 pm:
“M”
The US Dept. of Labor would step in and stop this sort of subterfuge. It’s illegal on any number of statutes never mind the pensions.
The lack of an option to not accept ANY changes exposes the Cullerton proposal as coercive. It’s a choice between two diminishments on it face. Let’s face it pretty much any plan to save a lot of money on pensions comes at the expense of the pensioner and is in fact a diminishment. When will the legal geniuses in the Illinois General Assembly finally accept the reality that their only option is to pay up?
- Norseman - Monday, Jul 25, 16 @ 2:24 pm:
The legal arguments by DiVito and Fitzgerald with a concurrence by our own expert, RNUG, speak for themselves.
While my previous comment was a little tongue-in-cheek, this or something extremely similar will pass. The Chicago tie-in is an imperative that unites most of the Dems with the Raunerites.
Secondly, from a practical standpoint. Who is really expecting a salary increase during the next 4 to 5 years. MC’s, with a few exceptions related to promotions or other special circumstances, haven’t had a pay raise for 10 years. Given the horrible budget, raises don’t seem likely. Tier 1’s within striking distance of retirement will really have no incentive to give up their AAI.
Finally, the guaranteed winners in this issue are the lawyers involved in the litigation.
- SAP - Monday, Jul 25, 16 @ 2:26 pm:
==Of course, public sector employers generally may simply decide not to give their employees a raise.== I think the authors are correct, and it looks like the only consideration model that could work is offering either continued AAI’s or future raises. Unfortunately, that is a less attractive choice than the keep your AAI if you agree that future raises will not count toward your pension offer.
- DuPage - Monday, Jul 25, 16 @ 2:30 pm:
@-m-2:11
The pension system in Illinois goes by your earliest employment covered by the pension system. Thus firing all the tier one employees and hiring them back, they would all automatically be tier one all over again.
As Jim Edgar has said, we have to pay the pension payments.
- Consideration - Monday, Jul 25, 16 @ 2:31 pm:
Even if you were to fire and re-hire - - once you are tier 1, you are always tier 1 - can’t change that…
A true consideration that would be constitutional and save money would be to offer employees something substantial (that isn’t necessarily financial) for changing terms to a lower AAI.
An example would be additional vacation days (2x what someone currently earns) or fewer hours for the same salary (a 30 hour week vs 37.5). One of the options would have to be to keep the current plan, however.
- LessAnon? - Monday, Jul 25, 16 @ 2:33 pm:
At the risk of immediate “not again” responses, I wonder if the only remaining solution is one more “early-out” opportunity to get long-time employees closer to retirement off the books to bring in newer, cheaper youngsters that automatically start in the “reformed” pension system. You would likely lose a lot of institutional knowledge for sure. But it appears there may be no “reforming” pensions in any way of those already working. So, cut losses and move on. In the current budget environment, more might opt out than continue in the circus.
- RNUG - Monday, Jul 25, 16 @ 2:34 pm:
- Honeybear -
I had to do lots of project planning in my former career. It was all about the details. I wrote quite a few RFI/RFP/RFQ’s. I had to read all the responses plus the final contracts looking for the missed items and loopholes! Getting that right is more draining than reading statutes and court decisions.
Law is more or less the same thing; it’s about past practice and the specific details. I’ve been reading about pensions, and specifically State of Illinois pensions, since about 1980. I feel I know a bit about that subject … and some about the related area of contracts. I didn’t even have to look up the citations in the above DiVito / Fitzgerald article because I had already read most of them; I was nodding my head as I read it.
Beyond that, I may know enough to be dangerous … that’s why I have a family law lawyer and use him as needed.
- Ron - Monday, Jul 25, 16 @ 2:36 pm:
No raises is the obvious answer. The of Illinois can’t afford to have the highest tax burden in the nation. We have one of the worst unemployment and job growth rates now. We are losing population faster than all states but West Virginia, which is a dump.
- Ron - Monday, Jul 25, 16 @ 2:37 pm:
Lol@ the author of this “analysis”. Can’t stop math folks
- Stones - Monday, Jul 25, 16 @ 2:38 pm:
The house will never offer a bet…er deal…that doesn’t benefit them (i.e. Diminishment). Might as well just live up to their obligations.
- RNUG - Monday, Jul 25, 16 @ 2:44 pm:
== Lol@ the author of this “analysis”. Can’t stop math folks ==
The legal and the math say the same thing … pension funds have to be paid in to!
- OldIllini - Monday, Jul 25, 16 @ 2:44 pm:
Think about what the Cullerton plan would do to the University of Illinois, one of the top research universities in the world, by decimating faculty ranks. UIUC faculty come here from many countries, including the US, and they will stay unless they get a better offer. Such offers would be abundant after enactment of the Cullerton plan. Playing games with vacations won’t work, because faculty do not get vacations. It would be best to simply pay the pension bill.
- Now What? - Monday, Jul 25, 16 @ 2:46 pm:
Excellent analysis, thank you! Tier 1 is what it is, and there’s no way around it. Tier 2 is the hornet’s nest, and while employees knowingly signed on, the Safe Harbor issue will be a problem of a different variety for Illinois in 30 years.
- Cubs in '16 - Monday, Jul 25, 16 @ 2:47 pm:
===Start with that. Then offer everyone a new job (with same responsibilities) that requires the voluntary acceptance…===
“Requires the voluntary acceptance” is an oxymoron.
- Federalist - Monday, Jul 25, 16 @ 2:49 pm:
At one time Mr. Madiar had some credibility.
That is no longer the case.
- City Zen - Monday, Jul 25, 16 @ 2:55 pm:
@Ron - Or the state could implement 2 two-tiered pay schedule. Since a Tier 2 employee’s overall compensation is lower due to Tier 2 pension rules, there’s a valid argument to offer Tier 2 employees raises on one schedule and leave the Tier 1 pay schedule relatively frozen. The argument being it costs more to fund a Tier 1 pension and that more money for raises has to be diverted to fund the more expensive Tier 1 pensions. Of course, that would require actually funding the pensions.
I believe Palatine SD15 (the home of the proposed 10 year teacher contract) has two pay schedules, albeit the reverse of what I proposed here. This is probably the future for most levels of government as they attempt to reign in employee costs.
- Formerly Known as Frenchie M - Monday, Jul 25, 16 @ 3:00 pm:
Questions that I never see asked (or answered):
How many employees are in Tier 1? And how many are in Tier 2?
And what’s the average age of Tier 1?
- Anonymous - Monday, Jul 25, 16 @ 3:09 pm:
I wonder how many more years we’ll still be talking about how to duck out of our financial obligations to those who serve us while the bill keeps getting higher by the day? Bets out there? 2-5-10 years?
- jeffinginChicago - Monday, Jul 25, 16 @ 3:22 pm:
Cullerton’s first proposal was the only Constitutional one. Pay raises are not guaranteed. That seems unpalatable, but all that is left.
- SecondGear - Monday, Jul 25, 16 @ 3:27 pm:
Until some sort of plan is developed for the current employees shouldn’t there be a consideration of giving all new employees a defined contribution retirement plan? At least then we can start using a system that isn’t a problem in the future.
- facts are stubborn things - Monday, Jul 25, 16 @ 3:29 pm:
The state has a few options that the court provided such as raise taxes and change the payment structure over a long period of time…kind of like refinancing a loan and stretching out the payments. Other then that, the state needs to bargain hard and keep raises at a minimum (a different matter of course) and also try to save as much as they can on health care. On the health care, if the state pushes too far they will find themselves back in court for trying to “back door” the Kanerva decision. Also, much talked about would be to tax retirement income in Illinois. The bottom line is, when it comes to pensions, the Illinois pension is about as sure a thing as we can find on this human planet. Thanks to the legislature, we have the courts pounding the final nails in the coffin. There are small things that can and perhaps should be done but I don’t believe there are any large savings out there or they would be diminishment.
- Anonymous - Monday, Jul 25, 16 @ 3:31 pm:
@ SecondGear - Monday, Jul 25, 16 @ 3:27 pm:
=Until some sort of plan is developed for the current employees shouldn’t there be a consideration of giving all new employees a defined contribution retirement plan? At least then we can start using a system that isn’t a problem in the future.=
No it actually makes the problem worse. Tier 2 is a defined benefit plan that actually over time goes a long way towards fixing the pension system.
- facts are stubborn things - Monday, Jul 25, 16 @ 3:33 pm:
@ SecondGear - Monday, Jul 25, 16 @ 3:27 pm:
Sorry, I forgot to place my name on the post.
- facts are stubborn things - Monday, Jul 25, 16 @ 3:36 pm:
@ jeffinginChicago - Monday, Jul 25, 16 @ 3:22 pm:
=Cullerton’s first proposal was the only Constitutional one. Pay raises are not guaranteed. That seems unpalatable, but all that is left. =
No his proposal was not constitutional because after the Kanerva deicison it was clear that it was a choice between two diminishments. Raises are not guaranteed, but once they are given they are tied to a pension payout. The state is free to bargain with the unions and try to never give out raises, but you can not tie a raise to giving up a 3% AAI by making the raise non pensionable if you don’t agree to the tier 2 AAI.
- AnonymousOne - Monday, Jul 25, 16 @ 3:39 pm:
SecondGear:
A defined benefit plan is far cheaper to taxpayers than a defined contribution plan PLUS Social security contribution by the employer! There is only one reason these public plans have become a problem. The state ditched out on it’s share of the contributions repeatedly even though employees haven’t missed a single one. Where have you been? If you doubt the integrity of a db plan, look at IMRF, a plan where employers are never allowed legally to pimp their employees and it is funded at over 95%. So great that retirees receive a 13th check each year. DO your research. There is nothing these public retirement plans did wrong other than our state’s part in paying.
- Tony T. - Monday, Jul 25, 16 @ 3:42 pm:
For Cullerton’s consideration model to be constitutional, it may have to be more draconian. It can’t say “your raises are no longer pensionable.” It would have to say, flat out, “you don’t get any more raises.”
That’s even a stretch constitutionally, but I think it’s closer to passing muster.
- Retired - Monday, Jul 25, 16 @ 3:43 pm:
Does everyone realize the TRS employee who contribute to TRS are actually also paying for the AAI (cola)?
- SecondGear - Monday, Jul 25, 16 @ 3:48 pm:
-facts are stubborn things-
Thank you for the insight. I understand now that Tier 2 employees are paying extra into the system to try and cover the underfunded amount for the Tier 1 employees. In researching this I found articles that say even that plan will not pull enough money to make the plan sustainable.
- SAP - Monday, Jul 25, 16 @ 3:51 pm:
LessAnon?: Maybe an early out could work, simply because the state would replace Tier I employees with Tier II.
- Groucho - Monday, Jul 25, 16 @ 3:56 pm:
Time to file bankruptcy.
- d.p.gumby - Monday, Jul 25, 16 @ 3:59 pm:
Eric and Gino are both friends and fine lawyers. Competing legal arguments that demonstrate the ultimate flaw in trying to address bad state finances on the back of pensioners.
- SecondGear - Monday, Jul 25, 16 @ 4:01 pm:
AnonymousOne,
Respectfully it appears to be the opposite of what you said. The cost to taxpayers/employers for pension plans is higher than 401k plans. One source of research is the U.S. Bureau of Labor Statistics. This article is from 2012 but the same principles apply. http://www.bls.gov/opub/btn/volume-1/pdf/retirement-costs-for-defined-benefit-plans-higher-than-for-defined-contribution-plans.pdf
- City Zen - Monday, Jul 25, 16 @ 4:06 pm:
==Does everyone realize the TRS employee who contribute to TRS are actually also paying for the AAI (cola)?==
Yeah, but they’re paying the same price for a benefit that has since been doubled and changed from simple to compounded interest.
If you had an insurance policy with a COLA rider, requested to double the interest rate and change the interest calculation from simple to compounded, do you think the insurance company would charge you the same amount or would your monthly payment go up? Illinois upped the benefit but never raised the premium.
- Steve Polite - Monday, Jul 25, 16 @ 4:08 pm:
SERS members also pay an extra 1% for the AAI.
Also state employees already have a defined contribution plan (521). We call it Deferred Compensation.
- AnonymousOne - Monday, Jul 25, 16 @ 4:08 pm:
To follow up on Retired’s comment about TRS employees paying for their own COLA (AAI actually), it’s so important for people to realize that there are 5 different public pension plans. They are not alike. If some employees in one fund receive free health insurance, it is a gross error to assume everyone in every public pension plan gets free health insurance. But for some reason, people do. Pretty mind boggling how there can be so much misinformation, but I guess the state would like it to be that way. Gins up the outrage.
- Steve Polite - Monday, Jul 25, 16 @ 4:15 pm:
I would seriously consider the 30 hour work week at the same salary as consideration for a reduced AAI. Especially if I could work 3 days on with 4 days off. You can’t put a price on extra time with family and friends. We only have a short time on this earth.
- walker - Monday, Jul 25, 16 @ 4:25 pm:
LOL That’s what RNUG said in four sentences.
Hopefully this detailed analysis will forestall some from continuing to claim there’s an easy out.
- qualified someone nobody sent - Monday, Jul 25, 16 @ 4:26 pm:
CITY SEN…
- qualified someone nobody sent - Monday, Jul 25, 16 @ 4:28 pm:
If the law was changed to that particular benfit, as so many pension enhancements over the years, what is your point? s I’ve said for 5 years; PENSIONS MUST BR PAID AS EARNED…PERIOD!
- Langhorne - Monday, Jul 25, 16 @ 4:30 pm:
Mumbo jumbo…choice
Choice…hocus pocus.
Nope, di-min-ish-ment
Case closed.
- qualified someone nobody sent - Monday, Jul 25, 16 @ 4:31 pm:
Sorry for the split. CITY ZEN @ 4:06 is the target of my diatribe.
- Anonymous - Monday, Jul 25, 16 @ 4:50 pm:
SecondGear @ 4:01
For those whose employers do NOT pay into social security, the defined contribution plans plus employer portion contribution to social security would be far more expensive than what is currently being paid by the employers. I speak of TRS. To add teachers to social security would really make taxpayers howl when they see the cost.
- Cassandra - Monday, Jul 25, 16 @ 4:53 pm:
Still, our political masters on both sides of the aisle may try the Cullerton plan, even if they know in their hearts it won’t fly.
Like Pat Quinn, they’ll want to appear to be “doing something,” and this something will allow them to make cheerier assumptions about the state budget for a while.
- Chicagonk - Monday, Jul 25, 16 @ 4:53 pm:
A better idea would be to mandate that local governments budget for the present value of pensions when determining salaries.
- Anonymous - Monday, Jul 25, 16 @ 5:00 pm:
== That’s what RNUG said in four sentences. ==
-walker-, that REALLY is funny, considering how long some the comments I’ve made in the past were !
- JS Mill - Monday, Jul 25, 16 @ 5:00 pm:
@- AnonymousOne -Amen! I will pay for TRIP (Teachers Retirement Insurance Program) for 35 years and some where in the ball park of $110k. Basically pre paying the premium, that I may only use for a few years and at the same time I have been paying into medicare handsomely. I also paid int SSI as well. So when someone goes on about how it isn’ “fair” that the taxpayers have to pony up for the pensions I have little sympathy because some of use taxpayers are paying for SSI and Medicare that we will never use.
- RNUG - Monday, Jul 25, 16 @ 5:01 pm:
Obviously, 5:00pm was I.
- justdoingtime - Monday, Jul 25, 16 @ 5:07 pm:
Anyone know the # of tier 1 vs # tier 2 employees? I know at my work site it’s 60% tier 2 and growing. A few more years and they tier 1 will be gone.
- Work in progress - Monday, Jul 25, 16 @ 5:10 pm:
@ lessanon
Your early out would not clear the books. It would actually do the opposite. It would dump a large group of younger people into a pension system that is already having trouble paying what s owed.
- City Zen - Monday, Jul 25, 16 @ 5:12 pm:
==SERS members also pay an extra 1% for the AAI.==
Are you sure that’s not the survivor benefit?
- City Zen - Monday, Jul 25, 16 @ 5:25 pm:
== the defined contribution plans plus employer portion contribution to social security would be far more expensive than what is currently being paid by the employers==
TRS normal cost is somewhere between 9-10%. SSI is 6.2% plus a 3-4% 401k match would be about equal. And even if it was more expensive, the taxpayers would shift all the funding risk to the federal govt and the individual. I’d gladly pay a slight premium in exchange for zero investment risk.
- Federalist - Monday, Jul 25, 16 @ 5:32 pm:
Retired - Monday, Jul 25, 16 @ 3:43 pm:
“Does everyone realize the TRS employee who contribute to TRS are actually also paying for the AAI (cola)? ”
YES, they know, but they could care less.
- Federalist - Monday, Jul 25, 16 @ 5:35 pm:
- City Zen - Monday, Jul 25, 16 @ 5:25 pm:
== the defined contribution plans plus employer portion contribution to social security would be far more expensive than what is currently being paid by the employers==
TRS normal cost is somewhere between 9-10%. SSI is 6.2% plus a 3-4% 401k match would be about equal. And even if it was more expensive, the taxpayers would shift all the funding risk to the federal govt and the individual. I’d gladly pay a slight premium in exchange for zero investment risk.
What 3-4% 401k match? Never heard Madigan or Cullerton talk about that. Indeed they want to low ball the state contribution to 6.0%
- Arthur Andersen - Monday, Jul 25, 16 @ 5:39 pm:
RNUG, it’s always good when the real lawyers agree with one’s legal opinions.
Agree fully with AnonOne. DC plans are always more expensive to run than comparable DB plans. SecondGear’s “evidence” actually pointed that out.
- Steve Polite - Monday, Jul 25, 16 @ 6:07 pm:
City Zen, I think Eric Madiar discusses the history of the AAI in his analysis published a few years ago. When legislation for the AAI was written it included a requirement that employees contribute an additional 1% to pay for the benefit.
- ixit - Monday, Jul 25, 16 @ 8:49 pm:
@Steve - Thanks for the info. I know TRS is 0.5%. I wasn’t sure about the other funds.
I never denied they didn’t pay for the AAI benefit. I merely point out that when TRS folks started paying for it, it paid out a whole lot less (1.5% simple interest). Whether or not that initial payout was right or fair is another matter. But what’s not in doubt is that they’ve been paying the same exact price ever since for a benefit that’s much larger. And as far as I can tell, it wasn’t negotiated for (no this for that).
- Harvest76 - Monday, Jul 25, 16 @ 8:55 pm:
I can assure you, mr. Madir does not see this as a problem. I made this exact argument to him at a conference last year and his response was total dismissal. He sees no difference between the employers right to withhold raises and simply taking those raises out of the pension calculation. I believe his position to be faulty.
- peon - Monday, Jul 25, 16 @ 9:59 pm:
There are forms of consideration that might work, if a member gains stability or flexibility they don’t have in the plan now in exchange for a benefit reduction.
These are not necessarily in the interest of the pension plan member but I could see a lot of people opting for them. Savings would be modest but doable.
Things to trade are portability (roll-over options at separation before retirement), lump-sum vs annuity at retirement, and what has been discussed before, converting some percentage of current value to a defined-contribution account outside the plan (investment companies could finance these buyouts to the state effectively re-amortizing some of the pension debt, as they would benefit from the new 403b/401k plans moved to their companies and future contributions).
I repeat it would not be in most people’s best interest, but more people would voluntarily enter into this type of “pseudo-bankruptcy” negotiation than you might think.
- Arthur Andersen - Monday, Jul 25, 16 @ 10:49 pm:
Here’s the detail on State Pensions’ member contributions:
SERS: 3.5% retirement, 0.5% survivor benefits, 0.0% AAI
SURS: 6.5% retirement, 1.0% survivor benefits, 0.5% AAI
TRS: 7.5% retirement, 1.0% survivor benefits, 0.5% AAI
I don’t know why SERS doesn’t contribute for the AAI. The difference in retirement in SURS/TRS retirement contributions dates back to the 1990’s change to the flat or “2.2″ benefit formula. The inimitable former SURS director made an argument that since most SURSers retired with the actuarial benefit, not the formula, the contribution should not be raised. Saving professors 30 bucks a check cost the System hundreds of millions of dollars in lost revenue over the intervening period, even more so when it came to light that the actuarial benefit was being calculated in an overly generous manner.
- AnonymousOne - Tuesday, Jul 26, 16 @ 7:04 am:
Not sure what you’ve missed with TRS contributions only totalling 9%. Teachers contribute 9.4% out of every paycheck. Perhaps it’s .4 To Teachers Health Insurance Program.
- RNUG - Tuesday, Jul 26, 16 @ 8:19 am:
Adding to what -AA- posted at 10:49pm,
Both Tier 1 JRS and GARS contribute 1% for their AAI out of a total contribution of 11% JRS and 11.5% GARS
- Steve - Tuesday, Jul 26, 16 @ 9:08 am:
In the future, Illinois government could say no state workers hired after 2018(or some or date) get a pension. The unions would be told that’s not negotiable. That would pass constitutional muster. Also, current workers might be told that Illinois will not allow them to accrue pension benefits any longer (moving to a 401A) system. Still, that doesn’t stop the long term problem but.. it begins to solve it.
- Anonymous - Tuesday, Jul 26, 16 @ 9:11 am:
Steve — and how does that solve the backlog of debt owed by taxpayers to the current system to be paid?
- facts are stubborn things - Tuesday, Jul 26, 16 @ 9:17 am:
@- Steve - Tuesday, Jul 26, 16 @ 9:08 am:
= Also, current workers might be told that Illinois will not allow them to accrue pension benefits any longer (moving to a 401A) system. =
I don’t think current tier 1 or tier 2 employees can be forced to move to a DC plan and have their pensions stop accruing. If I understood your above point correctly, that would fly in the face of the recent ISC ruling. The pinion rules that are in place when one is hired are protected until they retire. The ISC made that point clear. I think you and Gov. Rauner are the only two people left in Illinois that believe that it is only the benefits accrued to date that are protected and that benefits in the future can be reduced or diminished.
- Arthur Andersen - Tuesday, Jul 26, 16 @ 9:24 am:
AnonOne,The 0.4% TRS “missing” contribution covered the member share of the ERO, which lapsed on 6/30/16, and is no longer collected. That’s why I left it out, along with any contributions related to insurance. Apples to apples, you know.
- RNUG - Tuesday, Jul 26, 16 @ 9:34 am:
== Also, current workers might be told that Illinois will not allow them to accrue pension benefits any longer (moving to a 401A) system. ==
Clearly unconstitutional based on all the IL SC rulings. Once you are in the pension system, the rules at time of hiring plus any enhancements granted by the General Assembly are the terms of the pension and can not be unilaterally changed.
- Steve Earle - Tuesday, Jul 26, 16 @ 4:17 pm:
AA, a few years ago I tried to find the same AAI employee contribution info you posted. I spoke to a pension supervisor at SERS. He told me that 0% is shown for SERS members. He also told me that at one time it was allocated at 0.5%. He was unsure when or why it changed.