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CTBA: Tier 3 plan will cost government, employees more, won’t save much money

Wednesday, Sep 27, 2017

* From the Center for Tax and Budget Accountability…

Illinois’ fiscal year 2018 budget introduced major changes to the state’s public pension systems in an attempt to grapple with Illinois’ roughly $130 billion in unfunded liabilities. One of the most important aspects of these changes was a new package of benefits. This new package, called “Tier 3,” introduced a hybrid defined benefit-defined contribution plan in addition to the defined benefit plans of Tier 1 and Tier 2.

This month, the State Universities Retirement System (SURS) released the first long-term actuarial analysis of the effects of Tier 3 and other changes contained in the FY2018 budget.

CTBA has identified three major takeaways from SURS’ analysis:

    * The “normal cost” of Tier 3’s defined benefit plan-that is, the cost of funding the benefits earned by current employees in a given year-will be higher than many observers expected. As a result, public employers-in this case, public universities and colleges-will be required to make larger payments on behalf of their Tier 3 employees.

    * The larger normal cost also means that Tier 3 employees will pay the maximum 6.2 percent of their income towards the defined benefit portion of their retirement benefits. When added to the 4 percent of income they will pay towards the defined contribution portion of their retirement benefits, that means Tier 3 employees will pay 10.2 percent of their income in pension contributions-significantly more than the 8 percent current SURS workers pay.

    * Contrary to some reports, which concluded that because Tier 3 will not be implemented in FY2018 it will not be able to produce any savings in this fiscal year, SURS still projects $61 million FY2018 savings from Tier 3. Over the long run, however, the pension changes made in the FY2018 budget do not meaningfully reduce the state’s projected pension payments.

The full report is here.

Apparently, the new plan is just about as “This Is Illinois” as you can get.

- Posted by Rich Miller        

22 Comments
  1. - Macbeth - Wednesday, Sep 27, 17 @ 11:37 am:

    So — here’s a question: given Rauner’s 2 year plus tenure. Has he — at anytime during his administrastion — actually *solved* a problem?

    What I’m getting — sensing — is that Rauner — and his incredible world of business savvy — has *caused* many problems.

    And here, this is one more problem caused by Rauner.

    Is it one of those perspective things? Like, Rauner sees this as a success? Not as a problem?


  2. - walker - Wednesday, Sep 27, 17 @ 11:45 am:

    Can we please stop the posturing about “pension reform” as a campaign meme. There is one legal way to reduce our accumulated pension obligations — pay them down.

    Next issue please.


  3. - A Stounded - Wednesday, Sep 27, 17 @ 11:53 am:

    About right for Governor 1.4%….winning!


  4. - Annonymous - Wednesday, Sep 27, 17 @ 11:59 am:

    “Over the long run, however, the pension changes made in the FY2018 budget do not meaningfully reduce the state’s projected pension payments.”

    True, but the pension payments going forward are primarily due to under funding of past pensions. Tier 3 is a shift toward defined contribution plans and helping shield the state away from pension holidays/under funding whether it be due to corrupt politicians or unsteady economic conditions


  5. - Casual observer - Wednesday, Sep 27, 17 @ 12:00 pm:

    IIRC, RNUG has been saying these things about Tier 3 since it started being discussed. No news here.


  6. - My button is broke... - Wednesday, Sep 27, 17 @ 12:05 pm:

    Tier III wasn’t really designed to save money, it is a Tier II fix. (Maybe it was perceived to save money and no one fixed the misperception.) TRS has been saying for a while that Tier II will eventually violate Social Security minimum benefit levels and either the State would have to increase their benefits or the employees would join Social Security which would cost their employers. Tier III fixes this. This is why Tier III only applies to employees that don’t participate in Social Security (SURS and TRS). Tier III does not apply to the majority of SERS employees (with the exception of State troopers and others that do not participate in Social Security).


  7. - Name/Nickname/Anon - Wednesday, Sep 27, 17 @ 12:05 pm:

    The SERS savings will be miniscule as compared to SURS savings. Tier 3 will impact only a very small group of SERS employees.


  8. - California Guy - Wednesday, Sep 27, 17 @ 12:08 pm:

    Am I missing something here? Tier 3 increases the payments of employees toward their pensions. It also increases the amount that the employing institution must pay - which would be the universities. How is that a bad thing? The state’s pension liabilities remain high because of past pension debt. I thought the point of this plan was to “stop the bleeding?”

    This looks like another example of “this isn’t perfect, so let’s do nothing” that added to Illinois’ pension problems in the first place. You have to start somewhere.


  9. - DuPage - Wednesday, Sep 27, 17 @ 12:27 pm:

    None of the new pension schemes will eliminate the need to pay back the money previously “borrowed” (by the state not paying in required contributions). They owe the money, and will need to pay it.


  10. - JS Mill - Wednesday, Sep 27, 17 @ 12:59 pm:

    =This looks like another example of “this isn’t perfect, so let’s do nothing” that added to Illinois’ pension problems in the first place. You have to start somewhere.=

    No, it is more like this does not save any money because Tier 2 is doing that and the biggest cost is the old long term debt.

    In addition, very few people will opt for Tier 3. So there is that.

    @ Walker is right, paying the debt is the only way to reduce long term costs.


  11. - City Zen - Wednesday, Sep 27, 17 @ 1:27 pm:

    “Tier 3 employees will pay 10.2 percent of their income in pension contributions-significantly more than the 8 percent current SURS workers pay.”

    So a 28% increase is significant? How did CTBA describe the recent tax hike that was 32%? I’m sure they didn’t use the word “significant.”

    PS - And if 10.2% is significant, what does CTBA think of my working family contributing 13% towards our 401k’s, and that doesn’t include SSI. What about that “significant” burden?


  12. - G'Kar - Wednesday, Sep 27, 17 @ 1:29 pm:

    Once again, perception (Tier 3 will fix pensions) is more important than reality.


  13. - City Zen - Wednesday, Sep 27, 17 @ 1:47 pm:

    This report includes none of the risk analysis one would expect in a financial assessment. Typically, one spends more today to offset the risk of tomorrow. Does Tier 3 accomplish this for Tier 3 participants?


  14. - Hieronymus - Wednesday, Sep 27, 17 @ 1:58 pm:

    @CZ 1:27pm

    IMO, as long as the level of benefits is reasonably matched to its actuarially required contributions, and those contributions are actually made, then what is the beef?


  15. - Demoralized - Wednesday, Sep 27, 17 @ 2:43 pm:

    ==So a 28% increase is significant? ==

    I would say yes. If my withholdings went up 28% that would be significant and I would imagine it is for most people.

    It’s pretty easy to not have a problem with what comes out of someone else’s paycheck isn’t it?


  16. - City Zen - Wednesday, Sep 27, 17 @ 2:53 pm:

    ==I would say yes. If my withholdings went up 28% that would be significant and I would imagine it is for most people.==

    Never said it wasn’t. Just that CTBA seems to suffer from selective significance syndrome.


  17. - Anonymous - Wednesday, Sep 27, 17 @ 3:28 pm:

    California Guy - where does the money come from that the Universities would have to pay?


  18. - California Guy - Wednesday, Sep 27, 17 @ 3:45 pm:

    @ Anonymous

    Their budget. I’m assuming they will make some admin cuts that are probably already needed anyways. The alternative would be the State’s budget.

    The only way to pay down pension debt is to put more revenue towards pensions. This guy makes it sound like going from 8% employee contribution to 10.2% is some kind of deal breaker. The only legal route currently available to fix the pension issue long term is to reduce future benefits and increase pension funding (from employee, the employing institution, and the State if needed).


  19. - RNUG - Wednesday, Sep 27, 17 @ 5:28 pm:

    Always nice to have your analysis validated … /s


  20. - Ron - Thursday, Sep 28, 17 @ 1:48 am:

    No future state employee should have a pension. Ever again


  21. - Carl LaFong - Thursday, Sep 28, 17 @ 12:06 pm:

    I will bet that Ron is unaware that the State pays no FICA for its employees.


  22. - Tierd - Friday, Sep 29, 17 @ 9:55 am:

    What the state, county and city need to do is buy out the tier 1 employees who are an aging work force that expend more than they contribute. In terms of salary, health care cost, benefits ect.. use the payroll savings, which can total in the hundreds of millions of dollars to pay into the pension obligations in stead of constantly hiking taxes. And if they have to backfill any of the vacant positions. Those positions can be filled with younger people at half the salary and benefits and pay more into the pension obligation. Like the tier 2 and 3’s.


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