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RNUG examines two new pension ideas

Monday, Feb 29, 2016

* Finke

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…

Rich,

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

Similarities:

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 …

Differences:

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

Financial counseling:

    Fortner - required

    Batinick - none

Distribution options:

    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

Summary:

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.

My Opinion:

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.

- RNUG

- Posted by Rich Miller        

91 Comments
  1. - Anon - Monday, Feb 29, 16 @ 9:40 am:

    Has there been any discussion on the impact that adopting either of these plans would have on the ability for the government to continue to exempt some workers from social security?

    Also, do these bills address whether or not they think the benefits are being diminished in any way?

    This is sort of getting embarrassing.


  2. - Independent retired lawyer, journalist - Monday, Feb 29, 16 @ 9:48 am:

    Do both give workers the option of no change at all from the present system?


  3. - MSIX - Monday, Feb 29, 16 @ 9:48 am:

    Thanks, RNUG. Very helpful analysis.


  4. - SAP - Monday, Feb 29, 16 @ 9:53 am:

    ==Do both give workers the option of no change at all from the present system?==According to the 2d sentence in the article, yes.


  5. - Norseman - Monday, Feb 29, 16 @ 9:54 am:

    RNUG, great analysis. Fortner’s bill is really vague and difficult to see the savings to the state. The only thing it’s got going for it is the counseling. It’s important for folks to fully understand the ramifications of their choice.


  6. - chi - Monday, Feb 29, 16 @ 9:54 am:

    Good analysis.

    The transferability of the money to one’s children will lead many people to take the lump sum.


  7. - Sparky791 - Monday, Feb 29, 16 @ 9:56 am:

    My wife and I have two years left until full retirement. No thanks.


  8. - JS Mill - Monday, Feb 29, 16 @ 9:57 am:

    RNUG- Exactly right.


  9. - illinoised - Monday, Feb 29, 16 @ 9:59 am:

    I will soon be a pensioner. I guarantee you RNUG (great analysis, I might add) is correct, though I believe 98% non-takers is an optimistic figure. I would guess 99.5% more correct, and the .05% takers would have no survivors and would likely be facing a financial crisis requiring some immediate cash. My informal office poll found 100% non-takers.


  10. - Walter Mitty - Monday, Feb 29, 16 @ 9:59 am:

    As someone who is 20 years in TRS I appreciate the take RNUG has pointed out… The reality is those in Tier 2 are going to wake up in 10 years and realize they pay the same percentage as me, but half the benefit. Like any good pyramid scam, there needs to be new money to pay for the old benefits. If I do leave the public sector, I assure you I would roll my 20 years in an IRA and let it sit. If I return, I would hope any passage would allow as it is now to come back. I certainly would take the odds of an IRA for my contributions than the state in 20 years. The simple math and solutions presented have done their job. The public perception has been properly softened for the last few years with economic reality as well.The pension system will not be the same for me in 20 years because it can’t. I have a hard time following the math with any counter argument. The whole “Constitution” argument is not a safe one anymore. If it ever gets on the ballot to open it, it will pass with flying colors. I respect everyone’s opinion,I just think it’s inevitable.


  11. - Sue - Monday, Feb 29, 16 @ 10:01 am:

    These suggestions afford little relief from the pension burden. The reality is given the Supreme Court ruling- the State has little chance of finding any relief for existing participants. Best to crack down completely on the final year BS which etill occurs and to start focusing on improving the investment returns by forcing each system to hire true professionals along with outside consultants free of the political process which goes on. Hiring GS or Blackstobd would be a huge improvement over who the funds are currently using. A final measure would be to freeze administrative salaries for years and limit whstcDistricts can pay to new hires. If you can’t play with the pension side - at least reduce the pension cost by capping the salary which goes into the benefit formula


  12. - cdog - Monday, Feb 29, 16 @ 10:02 am:

    “Where the cash comes from:…”

    Highly probable that a bond offering would be needed.

    At near JUNK BOND ratings? No thanks. We just did that dance a few weeks ago and got our toes stepped on quite badly.

    (Amazing Effort RNUG!!! Greatly appreciated and admired.)


  13. - allknowingmasterofracoondom - Monday, Feb 29, 16 @ 10:05 am:

    Great job RNUG.

    Coming from the private sector, I just can’t get over this pension debacle. Just can’t get over it.

    The chosen few….


  14. - Smoke And Mirrors - Monday, Feb 29, 16 @ 10:06 am:

    This is exactly the rot we see on TV commercials where shady companies offer cash upfront in structured settlements that leave the person with a fraction of what they would otherwise collect. It makes no financial sense for the vast, vast majority of folks who do it, and it makes no sense for state pension recipients. Anyone who has no Social Security benefits, no 401(k) and no savings, which is likely the case with most state workers, and takes $750K or so with another 15-20 years on their biological clock instead of taking regular payments with COLA is an absolute fool. About the only person who should do this would be someone who’s been diagnosed with a terminal illness and knows that they have less than five years to spend the money.

    I suspect most state workers understand this. If they don’t, then I wonder whether they have sufficient acumen to be working as public employees. As for the legislature, if something sounds too good to be true–we can solve this pension mess by convincing our workforce to give up financial security for life in exchange for a fraction of what they would otherwise collect–it probably is.


  15. - Almost the Weekend - Monday, Feb 29, 16 @ 10:07 am:

    =The reality is those in Tier 2 are going to wake up in 10 years and realize they pay the same percentage as me, but half the benefit.=

    Hit the nail on the head. Ten years from now this will be the downfall of afscme and possibly other public sector unions. Once tier two employees move up the leadership ladder they will see how the previous leaderships hung them out to dry to save themselves.


  16. - lake county democrat - Monday, Feb 29, 16 @ 10:07 am:

    Somebody should set up a paypal tip jar for RNUG.


  17. - Anotheretiree - Monday, Feb 29, 16 @ 10:08 am:

    A few poor people will be tricked into taking this. Saw it happen under Blago’s buyout schemes.

    Mitty - Cashing out 20 years doesn’t seem like a good move. Using the 4% withdrawal rule, you need $1,000,0000 to generate a $40,000 income. I wouldn’t give up a Constitutionally protected benefit out of fear. If they can vote away a pension contract, then they can vote away a 30 year bond.The rule of law is over at that point.


  18. - JS Mill - Monday, Feb 29, 16 @ 10:10 am:

    =Best to crack down completely on the final year BS which etill occurs=

    Except that the data proves that is not a real issue. You might not like it, but is has little to no impact on the pension issue.


  19. - VanillaMan - Monday, Feb 29, 16 @ 10:11 am:

    NEXT! - Reverse mortgages based upon the value of silver!


  20. - Robert the 1st - Monday, Feb 29, 16 @ 10:13 am:

    =Except that the data proves that is not a real issue. You might not like it, but is has little to no impact on the pension issue.=

    I don’t know, my aunt getting 2, $10,000 raises her final years paying into TRS sure seemed to help bump up her pension.


  21. - cdog - Monday, Feb 29, 16 @ 10:14 am:

    I want to crack a really bad joke about the decrease in life expectancy of middle aged, middle class, white people that just made the news a few months ago.

    I won’t though. /s


  22. - illinoised - Monday, Feb 29, 16 @ 10:14 am:

    Yes, this might be attractive to Tier 2 folks, but Tier 2 is only about five years old. The heavy, heavy majority of state employees are Tier 1 folks. Once again, legislators are attempting the coward’s way out rather than choosing to re-amortize the pension debt as well as fix our flawed tax structure by implementing a progressive income tax. Illinois is in dire straights due to legislators who are more focused on reelection than on finding constructive and sustainable fiscal fixes.


  23. - D.P.Gumby - Monday, Feb 29, 16 @ 10:16 am:

    Once again evidence that there are no fair solutions except restructuring state taxes to raise more revenue. Those who believe otherwise are looking for unicorns.


  24. - X-prof - Monday, Feb 29, 16 @ 10:18 am:

    These plans are similar to, if not identical to, the cash out option currently available to Tier I employees who elected the “portable option” under SURS (and perhaps other systems?). It would be interesting to find the statistics on how many choose that option. If the percent opting to cash out now is small, as I would guess it is, then the impact of these proposals will not amount to much since they are less generous than the portable plan option.

    Rather than speculate, objective evidence should be readily available to evaluate what percentage of retirees would exercise the new options offered by these proposals. RNUG, is there any way to get that information from SURS and other retirement systems that offer the portable option? At a minimum, we can conclude that no one on a portable plan should/would choose either of these options.

    I don’t see any constitutional issues in these proposals, since they retain the status quo as an option. However, my main concern is that the impact of these proposals might be exaggerated and used as a phony substitute for new revenue.


  25. - Walter MItty - Monday, Feb 29, 16 @ 10:20 am:

    Anotherretiree Awesome point… My theory is based upon my school finance courses years back…. With 20 or so years left, I would never withdrawal and suffer penalties. There are plenty of tax folks that can get in the weeds. My belief, I see things for what they are, not what I want them to be. Tier 2 was the death nail to the scheme if they don’t turn off the pension faucet much sooner. It’s not really that complicated, there is not enough money projected to come in the system, let alone pay the liability.


  26. - illinoised - Monday, Feb 29, 16 @ 10:21 am:

    I am SURS Tier 1. I would not take the cash option, and have never known anyone to take that option.


  27. - Ducky LaMoore - Monday, Feb 29, 16 @ 10:21 am:

    Yeah, tier 2 folks really got the shaft. I turned down an IML job after reading their tier 2 benefits. From the perspective of tier 2, pensions are a sham and that is why I chose the self-employed route. My money is growing in a roth account and it is mine. The only person that can screw it up is me.


  28. - My two cents worth - Monday, Feb 29, 16 @ 10:22 am:

    Almost the Weekend @10:07
    You do realize that Pension benefits are given or taken away by the GA. AFSCME cannot and has not done anything in contract negotiations.


  29. - RNUG - Monday, Feb 29, 16 @ 10:26 am:

    == Has there been any discussion on the impact that adopting either of these plans would have on the ability for the government to continue to exempt some workers from social security? ==

    Should still be an IRS qualified plan unless it gets too heavy handed on cutting back the assumed current value. All this does is offer a lump sum option


  30. - RNUG - Monday, Feb 29, 16 @ 10:28 am:

    == Do both give workers the option of no change at all from the present system? ==

    Yes, just adds a lump sum option to the systems that didn’t have such a choice.


  31. - northernwatersports - Monday, Feb 29, 16 @ 10:32 am:

    Thanks to RNUG for the continued analysis…
    To the post: I think if such plans were adopted within the next couple years, any Tier 1 takers would be those rare cases with extraordinary circumstances. The bulk would either not be eligible (draft bills limitations), or would do the math and realize the severe negative risk of accepting such a plan. Therefore, very little (if any) real savings for the State.
    I however, also agree with the slowly evolving perceptions and realities that give light to Walter Mitty @ 9:59.
    Maybe I fall too easily into the dooms-day idea Walter suggests, but if a buy-out bill becomes available…and a Con-Con/Con-Amendment proves to become a reality (radically changing any pension provisions) my fear is that the State might ultimately suffer run away cash flow problems. Although the system is based on funding over a long term, if large numbers of annuitants simultaneously flooded the retirement systems with both regular pensions and early retirement cash buyouts, the State could find itself in an unprecedented cash shortage.
    I’m no finance expert, but I think most folks know when to hold ‘em and when to fold ‘em. Hope I’m not the last one at the counter for my money!


  32. - RNUG - Monday, Feb 29, 16 @ 10:32 am:

    == These suggestions afford little relief from the pension burden. ==

    There are no legal options that will make much of a difference. This may shave a few hundred million off the debt at best.


  33. - Stones - Monday, Feb 29, 16 @ 10:32 am:

    Sort of like when you are in Vegas and the dealer offer you insurance at the blackjack table. No thank you.


  34. - The Dude Abides - Monday, Feb 29, 16 @ 10:35 am:

    Excellent analysis by RNUG. I don’t see much savings for the state here, certainly not in the short run. Where is the money for these lump sum payouts coming from in the next couple of years? This could amount to a pretty decent chunk of change even if just 5% of the retirees in the next 2 years took it. With the budget impasse and the tax rollback to 3.75% we aren’t paying our current bills now. It seems to me that the Legislature is wasting their time debating either of these two bills.


  35. - formerpro - Monday, Feb 29, 16 @ 10:37 am:

    The sponsors of these bills, like many (if not most) state senators and representatives, including in leadership, and also including the Governor, are still in denial, looking for ways to take money already earned by public employees and retirees. The Supreme Court justices have spoken with no dissents, a bi-partisan message: PAY UP!!!


  36. - Been There - Monday, Feb 29, 16 @ 10:38 am:

    ===Financial counseling:
    Fortner - required
    Batinick - none====
    I agree with RNUG that this would be a bad deal I disagree with him and others here that hardly anyone will take it. I use to a tax preparer and it always amazed me how many people took the lump sum from their pensions if allowed. Then went out and bought a boat, RV, new car, etc. Even after I told them the tax consequences and how the pension would be better (unless of course the system they were in was to go broke).
    Either way probably still would only be a small impact on the whole system.


  37. - anon - Monday, Feb 29, 16 @ 10:43 am:

    Sounds like the bills may be constitutional, but the purported savings are greatly exaggerated.


  38. - Peoria Guy - Monday, Feb 29, 16 @ 10:51 am:

    Agree with Been There. I have seen an ungodly number of people cash out their 401(k)’s when they leave their job. It is ridiculous. Temptation is powerful, especially for the uneducated.


  39. - Peoria Guy - Monday, Feb 29, 16 @ 10:55 am:

    Correct me RNUG if I am wrong, but the spouse of a deceased participant has the choice of a lump-sum or a reduced monthly benefit. I would like to see those statistics between the two options. Of course that spouse may be quite a bit older than the typical recent retiree from the system and that could influence the decision.


  40. - Captain Illini - Monday, Feb 29, 16 @ 10:57 am:

    Those worried about a Con-con or amending the state constitution should just relax, since nothing done in the future can affect persons in the past…what’s earned is earned - period.


  41. - Arthur Andersen - Monday, Feb 29, 16 @ 10:57 am:

    Nice job, RNUG.

    X-prof, I don’t agree that these proposals are “identical to..portable SURS.” Admittedly, I haven’t read the SURS article of the Pension Code in awhile, but as I recall Portable SURS is funded annually and balances may be moved as a lump sum whenever the member terminates service, not just at retirement. That program is a much better deal than these proposals.


  42. - DuPage - Monday, Feb 29, 16 @ 10:58 am:

    Jim Edgar when asked about the contributions to the 5 state systems responded: “We have to pay this”.


  43. - Ducky LaMoore - Monday, Feb 29, 16 @ 11:01 am:

    @Dupage

    Was that his answer in 2016? Obviously not his answer in 1996. LOL


  44. - RNUG - Monday, Feb 29, 16 @ 11:07 am:

    == Somebody should set up a paypal tip jar for RNUG. ==

    Then maybe I could afford to buy a vacation home in Santa Fe … or pay off the two mortgages I currently have!


  45. - CapnCrunch - Monday, Feb 29, 16 @ 11:08 am:

    There are three ways to discharge a debt, pay the amount due, default, and restructure it (get the lender to accept less than the amount owed). Guess which approach these folks are attempting. They are modern day alchemists trying to transform debt into thin air.


  46. - DuPage - Monday, Feb 29, 16 @ 11:09 am:

    @Ducky 11:01

    It was a couple years ago right before they passed the pension reduction, (the one thrown out by the ISC).


  47. - Nieva - Monday, Feb 29, 16 @ 11:13 am:

    Understand that most state workers get Social Security when they are old enough. Teachers do not. Let’s put teachers on SS like everybody else. Then if the pension system fails they will at least have a backup.


  48. - BC - Monday, Feb 29, 16 @ 11:16 am:

    @RNUG, what if the state offered to buy back the 3% compounded AAI from currently employed Tier 1 participants?
    For example, the state offers each employee a check for $10,000 right now if they agree to give up their currently promised AAI when they retire and instead accept a simple COLA tied to inflation.

    Such an arrangement would be constitutional. Not sure how many employees would take the deal and whether or not it would move the unfunded liability much.

    Of course, this idea, like Fortner’s and Batinick’s, would incentivize pensioners to grab a short term gain in return for some long term pain.


  49. - Reality Check - Monday, Feb 29, 16 @ 11:16 am:

    @Almost the Weekend, you must not have been around in 2011 when the unions fought hard against Tier 2, and correctly warned members that it was only the beginning of attacks that would threaten current employees and retirees as well.


  50. - AnonymousOne - Monday, Feb 29, 16 @ 11:28 am:

    Tying the COLA to inflation could be a problem in the future, as in the 70’s inflation ran in double digits. Too volatile. If you take a running average of inflation from the 70’s to the present, the figure amounts to just about 3%. 3% is a fair, wise amount. Many don’t like it now with Social Security doling out 0% increases, but they’ll sure like 3% when SS is handing out 8 or 10% increases.

    https://www.socialsecurity.gov/news/cola/automatic-cola.htm


  51. - RNUG - Monday, Feb 29, 16 @ 11:34 am:

    - AnonymousOne - beat me to it. Average inflation for almost any long term period since the Feds started measuring it has ran between 2.9% and 3.2%.

    What would make a difference for the State is moving from compounded to simple but it would be bad for the retiree.


  52. - Joe M - Monday, Feb 29, 16 @ 11:38 am:

    I apologize if this has already been covered. But I can’t find if the payout would be based for only the amount the employee had paid in — or if the payout figure also includes the amount the State was also supposed to be contributing?


  53. - Liberty - Monday, Feb 29, 16 @ 11:53 am:

    The proposals are not like SURS plans- the portable plan gives you 5% and matching funds- you give up spousal benefits and insurance:


  54. - RNUG - Monday, Feb 29, 16 @ 12:00 pm:

    == But I can’t find if the payout would be based for only the amount the employee had paid in — or if the payout figure also includes the amount the State was also supposed to be contributing? ==

    Here’s a rough / approximate way how I think it should work.

    The payout would be based on some (reduced) percentage of the current value of your pension benefit. In other words, they would calculate your starting pension under the current rules, then using standard life expectancy and the current 3% AAI ( in at least one of the cases), figure out how much they expect to pay you over your theoretical lifetime. Then they reduce it (discount it) based on other standard formula that takes into account future inflation / investment earnings (generally assumed about 7% - 8% long term) to come up with the equivalent “value” in today’s money.

    Notes: they are assuming you only gain 3% a year on the pension side but will be subtracting 7% a year on the discounting side … so you already start out a loser.

    Then each bill will further reduce that number, in the one case to 75% (25% reduction) and in the other case to whatever level the structured settlement people offer you (keep in mind they are in business to make money off the deal).

    Finally, if you take the lump sum and don’t roll it to an IRA, you have to immediately pay (at least) Federal taxes on it.


  55. - Ms. SHEESH - Monday, Feb 29, 16 @ 12:10 pm:

    And–is there a minimum per centage benefit guarantee if the Pension entity is taken over by reason of default or bankruptsy? Because my experience with the Pension Board Guarentee Corporation (PBGC) took over after my company was sold and the pension pay out was a fraction of what it should have been. Beware of the embedded dishonesty.


  56. - Mouthy - Monday, Feb 29, 16 @ 12:16 pm:

    If I remember correctly the lump sum payouts was tried by Blago. I remember getting the offer while I was still working and it was for about two years of benefits. The plan was bad and I don’t think very many people took it. Looks like these are stacking up the same way…


  57. - Person 8 - Monday, Feb 29, 16 @ 12:19 pm:

    First, I applaud that these plans are at least constitutional.

    Secondly, These plans are basically tomfoolery. RNUG made the reference to JG Wentworth, which is spot on. The problem is that many of the young tier 1 teachers I have interacted with over the past few years, believe in most of the rhetoric that the pensions will be gone, there’s nothing they can do about it and they should just cash out asap. The union needs to do a better job sharing retirement info with those teachers to help them better understand the issue at hand.


  58. - Anonymous - Monday, Feb 29, 16 @ 12:19 pm:

    Barring the possibility of a law allowing for state bankruptcies (which is very unlikely), there is one other scenario in which taking a buyout would make sense - and that is double-digit inflation similar to what occurred in the late 70’s / early 80’s. I remember 14% interest on long bonds, and 17% on MM funds. If that happened again, a 3% annual increase would look pretty anemic. But if all the printing the Fed has done over the last 7 years hasn’t caused it, what would?


  59. - illinifan - Monday, Feb 29, 16 @ 12:22 pm:

    I want to add to the kuddos for RNUG on this. Thanks much for logical presentation of information.

    Here is the reality. Whatever deal offered will be to the benefit of the employer. It can be a win for the employee if the business was to go bankrupt or as noted if the employee has no spouse and figures they will die young. My husband was offered such a deal in private industry and took it. He had enough sense to move it to an IRA, but many of his cohorts took the money and paid off bills. Sad but all too common.


  60. - Anonymous - Monday, Feb 29, 16 @ 12:25 pm:

    RNUG’s analysis proves again the great worth of this Capitolfax blog. I learned so much on here about my pension. Comments during the previous two years have also been very valuable. Thank you all so much.


  61. - Joe M - Monday, Feb 29, 16 @ 12:39 pm:

    RNUG, thank you for the analysis!. I would never take them up on such an offer, but its good to learn as much as one can about any pension proposals.


  62. - X-prof - Monday, Feb 29, 16 @ 12:41 pm:

    AA: I wrote, “similar to, if not identical to,” not “identical to.”

    We agree on this: The SURS portable plan allows employees who leave the university before reaching retirement age to get a refund of both the state’s and their own retirement contributions (vs losing the state’s under the traditional plan). It also offers a lump-sum option at retirement.

    So, yes, taking the lump sum of both contributions before reaching retirement age (where the annuity is not an option) is a better deal than what the traditional Tier I plan offers, with or without these new proposals. But the choice between the lump sum and the annuity at retirement is similar to the choice under the new bills. We can examine the choices made by *retirees* (i.e, those who did not leave) under the portable plan to get some idea of how many would forego their annuity to receive a lump sum payment at retirement under these new bills. I recently made this no-brainer decision myself.


  63. - RNUG - Monday, Feb 29, 16 @ 12:55 pm:

    = Because my experience with the Pension Board Guarentee Corporation (PBGC) took over after my company was sold and the pension pay out was a fraction of what it should have been. ==

    - Ms. SHEESH - , obviously you are new here because I have covered all that in years past.

    First, the PBGC is there for when private companies abandon their pensions, either through financial skullduggery such as underfunding or only being invited in company stock, or bankruptcy reorganization of one type or another.

    Because of Federal Law and their ability to raise revenue through taxation, states can’t take bankruptcy, so there is no equivalent to the PBGC. In addition, Illinois does not allow bankruptcy for any government entities.

    In most states, the pensions are backed by the full faith and promise of the state, basically the same as most General Obligation bonds and basic Contract Law. In the case of Illinois, the Pension Clause in the State Constitution makes it crystal clear the pensions are a contract AND they can’t be diminished (reduced).

    The only loophole to such an arrangement is arguing state’s reserved “police powers” and the IL SC has already made in clear in the SB-1 ruling that the court won’t buy it … especially when the “crisis” is self-created. And you are unlikely to get such a claim into Federal court since it is the State itself dealing with its own employees (part of State’s rights).

    “Police powers” arguments by states have been tried before, mostly during the depths of the Great Depression. Even in the midst of that financial disaster, only one such claim was partially approved. If there is anything that is a sure bet, it is a government pension in Illinois.


  64. - Formerly Known As... - Monday, Feb 29, 16 @ 12:56 pm:

    As @RNUG says, these are both bad deals for nearly all retires.

    Still, it is good they have moved on to discussing options that are plausibly constitutional in nature instead of blatant diminishments without consideration.


  65. - Anonymous - Monday, Feb 29, 16 @ 12:59 pm:

    Nice option for a very few. If only those with no spouse and a short life expectancy take the deal, it may cost the state money.


  66. - My two cents worth - Monday, Feb 29, 16 @ 1:00 pm:

    Ms. SHEESH @ 12:10
    Pensions are Constitutionally protected. There cannot be any take over. Even if the Constitution were to be changed, as pointed out earlier today, what is earned is earned, period. When you look at the fact the last challenge to the ISC, the ruling was unanimous. All the State can do is offer plans like these and hope some people will take them. The reality is that the system has been severely underfunded for decades. It makes great copy and plays to the conservative base to try and reduced the benefits, but in reality, nothing much is going to change for years to come. Maybe someday, we will have some level heads running things and they will restructure the ramp. Probably just me wishful thinking.


  67. - spidad60 - Monday, Feb 29, 16 @ 1:00 pm:

    I would like to add my thanks to RNUG, always appreciated. One option I have yet to hear from anyone is to increase the pension contribution by both the State, and employees. Such an increase would need to be calculated so that the employee contribution would only increase to the amount that adjusts for market fluctuation and not making up for the employer’s missed contributions. Is this option permitted under pension laws?


  68. - Cassandra - Monday, Feb 29, 16 @ 1:04 pm:

    Sigh.

    Sounds like these proposals would result in a diminishment, which is unconstitutional, even if the employee agrees to it. You can’t agree not to be covered by the constitution.

    Why do both parties, and let me emphasize the both, keep ignoring the crux of this dilemma. If you are going to save large sums of money on pensions, you have to diminish the pensions. And that’s unconstitutional.


  69. - Almost the Weekend - Monday, Feb 29, 16 @ 1:06 pm:

    -Reality Check at 11:16-

    Dont worry I was around. I was also around in 2013 when they also fought hard against pension reform, but lost. I was also around in 2014 when they fought hard to elect Kirk Dillard in the Republican Primary, but lost. I was also around in 2015 in their attempt to get enough votes in the house in 2015 to seek arbitration, but lost.

    My point is fighting hard doesn’t cut it, you need results. AFSCME needs new leadership to change their PR perception in media around the state and to show rank and file that they are for real. The status quo worked in the 20th century, but not now.


  70. - Harry - Monday, Feb 29, 16 @ 1:15 pm:

    In order for the Plans to retain IRS qualification, the lump-sum payouts have to be fair value for the value of the annuity being cashed in. That will probably mean a discount rate well under the 7.25-7.5% currently used, maybe in the 4.5-5% range.

    Poof!! No savings, even from the few who take the option.

    But sure, we can all waste time talking about it rather than doing useful things.


  71. - phil T. - Monday, Feb 29, 16 @ 1:19 pm:

    @BC

    I think a lot of employees would take that deal. If they’re planning on working a full 25 or 30 year career, it would be really stupid financially. But it might make more sense for someone who only pays into the pension for 10 or 15 years.

    Would love to hear from a pension actuary about this idea.


  72. - JS Mill - Monday, Feb 29, 16 @ 1:29 pm:

    =I don’t know, my aunt getting 2, $10,000 raises her final years paying into TRS sure seemed to help bump up her pension.=

    And that has what to do with my point? I never said that it won’t/doesn’t impact individual pensions. As a matter of mathematics, it does not contribute significantly to the pension problem.

    Like it or not that is factual.

    $10k per year, interesting. So she was granted a flat figure, not the 6% per year that has been the max in the statute? If districts go above the 6% then they are liable for the additional expense.


  73. - RNUG - Monday, Feb 29, 16 @ 1:40 pm:

    == increase the pension contribution by both the State, and employees. ==

    The State can increase their share any time they want to; they don’t want to increase, they want to DECREASE.

    UNLESS a new / enhanced benefit is offered, you can NOT increase the employee portion of the contribution. The pension contract IS an individual, not group, contract and can only be changed by VOLUNTARILY agreement by the State and each INDIVIDUAL employee. Why would you as an employee agree to contribute more for nothing in return?

    You want to offer something? Then offer to lower the Rule of 85 by 1 for each year an employee pays double (8% instead of 4% for SERS coordinated as an example). Cap it at a max of, say, 10 years reduction). Being able to retire younger would be worth something to a lot of people.

    It would provide a short term minor influx of cash. It may not save much of the pension liability (I’ll let people at the systems try to figure that out but it might be turn out to a bad idea like the 2002 ERI). It would get rid of high paid Tier 1 people and their increasing pension liability and replace them with lower paid Tier 2 people and their excessive pension contributions, so there would be some GRF payroll line item savings and, maybe, a slight positive impact on the pension fund liability. Bureau of Personnel would have to figure if that was a net gain or loss after including that additional health insurance costs for the younger retirees. And it should be constitutional.


  74. - JS Mill - Monday, Feb 29, 16 @ 1:55 pm:

    The only completely constitutional way the state can significantly reduce pension costs is through cost shift. That would be a $1.4-$1.6 billion cost reduction. The other entities (schools etc.) will have to find a way to fund the payments, for many that would be a back breaker financially.


  75. - CharlieKratos - Monday, Feb 29, 16 @ 2:13 pm:

    I suppose you could also offer a “1 week for each percent” option where you get an extra week of vacation for each 1% the employee picks up. Or something like that.


  76. - Blue dog dem - Monday, Feb 29, 16 @ 2:35 pm:

    I would be surprised if this amounted to ’spit in the ocean’ in the big pension scheme. But if it makes the RAUN Man feel like he has accomplished something, well then it is a good thing. RNUG and I have had dialogue on how most young people lack when it comes to financial planning, but I also recommend for those who would think about “cashing out” to get help from a professional.


  77. - Captain Illini - Monday, Feb 29, 16 @ 2:57 pm:

    RNUG: Interesting idea. A few years back - probably 10 or so now - I tried to offer an incentive program to a Senator to evaluate that allowed vested employees to buy up to five years of time & age in exchange for not retiring until five years had past, where all the money collected would be in the pension funds. Persons could buy less time up to one year, etc. She told me their analysis found it to be a money loser, but I can’t see how. In any event, creative ideas like this are how we’ll eventually get out of this mess I believe.


  78. - RNUG - Monday, Feb 29, 16 @ 3:22 pm:

    - Captain Illini -

    May have to put limitations, like staying a minimum of 5 years like you say or longer, to possibly make it have savings.


  79. - Captain Illini - Monday, Feb 29, 16 @ 3:35 pm:

    -RNUG-
    Much respect.
    Yes, the theory was to allow for a quicker turn over of higher paid employees for lesser paid new employees, as well as strictly reserving the funds for pensions. If you bought five years, you must work five years longer, etc. Now with Tier 2, this idea has more merit since it eliminates Tier 1 employees over time, with incentive as they will realize the Rule of 85 sooner.

    Thanks again for all your cogent analysis.


  80. - Anonymous - Monday, Feb 29, 16 @ 3:41 pm:

    =I don’t know, my aunt getting 2, $10,000 raises her final years paying into TRS sure seemed to help bump up her pension.=

    @Robert

    I feel you on this one. Although I am a Union member, that stuff is ridiculous. Trust me when I tell you that most Union guys that I know feel the same. Of course, they aren’t going to be getting those two 10K raises.

    I’m Definitely Pro-Union but when I hear about stuff like that it makes me cringe. Somebody needs to police that. A few get rich while the rest of us hope our pensions survive the next challenge. It’s sad.


  81. - Arthur Andersen - Monday, Feb 29, 16 @ 4:19 pm:

    Captain IL and RNUG-most purchase of service credit programs cost the pension funds because there is no employer match to the employee’s portion of the cost of the purchased credit. (One notable exception is for service as an officer/employee of a statewide labor organization-that service requires both portions to be paid.)

    A creative solution might require employees picking up more of the freight.


  82. - Independent retiree/lawyer/journalist - Monday, Feb 29, 16 @ 5:44 pm:

    —RNUG Then maybe I could afford to buy a vacation home in Santa Fe … or pay off the two mortgages I currently have!—
    You have been such a big help to people with your analysis, here’s a tip for you. Can’t afford Santa Fe itself? Try the town surrounding Santa Fe, including but not limited to the northern suburbs of Albuquerque like Bernalillo, Rio Rancho, Placitas, etc.!


  83. - RNUG - Monday, Feb 29, 16 @ 6:24 pm:

    - Independent retiree/lawyer/journalist -

    Thanks. We have friends in Albuquerque proper. We might move to the area someday once we no longer have ties here.


  84. - Blue dog dem - Monday, Feb 29, 16 @ 6:34 pm:

    RNUG….you have been a good help on this issue. When you find a misstatement, you are not demeaning. I think that is classy. As a token of my appreciation, might I recommend some inexpensive third home options. If you like water, you can’t beat Cairo. Build tall enough, you can see water on both sides…..


  85. - up2now - Monday, Feb 29, 16 @ 7:16 pm:

    There’re just not enough good things to say about RNUG. You are a true gem of insight and clarity on the pension issue.


  86. - RNUG - Monday, Feb 29, 16 @ 9:08 pm:

    == Build tall enough, you can see water on both sides….. ==

    - Blue dog dem -, nice suggestion but these days we avoid stairs, that’s why I’m living in a small 2 bedroom ranch w/o a basement and a garage bigger than the house! … and my son & family are living in my large former home.


  87. - RNUG - Monday, Feb 29, 16 @ 9:28 pm:

    == what if the state offered to buy back the 3% compounded AAI from currently employed Tier 1 participants? ==

    -BC-

    I understand your point and it would save the State quite a bit in the long run. But if you run the numbers, it would be a really bad deal … $10K now would cost you anywhere from $100K to $250K over a typical life expectancy if you retired at age 60. Compounding really is a big deal.


  88. - Person 8 - Monday, Feb 29, 16 @ 9:52 pm:

    So I took this example from the article: “Batinick said that for the Teachers Retirement System, someone who would retire with a $50,000 annual pension would have net present value of $750,000. Under Batinick’s proposal, the employee could get 75 percent of that as a lump sum.”

    To put that into perspective…..TRS employee retires at 62 with above annuity. They would reach 75% of $750K (563K), in 10 years receiving the normal annuity. Even if the money is reinvested and gets a 3% return on investment, the money runs dry after 11 years.

    Now try that with a 55 year old….with a 7% return on investment. The money would run dry by age 69.

    (for both examples I deducted what their annuity would have been, if they had withdrawn that amount each year)


  89. - Ms. SHEESH - Monday, Feb 29, 16 @ 11:14 pm:

    RNUG…..yes, I am new…thanks very much for your information and clarification. I agree…if there was a tip jar, I’d be helping to fill it!!!


  90. - lisabgood1 - Monday, Mar 7, 16 @ 1:41 pm:

    RNUG - how would these new Bills affect survivor benefits? Thanks!


  91. - lisabgood1 - Monday, Mar 7, 16 @ 1:44 pm:

    RNUG - how would these new Bills affect survivor benefits? Thanks!


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