An Illinois House committee Monday will begin hearings on a new approach for dealing with the state’s crushing pension debt.
Under consideration will be plans that would allow workers at retirement to take pension benefits as a lump-sum cash payment and give up guaranteed pension payments for life.
For some workers, this could mean a payout of hundreds of thousands of dollars. At the same time, proponents say, it would help reduce Illinois’ crushing pension debt that now stands at $111 billion.
“I’m trying to find a constitutional way to save the state a whole bunch of money,” said Rep. Mark Batinick, R-Plainfield, sponsor of one of the pension bills. “I call it a win-win scenario.”
But it’s also a scenario that needs some scrutiny and raises a lot of questions that lawmakers want to see answered.
The article is about two bills: HB4427, sponsored by Rep. Mark Batinick, with bipartisan co-sponsors; and HB5625, sponsored by Rep. Mike Fortner.
* Our resident pension expert RNUG took a look at both proposals…
After reading Doug Finke’s very good Sunday SJ-R pension article, I made the time to read both bills. They are similar but also different.
HB4427 - Batinick
HB5625 - Fortner
Both only apply to NEW retirees.
Both require an irrevocable decision
Both eliminate survivor’s benefit completely (with one exception)
Both can’t be chosen if a QILDRO is in place (which protects a divorced spouse’s interest in a pension)
Both can’t be chosen if using the Reciprocal Act
Both retain any earned rights to Group Health insurance (apparent acknowledgement to Kanerva)
Both do NOT include the value of survivor’s benefits in calculating current value of the earned pension
Can’t repay if you go back to work later
Both let you fully cash out but …
Where the cash comes from:
Fortner - either private partnership money (think something like JG Wentworth’s structured settlement buyouts) or possible state bond offering
Batinick - state money
How much you might get:
Fortner - whatever the private partner offers for the (unspecified formula) current value
Batinick - 75% of current value including expected AAI, reminder - in either case, survivor’s benefits are not figured into current value
Fortner - required
Batinick - none
Fortner - “full” only
Batinick - “full” is 75% or you can choose less than “full” by percentage and get part cash-out and part pension (apparently with only a simple interest AAI) but the cash-out has to be a minimum of$50,000. Partial pension may include a survivor’s benefit on the reduced amount (language isn’t specific enough for me to be absolutely positive but I read it as including)
Return to work:
Fortner - silent presume start over from zero
Batinick - start over from zero but if partial reduction, said reduction also applies to any newly earned benefits
Both aim to reduce the State’s Pension liability by paying the retiree less than the full current value and eliminating paying survivor’s benefits. Fortner farms the payout off on the private sector which could short the retiree more than the State may be shorting them, so expect less “savings” to the State, Batinick retains all the “savings” for the State.
For 98% of retirees, these options will be a bad deal, especially if you have a spouse you want to provide a pension to should you die early.
There are some cases I can think of where a retiree MIGHT consider it. If both spouses work for the State, I could see the one with the smaller pension possibly cashing out but remember there are tax implications if the cash is not rolled into a traditional IRA. Or a deathly ill currently single person with very short life expectancy who wanted to leave something to their kids. But even both of those scenarios have some risk of outliving the cash.
Either bill could be amended before passage, which might change things. If either bill is passed and you were to consider it, get the best PAID financial advice you can BEFORE you sign anything.