* I asked our pension expert RNUG (fka Retired Non-Union Guy) to look forward after Judge Belz’s decision last week striking down the state’s pension reform law. Here it is…
As I said in another e-mail, no way does Belz’s decision get overturned so the State needs to find another way forward. I’m also assuming there is no way to negate the $111B of pension funding indebtedness.
Here are some off the top of my head thoughts on how to deal with it. A lot of them are NOT original to me; I’m sure I’ve plagiarized ideas from almost every blog commentator. Heck, we need to steal all the good ideas we can find to solve this problem. I’m probably going to be too long-winded (no surprise!) and not all of this directly addresses the pension debt but here goes:
* The classic cut waste / abuse / fraud suggestion. Not saying it doesn’t exist, but the last couple of year’s tight budgets under Quinn have already squeezed some of it out of the State agencies. The biggest problem will be finding it; I don’t’ believe there is anywhere close to enough auditors / inspector generals’ staff to root out what is left. And since you will need to hire people or contractor’s to find it, you will quickly reach a point of diminishing returns.
* Have an honest debate in the Legislature about what should be government functions and what the State should quit doing.
* Just keep following the 1995 “ramp”. Problem is not enough tax revenue when the temporary increase sunsets Dec. 31st.
* Rework the “ramp”. This has several ways to approach it. One item would be to reset the target to 80% funded. Another way would be to bond out most or all of the just “indebtedness” and fund it with a commitment of either a fixed portion of current tax revenues or a new revenue source dedicated to just repaying the new “pension bonds”.
* Again change the pension terms for new hires. You could force all new people into a 457 plan (government version of a 401K) but this would be a double-edged sword for multiple reasons. (1) Right now, projections are that “Tier 2″ members not only pay for their full amount but will also end up paying part of the “Tier 1″ debt. This is only going to increase percentagewise as “Tier 1″ members retire and “Tier 2″ members increase. If there are no more new “Tier 2″ members, then there is none of their money going to offset the “Tier 1″ debt. (2) With a 457, there will be much more clamor and scrutiny of the employer match. No employer match and it probably runs afoul of IRS pension regulations. If there is an employer match, I don’t think the State can get away with “notational entries”; it will have to be cold, hard cash going into the 457 plan. (3) 457 plans have an interesting “loophole”; the funds can be withdrawn upon leaving government service with no age requirement or penalty. That creates the potential for people who leave government employment to blow their entire retirement savings, which kind of defeats the purpose of retirement savings. Yes, I know that’s branching into “nanny” government to make sure people don’t waste their retirement savings … but there is a common interest in making sure people don’t end up on welfare in their old age.
* Create a program for current “Tier 1″ (and probably have to be offered to “Tier 2″ also) employees to either fully or partially (credits going forward) opt out of the Defined Benefits program in favor of a 457 plan. Still has the “457″ problems I noted above. If full opt out, it would also require the State to immediately pony up the cash equivalent of the already earned benefits. The other problem is I would expect the “Tier 1″ people at least halfway to retirement would not choose it, so the savings would be limited.
* Create a program for both “Tier 1″ employees and retirees to opt out of the guaranteed 3% AAI in favor of a uncapped COLA guaranteed to match the Federal SSA COLA. This would be a pure gamble on the State’s part because the COLA over any period of time has averaged between 2.9% and 3.1% (in other words, the State pension planners knew what they were doing when they picked 3% as the AAI). IF, and that’s a big IF, inflation stayed below 3% the State would achieve some savings. However, if inflation were to soar, the State would be stuck with some large unplanned costs.
* Go back to the previous “Schnorf” plan and stick to it. For current employees, pick up the full employee contribution in exchange for foregoing some scheduled raises or COLAs. Going forward, that would have the effect of permanently lowering pensionable salaries by 4% (assumed normal SERS contribution).
* A different twist on the “Schnorf” plan. Some people want / need time off more than they need pay. Develop a plan to allow work schedules with less than “full” hours with pro-rated salary reduction. It won’t save a lot in the short run, but if it is in place for more than 6 years, it will affect the “final average compensation” which will reduce the amount of the earned pension.
* For existing “Tier 1″ employees, offer an uncapped COLA in place of the fixed 3% AAI but require a higher contribution rate (0.5%. 1% ?). It might have some of the same problems as the AAI / COLA swap suggested above but they should be able to create a cost structure to offset some or most of those issues.
* One of my more off the wall ideas would be to offer another 2002 ERI style early out, but make the buy-in cost more. Upside would be stopping any increases in additional pension benefits for the people who take the deal anyway. Downsides would include the immediate cost hits, less employee contributions going into the pension funds, and yet another loss of institutional knowledge that the State probably can’t really afford.
* The cost shift to the school districts for the “normal” pension costs. This one is fraught with perils. Potentially, the State would save money at the expense of the school district (local taxpayers) getting stuck with an unaffordable cost. It doesn’t get rid of the cost going forward; it just shifts it from the State to the local districts. And I can see such outcry that the State ends up sending the same money to the school districts, except it is now called school funding instead of pension funding. I may be in the minority, but I just see this as another way to kick the can down the road and end up with a lose / lose situation.
* Get creative with taxation / revenue sources in order to just pay the bills. Various ideas have been floated; there seem to be a number of reasonably viable paths but none will be easily achieved. (1) Eliminate some or all of the various income tax exemptions. (2) Switch from the current flat income tax to a graduated income tax with the goal of increasing overall revenue. (3) Expand the sales tax to cover all services. (4) Phase out the income tax completely in favor of an expanded sales tax with no exemptions. (5) Replace the corporate income tax / sales tax with a gross receipts tax; makes exemptions or evasion almost impossible. Some of these will require changing the constitution with voter approval. Almost all of these changes will require overcoming the entrenched special interests supporting the current approach or the current loophole.
* DOC is one of the larger budget costs; reform the laws in this State to decriminalize victimless / non-violent offenses. Yes, that includes things like decriminalizing drug possession of minor amounts (keep the dealing offenses on the books). Also take a serious look at the rest from releasing elderly prisoners; it costs the State a lot to incarcerate them for what may be minimal safety benefit.
* Just get Rauner’s friends to pay off the pension fund indebtedness in total. Okay … this one is snark.
Bottom line: the pension funding will not get solved in a vacuum or in a stand-alone solution. It’s going to have to be just a part of a bigger solution addressing a number of the State’s problems.