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* AP…
Gov. Bruce Rauner is touting a Senate plan to fix Chicago’s pension system after the Illinois Supreme Court rejected the city’s bailout plan.
The court ruled unanimously Thursday that the law reducing benefits and increasing employee contributions to fill an $8 billion hole in two retirement programs violated the state constitution’s protection of promised benefits. It ruled the same way on a state-pension overhaul last year.
According to audio released by his office, Rauner told reporters at a school visit in Paxton that benefits already accrued should be untouched. He backs a plan by Senate President John Cullerton — a Chicago Democrat — to offer employees a choice of less-expensive future retirement options.
* From yesterday’s Supreme Court decision…
Even taking as true the facts advanced to support the City’s claim, we hold that as a matter of law, members of the Funds did not bargain away their constitutional rights in this process. To be sure, ordinary contract principles allow for the modification of pension benefits in a bargained-for exchange for consideration. Buddell v. Board of Trustees, State University Retirement System, 118 Ill. 2d 99, 104-05 (1987) (pension rights can be modified “in accordance with usual contract principles”). As we explained in Heaton, the pension protection clause was not intended to prohibit the legislature from providing “additional benefits” and requiring additional employee contributions or other consideration in exchange. Heaton, 2015 IL 118585, ¶ 46 n.12. Likewise, nothing prohibits an employee from knowingly and voluntarily agreeing to modify pension benefits from an employer in exchange for valid consideration from the employer. Kraus v. Board of Trustees of the Police Pension Fund, 72 Ill. App. 3d 833, 849 (1979); see also York v. Central Illinois Mutual Relief Ass’n, 340 Ill. 595, 602 (1930) (“one party to a contract cannot by his own acts release or alter its obligations. The intention must be mutual.”).
* Now, here’s the Cullerton plan as described by Mike Schrimpf on Jan 22, 2016…
Pension Plan Summary
BenefitsTier 1 members (hired before January 1, 2011) in SERS, SURS, TRS, and GARS are provided two choices and must make an election between the two choices.
Choice 1
· COLA is the lessor of 3% OR ½ CPI, simple interest on the originally granted annuity.
In Exchange For
· Future increases in salary will count as pensionable salary.Choice 2
· No changes to current level of pension benefits; COLA remains at 3% annually, compounded.
In Exchange For
· Future salary increases will not count as pensionable salary.
* From the Illinois Constitution…
SECTION 5. PENSION AND RETIREMENT RIGHTS
Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.
* From our resident pension expert RNUG, who has been proven right every time…
Let’s take a look at the legislation through the lens of the most recent decision that basically says you can’t change things except, MAYBE, by the consideration contract model.
A court would take up the issue of diminishment under the Pension Clause first, then look at contract law consideration.
First, there is no “keep what you have” option. The proposed choice is coerced, so it’s not going to be judged as voluntary under contract law and that is before we even look at any consideration or diminishment issue.
In Choice 1, the so-called consideration is that future salary increases will count as pensionable salary. How is that different from today? It isn’t; today any raise received will be part of the salary used in the pension calculation formula. So you get nothing new in exchange for giving up your 3% compounded AAI. Doesn’t sound like any kind of valid consideration and, in fact, diminishes your future pension payments.
In Choice 2, the so-called consideration is keeping your existing 3% compounded AAI in exchange for diminishing the salary basis used for calculating the pension. You get to keep what you are already entitled to in terms of pension payments, but we won’t let you have a higher Final Average Compensation than you have today. In other words, we will limit one of the factors used to calculate your pension. That is clearly diminishment, and there have been a number of prior rulings that, to paraphrase, say you don’t have to give raises, but if you do, it counts towards the pension.
Without citing the various cases, it’s clear to me that both Choice 1 and Choice 2 would likely be ruled unconstitutional.
Now if you added “keep what you have”, it might be legal enough to pass the constitutional test but it might still have issues as to whether or not is was “valid” consideration … although the IL SC did tend to imply if you were fool enough to voluntarily agree to a bad deal, it might be legal.
I can’t imagine anyone who understood it taking either choice voluntarily.
And if forced to make a choice, personally, I would refuse to choose - while undoing things after any court ruling - so I could later argue to the IRS that “irrevocability” did not apply because I never agreed to the change.
- RNUG
posted by Rich Miller
Friday, Mar 25, 16 @ 8:18 am
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Thanks for the continued analysis.
Would a one-time bonus suffice as consideration? Perhaps ees under 30k get $1,000, under 50k get $1,500, under 80k get $2,000, all others get $2,500? I know, the amounts would need serious work, but would the concept pass?
Comment by Mongo Friday, Mar 25, 16 @ 8:26 am
Outstanding Analysis in Easy to Understand Language-Thank You RNUG
Comment by x ace Friday, Mar 25, 16 @ 8:29 am
Kudos to RNUG.
Comment by Norseman Friday, Mar 25, 16 @ 8:30 am
Rung, thanks again for your analysis. Your time spent is well appreciated.
Comment by No Longer A Lurker Friday, Mar 25, 16 @ 8:31 am
Thanks again for your careful review and concise summary.
Comment by weltschmerz Friday, Mar 25, 16 @ 8:32 am
=== Outstanding Analysis in Easy to Understand ===
Agree, but somehow reading comprehension escapes our policy leaders.
Comment by Norseman Friday, Mar 25, 16 @ 8:32 am
Times change, folks. Time to make a thoughtful change to the constitution. the city and state cannot sustain this, and harmful to taxpayers.
Comment by anon Friday, Mar 25, 16 @ 8:33 am
=== Time to make a thoughtful change to the constitution===
Such as?
Comment by Rich Miller Friday, Mar 25, 16 @ 8:35 am
Could we get you to explain this to the Gov, GA and Senate? Apparently they don’t understand! Thank you for your great explanation.
Comment by BBG Friday, Mar 25, 16 @ 8:37 am
Even if the constitution is changed it still wouldn’t apply to those already in the system. This will not be fixed by taking away what has already been earned by workers.
Comment by historic66 Friday, Mar 25, 16 @ 8:37 am
Great analysis.
Why — why?! — don’t they simply start with the premise that one choice *has* to be what exists now.
And then move to — okay, so, what will entice people to choose the second choice — something new and interesting and possibly persuasive?
I’ve always thought one way to go forward is offer a decrease work week hours — for same salary — in exchange for a lesser pension at the end. Short-term gain in exchange for long-term payout.
Comment by Macbeth Friday, Mar 25, 16 @ 8:39 am
8:33 Anon - The only thing that has changed with time is the refusal of the state to fully fund the pensions. Which the 1970 convention foresaw and which the voters of Illinois agreed to protect against. You may not like the answer, but get used to it — it ain’t changing.
Comment by A worker Friday, Mar 25, 16 @ 8:40 am
There’s something theraputic (or maybe it’s schadenfreudian) about watching RNUG casually dismantle the various pension plans that try to get out of paying what they owe. It’s like watching a master pianist playing Variations on Chopsticks.
Thank you again for your brilliance and ability to distill the arguments down to the essentials and explain with seeming ease why they will not work.
Comment by Name Withheld Friday, Mar 25, 16 @ 8:43 am
Here’s a unique and thoughtful change: FUND the pension systems. What an odd thought that would be
Comment by Anonymous Friday, Mar 25, 16 @ 8:45 am
How do all the big brain deciders ever expect to get a constitutional pension plan when none of them can grasp ‘diminishment’?
If our deciders ever spent all the effort and time solving the pension payment issue, rather than on another cockamamie ‘plan’, IL would be a LOT further along.
Comment by sal-says Friday, Mar 25, 16 @ 8:46 am
==offer a decrease work week hours — for same salary ==
They did that once. But we are finding out now that new Governors apparently are not bound by the old contracts and will try to force employees back to the 40 hours with the same pay. The workers may never agree to that concession again after that was one was Rauner’s contract demands.
Comment by HangingOn Friday, Mar 25, 16 @ 8:49 am
=== the city and state cannot sustain this, and harmful to taxpayers. ===
Was it harmful to taxpayers when the GA and governor decided to use the pension funds as a piggybank for state government?
Comment by Anonymouth Friday, Mar 25, 16 @ 8:50 am
“FUND the pension systems.”
Unfortunately, there isn’t the political will to raise taxes enough to pay for the government and fully fund pensions.
Comment by Huh? Friday, Mar 25, 16 @ 8:52 am
Great job RNUG!
Perhaps if a “None of the above” option were added, plus a $10,000 one-time cash incentive added to the other options. This would likely get lots of takers for the other options and make them true choices.
To quote Rauner “Short term pain (for the state) for long term gain”.
Comment by Omega Man Friday, Mar 25, 16 @ 8:54 am
What’s really tragic is that the 3 percent annual COLA didn’t even exist in 1970. We have Jim Thompson to tank for the give away which is most responsible for the unfunded liability
Comment by Sue Friday, Mar 25, 16 @ 8:55 am
Chicago’s choices are 1)raise the retirement age 2)Sell property 3)City income tax 4)Exit the public education business by contracting out education to the private sector. 5)Raise employee contribution levels to the pension plans. Eventually, declare Chapter 9 if Illinois state law is changed to allow it. I do realize that some, if not all, these choices aren’t real doable in Chicago or the state of Illinois but something will have to change. Can Chicago raise sales taxes much higher without bringing in less revenue? Can Chicago raise property taxes much higher without destroying property values and bringing in less revenue?
Comment by Steve Friday, Mar 25, 16 @ 8:56 am
Well, I’m going to disagree with RNUG’s analysis slightly. First, I’d note that there is not an actual bill, so none of us REALLY know what Cullerton’s proposal is.
However, my understanding is slightly different from what RNUG has stated. My understanding is that the plan is essentially to declare an indefinite wage freeze for all state employees. That is, no future raises (period). The state would then offer to lift that freeze for employees who agreed to the pension changes outlined. The difference is subtle, but important. Employees have no rights to future wage increases (unless a CBA or other law requires it). Under the proposal as I understand it, an employee could, in fact, “keep what they have” under the pension system. They don’t have to agree to the state’s offer. If they don’t agree, however, then they risk not gettin any future salary increases (or, the state could offer such increases conditioned on the employee’s agreement that such increases would not count in their pensionable earnings - there is a NY case that held that payment of bonuses to state employees conditioned on their agreement not to count the bonus as pensionable earnings was constitutional under NY’s pension clause, which is the model for Illinois. I don’t have the cite in front of me, but I think it is cited in Madiar’s article).
Now having said this, I think RNUG is correct that there are several contract law doctrines - economic duress, unconscionability, the implied obligation of good faith - that could be used to invalidate this kind of ploy by the state. In addition, there is a doctrine called “the doctrine of unconstitutional conditions” that makes it unconstitutional in some cases (not all) for the government to require a waiver of constitutional rights in order to receive a government benefit (e.g., a raise or some other monetary benefit). For example, I’m pretty sure that if the state passed a law saying to employees “No future raises for you unless you agree to waive forever your constitutional right to a jury trial,” I’m pretty sure the ILSC would say “no way.”
But given some of the language about “waiver” in the current ILSC opinion, it is not entirely clear to me that Cullerton’s plan as I understand it, is facially unconstitutional. I don’t think it will fly, but if you start from the premise that employees have no entitlement to future raises at all, then it IS technically consideration to tell an employee “I’ll give you a hefty raise, which you are otherwise not going to get, but only if you agree to certain pension changes; if you don’t want to agree to the pension changes, fine, but then no raise.” At the very least, the ILSC’s language gives the Legislature and Governor an opening to try this without looking completely crazy. Unfortunately.
[Note that I tried to post this comment yesterday in the thread on “Is Consideration Still Alive” but I’m not sure it actually made it; I apologize if this is a duplicate from yesterday].
Comment by jdcolombo Friday, Mar 25, 16 @ 8:56 am
=- anon - Friday, Mar 25, 16 @ 8:33 am:
Times change, folks. Time to make a thoughtful change to the constitution. the city and state cannot sustain this, and harmful to taxpayers.=
YOUR assertion that a change to the constitution be made, obviously to brake the contract with taxpayers, would be harmful to taxpayers.
I know you are merely a troll, but at least understand that the pension is affordable. The annual cost has come down $400-$500 million since Tier II was enacted. That is real saving if you consider that annual cost was around $1.9 billion at the time. And the annual cost will continue to decrease for a while.
The rest is DEBT. Maybe you don’t pay your debts. Sounds like you do t from your comment. But there is no way out of this one. The rest of this is a political side show.
Great job RNUG.
Comment by JS Mill Friday, Mar 25, 16 @ 8:57 am
I wouldn’t be surprised should a healthcare benefit be used as a consideration for existing employeees. If Rauner gets his way and slashes employe healthcare to the bronze level with higher premiums I could see a platinum plan offered with low to non existent premiums in exchange for simple cola or future time being tier 2. Wouldn’t appeal to those close to retirement bur for younger tier 1’s with a family might.
Comment by Mason born Friday, Mar 25, 16 @ 8:59 am
Thoughtful change to Constitution from novice view–
Add language to the Constitution that would limit or prevent Early Retirement Options.
Too many times the political winds change direction and blow from the right or the left and a whole group of employees are allowed to retire very young.
Taxpayers should not need to be paying a 52 yr old $100,000 per year with full family health coverage. It does not pass the smell test.
Keep your benefit, but no payday until you are 65.
(It would be interesting to see an age breakdown, across all retirement systems)
RNUG’s efforts are priceless and provide such an important service. Many thanks.
Comment by cdog Friday, Mar 25, 16 @ 9:01 am
== Would a one-time bonus suffice as consideration? ==
Anything can be consideration IF it is a VOLUNTARILY choice. The courts would want to make sure there was no coercion.
Although the courts might intervene in a drasticly unbalanced or extremely complex but unexplained deal, it is not the court’s job to protect you from yourself. Sufficient would in the eye of the beholder. Or to put it another way; a fool and his money are soon parted.
Comment by RNUG Friday, Mar 25, 16 @ 9:02 am
@Sue- I would like to see your math on your cola assertion. Hint: you won’t find it since it does not exist. Under funding is the single biggest reason for the unfunded liability. Go visit the CTBA website. It is all broken down for you and they even use color coded charts.
Comment by JS Mill Friday, Mar 25, 16 @ 9:05 am
The other important part of the decision was that the unions have no right to negotiate changes to the pension on behalf of their members. Even if you could get AFSCME leadership to agree to reduced pension benefits in exchange for less hours, earlier retirement, etc., that doesn’t bind the individual members.
This leaves the only real option a voluntary reduction in benefits by each individual employee in exchange for something that employee finds beneficial. The two most likely are earlier retirement and a cash payout. The problem for the State is that most people act rationally. While you may get some who take a significantly lower cash payment than their pension is worth, you aren’t going to get many who do so unless it is to their advantage. For example, not many healthy retirees are going to take 75% of their pension value in a cash payment, but someone with a terminal illness may. That doesn’t help the State save any money.
Comment by Pelonski Friday, Mar 25, 16 @ 9:07 am
JS- you fail to appreciate how much less the taxpayers would need to fund but for the 3 percent annual compounding benefit. By the way inflation has been non existent for the past 25 years nevertheless you keep getting this giveaway. NY another liberal bastion doesn’t even have this provision
Comment by Sue Friday, Mar 25, 16 @ 9:09 am
RNUG, thank you for your analysis of Cullerton’s pension plan.
Comment by Mama Friday, Mar 25, 16 @ 9:10 am
“Tier 1 members (hired before January 1, 2011) in SERS, SURS, TRS, and GARS are provided two choices and must make an election between the two choices.”
“hired before January 1, 2011″ - I am assuming this excludes retirees.
Comment by Mama Friday, Mar 25, 16 @ 9:12 am
== What’s really tragic is that the 3 percent annual COLA didn’t even exist in 1970. We have Jim Thompson to tank for the give away which is most responsible for the unfunded liability ==
The 3% AAI was accompanied by an increase in employee contributions. In the case of SERS, the rate for coordinated employees went from 3% to 4%, a 25% increase in employee contributions. The contribution rate wasn’t picked by the employees; it was picked by the State and private financial experts to properly fund the AAI. And it was the State’s choice to make it a 3% AAI instead of a COLA because the State wanted a predictable number for budgeting purposes.
Comment by RNUG Friday, Mar 25, 16 @ 9:14 am
RNUG’s analysis is pretty strong, but he fails to take into account one thing: current public employees don’t have a claim raises indefinitely. Yesterday’s decision leaves open the possibility the union workers (in the next union contract, for instance) would not get a raise except with pension implications. Similarly for non-union workers. In other words, future raises (not protected by the pension clause) become an element in the bargained-for-exchange model.
Comment by ChiTownSeven Friday, Mar 25, 16 @ 9:15 am
== Chicago’s choices are 1)raise the retirement age 2)Sell property 3)City income tax 4)Exit the public education business by contracting out education to the private sector. 5)Raise employee contribution levels to the pension plans. ==
-Steve-,
The courts have already ruled out #1 and #5.
Comment by RNUG Friday, Mar 25, 16 @ 9:17 am
Return the pension program to the same as 1970, eliminating all of the added perks over the past 4 decades. By the letter of the law, nothing has changed!
Comment by Anon Friday, Mar 25, 16 @ 9:19 am
At a minimum, we need to start taxing pension benefits and put that billion generated annually back into the pension funds. That’s one thing we can absolutely do.
Comment by Dan Johnson Friday, Mar 25, 16 @ 9:21 am
Under this analysis, there needs to be a “keep what you have” option in any reform to pass constitutional muster. So in order to get the employee to choose an option that changes their current plan, it would need to be a pretty attractive deal for the employee. I don’t see how this would do much more than nibble around the edges of the pension problem.
Comment by Anonymous Friday, Mar 25, 16 @ 9:21 am
==keep getting this giveaway==
As RNUG so eloquently stated, the employees pay into it. Which stands to reason if they decide to cease this practice, there would be millions of dollars, payable immediately, to refund the employees who paid into this. I don’t see where the state can afford to do that.
Comment by HangingOn Friday, Mar 25, 16 @ 9:21 am
There is a small group of Tier 1 employees that might take a buyout. You vest in the pension at 7 years of service, actually 7 1/2 because of the 6 month probationary period (which you can buy back). That means there are a group of Tier 1 employees who have not vested. Don’t know how many or how much money it would save the state to see if they would take a buy-out.
Comment by BBG Friday, Mar 25, 16 @ 9:23 am
- jdcolombo -
I agree a one-time bonus, which is what I believe the NY case was about without tracking it down, could be deemed non-pensionable. But to quibble a bit, once it becomes part of the “base” and becomes repetitive on a monthly or annual basis, I think the courts would consider it salary … and the IL courts have been clear salary is pensionable.
Comment by RNUG Friday, Mar 25, 16 @ 9:23 am
With regards to the State using the threat of eliminating future wage increases to force employees to agree to reduced pension benefits, there is little chance this will make a big difference. Given the economic conditions of the State there isn’t going to be much money to fund wage increases, anyway. Few rationale employees will give up a constitutionally guaranteed benefit in exchange for what amounts to a promise that the State will provide raises in the future. The General Assembly has already tried numerous times to get out of their constitutional obligations. There is little doubt that they would do the same with “guaranteed” wages if convenient.
An important thing to remember about any plan the State develops is that employees are not indentured servants. If you permanently stop raises or take other actions designed to coerce a reduction in benefits, it will affect the State’s ability to hire qualified people. You will keep most of the older workforce who can ride out the changes, but the ability to recruit new talent will be greatly diminished.
Comment by Pelonski Friday, Mar 25, 16 @ 9:24 am
===Can Chicago raise property taxes much higher without destroying property values and bringing in less revenue?===
As Chicago has the lowest property tax rate in all of Cook County, it probably can substantially increase the property tax rate without destroying property values. I could be wrong but while the last reported composite property tax rate in Chicago was 6.81% while Rolling Meadows with a property tax rate of 12.26% is not being held back but is one of the fastest growing cities in the state. If the higher property tax rate (almost double) in Rolling Meadows is holding it back it is not evident to me.
Comment by Hit or Miss Friday, Mar 25, 16 @ 9:26 am
I think the compounded vs. simple interest difference is important, but not as sizable a component as is commonly thought. Let’s say someone retires with a $50,000/yr. pension today and lives another 25 years. At 3% simple, the final annual pension is $87,500. At 3% compounded, it is $104,688. A little less than 20% difference.
Comment by Six Degrees of Separtion Friday, Mar 25, 16 @ 9:27 am
This seems to be one of the core debates left.
~jdcolombo, 8:56 a.m.: “…an employee could, in fact, “keep what they have” under the pension system. If they don’t agree, however, then they risk not gettin any future salary increases (or, the state could offer such increases conditioned on the employee’s agreement that such increases would not count in their pensionable earnings,” referencing a NY case upholding payment of bonuses conditioned on the bonuses not counting as pensionable earnings.
~RNUG, original post and @9:23 a.m.: “In other words, we will limit one of the factors used to calculate your pension. That is clearly diminishment,” and “once it [bonuses]…becomes repetitive on a monthly or annual basis, I think the courts would consider it salary…salary is pensionable”
Comment by COPN Friday, Mar 25, 16 @ 9:30 am
== “hired before January 1, 2011″ - I am assuming this excludes retirees. ==
-Mama-
Tier 2 started January 1, 2011 … hen e the date specified.
Comment by RNUG Friday, Mar 25, 16 @ 9:31 am
== (It would be interesting to see an age breakdown, across all retirement systems) ==
It’s in the annual reports of the 5 pension systems. Not always easy to dig out of the stastical tables.
Comment by RNUG Friday, Mar 25, 16 @ 9:33 am
Sue,
If my calculations are correct, inflation has averaged just under 2.7% from 1989 (when the 3% AAI was passed I believe)-2015. So retirees outpaced inflation by about 0.3%? I wouldn’t call that nonexistent. The inflation from in the 1970’s averaged 7% and in the 1980’s 5.5%, so I would say the 3% was pretty spot on in 1989 predicting future inflation. Also, as RNUG mentioned this 3% AAI was accompanied by an increase in employee contributions. Not exactly what I would call a giveaway.
Comment by OswegoTim Friday, Mar 25, 16 @ 9:35 am
One only needs to look at the “fully” funded pension system in Illinois, IMRF, to see the difference between making payments as required and not making payments.
Another point, required pension payments to make the system whole in 2049 are pretty flat from here on out into the future. We are only a few billion out of balance annually in the General Funds budget. A modest set of tax increases (income and motor fuel) coupled with cuts across all appropriations and loopholes (including locals and other statutory transfers) is not difficult math.
Fear mongering and ideology are making a simple mathematical solution, appear impossible to achieve. The perception that the problem gets worse is only true if you don’t ever pay the bills. The destruction of social services and higher education cannot be justified by a fiscal problem whose scale is seen and solved every day in the business world.
Comment by Markus Friday, Mar 25, 16 @ 9:38 am
== Return the pension program to the same as 1970, eliminating all of the added perks over the past 4 decades. ==
Violation of the Constitution. Change the Constitution and you still can’t make it retroactive. And if you could, there is a little issue of both contract law and IRS oversight of pension systems for employees that do not coordinate with SSA; that’s the vast majority of “state” employees, ie, TRS and SURS.
Comment by RNUG Friday, Mar 25, 16 @ 9:39 am
==it IS technically consideration to tell an employee “I’ll give you a hefty raise, which you are otherwise not going to get, but only if you agree to certain pension changes; if you don’t want to agree to the pension changes, fine, but then no raise.” At the very least, the ILSC’s language gives the Legislature and Governor an opening to try this without looking completely crazy. Unfortunately.==
I agree with RNUG and even if the ILSC agrees with the stance above, where is this hefty pay raise and when will we get it? It’s another issue altogether to tell employees you will be given a benefit (i.e. something of value) when the state dictates the value and can (at least theoretically) basically assign it a value of zero. Kind of like telling someone that for $1K, I’ll give them all of the fish I catch in my lifetime but not guaranteeing that I’ll ever even go fishing. I’m not a lawyer but it seems patently absurd unless they outline a “guaranteed” raise schedule for those considering Choice 1 in order to place hard numbers on this so-called benefit.
Comment by CrazyHorse Friday, Mar 25, 16 @ 9:40 am
===Time to make a thoughtful change to the constitution. the city and state cannot sustain this, and harmful to taxpayers.===
First of all, any changes to the constitution will not eliminate the $100+ billion dollar unfunded liability that is the problem. The structure of the pension systems is NOT the problem. The problem was created by the state when it took pension holidays and made reduced contributions which is exactly what Rauner has proposed recently. By the way, every single one of the millions of state employees never missed a single contribution on their part.
Comment by forwhatitsworth Friday, Mar 25, 16 @ 9:40 am
@Sue- “fail to appreciate” no I do t but your incorrect narrative was about the single biggest reason for the unfunded liability. You are, in point of fact, wrong.
I love your “liberal bastion” patter, it is so comety meaningless and irrelevant. Unless you are suggesting that the new “conservativism” is about welching on debts and obligations.
Admirable. /s
No “Sue”, you are going to pay the bill.
Comment by JS Mill Friday, Mar 25, 16 @ 9:43 am
I don’t suppose we could lock RNUG in a room with the governor and legislative leaders, could we? Though admittedly that wouldn’t guarantee they’d listen to him.
Comment by JoanP Friday, Mar 25, 16 @ 9:44 am
“RNUG, can people be fired for refusing to choose one of the new pension plans?”
My question was answered above by jdcolombo @ 8:56 am.
Comment by Mama Friday, Mar 25, 16 @ 9:46 am
If salary is pensionable could increases in the future be given as a once yearly “bonus” for a period of time until actuaries are more favorable. Would need to be negotiated but seems possible?
Comment by Anonymous Friday, Mar 25, 16 @ 9:48 am
I know I mentioned it in a post yesterday, but I would definitely consider giving up my compounded raise for a simple raise in retirement for 5 years of time and 5 years of age. RNUG noted I would lose 100K during my expected retirement years, but I would gladly give away 100K over a 25 or 30 year period in exchange for 5 years of my life. I could make up that 100k in 5-7 years working a minimum wage job if needed.
Comment by Ratso Rizzo Friday, Mar 25, 16 @ 9:51 am
- RNUG -
Yes, it was a one-time bonus, and I agree that there may be limits to “repeating” this kind of offer before it is considered “salary” that must be included in the pension calculation.
Don’t get me wrong - I’m completely disgusted with the state’s various attempts to reduce pension benefits, instead of doing what they need to do: raise taxes and pay what’s owed. And then learn a hard lesson about promising more than you can deliver (unlikely, but one can always hope). But I think the ILSC’s opinion didn’t slam the door on this kind of gambit, meaning that at some point there will likely be yet ANOTHER lawsuit over proposed pension changes. Sigh . . .
Comment by jdcolombo Friday, Mar 25, 16 @ 9:52 am
== That means there are a group of Tier 1 employees who have not vested. ==
They have a right to the pension the day they are hired but haven’t accumulated enough service to actually collect it.
But to take the point you are trying to make, if we draw an 8 year line, the last new Tier 1 was hired December 31, 2010 … almost 5 1/2 years ago. So you would just be talking about the group hired between 2008 and 2011. Pretty much a rounding error in the overall scheme.
And I should note that someone who had previous service under Tier 1 and later returns to State employment after 1/1/2011, is still Tier 1. This is a miniscule group, but there were a few Tier 1 hires in this category. Statistically, they don’t matter in terms of the overall pension debt.
Comment by RNUG Friday, Mar 25, 16 @ 10:00 am
jdcolombo - Well reasoned and balanced analysis of Cullerton proposal.
One thing that would seem to be a problem, in my mind, is how to treat “tier 2″member, as they already have a reduced benefit compared to Tier 1. I believe the law would have to be a blanket “no more raises” for all employees covered by the pension systems - the GA couldn’t exempt Tier 2 without giving more ammunition to the plaintiff in court. Perhaps the reduction in benefits (for Tier 1) looks like Tier 2 - so if Tier 2 agrees to the reduction they are in fact continuing to receive what they already have.
The slippery slope, however, is why not take it all the way? If this works - why should the State give any pension at all? Just force a choice between raises or a pension, period.
What about already earned benefits? Could the choice require a give back on those? As a plaintiff, I would argue that even the Cullerton choice forces me to give up some already earned benefit.
Comment by archimedes Friday, Mar 25, 16 @ 10:01 am
Professor Colombo, I appreciate your input. The proposal you’re discussing was floated by Cullerton earlier. This latest one focuses on pensionable salary. I surmise that the change is due to the latest war going on over collective bargaining. It seems problematic to me if you don’t limit collective bargaining over salary if you enact a plan prohibiting wage increases without agreement on reducing pensions. Otherwise, you have the union negotiating an X% raise that will only apply to a subset of union members.
I would also like your thoughts on the equal protection concerns that may arise given the pay wage freeze would naturally apply to Tier 1 employees only. Tier 2’s pension plan is basically a plus for the state, so they dare not ask for further concessions.
Comment by Norseman Friday, Mar 25, 16 @ 10:03 am
Basically what it comes down to IMHO is if the state wants to get out of paying the check they are going to have to find equitable consideration for each individual employee. Something enticing enough to that individual. So unless the governor is willing to set up a whole new group to contact and negotiate with each tier 1 employee to find something they value enough to change a sure thing (tier 2 are hosed as Rnug has pointed out) it’s all kick the can Till the next court case.
I can see some people taking consideration but I can’t see the state doing better than break even.
Comment by Mason born Friday, Mar 25, 16 @ 10:04 am
How many more years and lawsuits will be required before our state does the correct, lawful and moral action of actually paying what they should’ve been paying for decades. As IMRF shows, there is absolutely nothing wrong with a defined benefit system if payments are made. Every employee made 100% of their payments. And contrary to what some would like others to believe, there are few, select cases of extravagance (but these are the ones selected and portrayed as typical and usual).
It’s amazing to see thieves and immoral actions excused and perpetuated. I guess it’s moral decay with the blessings of the people.
Comment by Anonymous Friday, Mar 25, 16 @ 10:04 am
cdcolombo
You are saying that state workers have no constitutional right to wage increases and you are essentially correct. They do however have a right to have any wage increase considered in the calculation of their pension. So your assertion is that by passing a law that eliminates all raises then consideration becomes granting pay pensionable raises to those who give up the 3% AAI? Sleazy perhaps but constitutional you say.
I disagree and I think the ISC would throw it out like so much of the rubbish they have already disposed of. The words discriminatory, coercive, and diminishment all come to mind when I look at this tactic. I believe that the ISC would see this for what it is and dispose of it in short order.
Besides given the state’s finances and the governors treatment of state workers I doubt many are counting on any wage increase in the next four years anyway!
Comment by Old and In the Way Friday, Mar 25, 16 @ 10:06 am
== I don’t suppose we could lock RNUG in a room with the governor and legislative leaders, could we? ==
-JoanP- ROLF!
I don’t think you could pay me enough … and I’ve got 2 mortgages to pay off. Plus I’d want to see the appropriation passed and signed first!
Comment by RNUG Friday, Mar 25, 16 @ 10:07 am
P.S. The practical problem with a wage freeze proposal is that folks actually expect a pay raise. Do you really expect state workers besides his appointments and hires will receive a raise under the Rauner administration?
Comment by Norseman Friday, Mar 25, 16 @ 10:08 am
- archimedes -
As I noted, there are contract law doctrines that sometimes prohibit a party with leverage (e.g., the state) from using that leverage to extract concessions in a contract. The worse the deal becomes (”give up your pension completely or no raises for you ever”), the more likely a court would apply these doctrines to invalidate the supposed “agreement.” And the more likely a court would impose the doctrine of unconstitutional conditions to void any such action.
I understand where the court was coming from when it said what it said in the current opinion - there ARE circumstances in which one can validly waive constitutional rights, and there are circumstances in which one can validly bargain away benefits one already has. As I said above, however, the unfortunate part of this is that this probably gives the Legislature (and Governor) an opening to try it, rather than simply paying up.
Comment by jdcolombo Friday, Mar 25, 16 @ 10:08 am
@948am At some point Tier 2 will be approaching majority as far as AFSCME negotiating team. Such a yearly “bonus” would mean nothing to them as would make no difference to their pensions.
Comment by Anonymous Friday, Mar 25, 16 @ 10:09 am
Basically what it comes down to IMHO is if the state wants to get out of paying the check they are going to have to find equitable consideration for each individual employee. Something enticing enough to that individual. So unless the governor is willing to set up a whole new group to contact and negotiate with each tier 1 employee to find something they value enough to change a sure thing (tier 2 are hosed as Rnug has pointed out) it’s all kick the can Till the next court case.
I can see some people taking consideration but I can’t see the state doing better than break even.
Comment by Mason born Friday, Mar 25, 16 @ 10:10 am
== “RNUG, can people be fired for refusing to choose one of the new pension plans?” ==
-Mama-
They could try but I doubt it would stick. I used to have the name of the lawyer who wrote most the Civil Service Code; if he’s still alive, I think he would have lots of fun with an unlawful discharge claim over something like that.
Comment by RNUG Friday, Mar 25, 16 @ 10:12 am
The states best chance to reduce pensions is to effect wages by wining an impasse with afscme an imposing the gov. Last offer. This is where the real fight is. Eliminating collective bargaining on wages in the future. This is a legal, however, probably near impossible task. Pension law is a settled matter! Not sure the isc will want to offer much more on the topic.
Comment by Anonymous Friday, Mar 25, 16 @ 10:15 am
Thanks, RNUG, for another great analysis.
It looks coercive to me and not like it’s consideration. The cost of living goes up while salaries are frozen. Bill collectors and sellers of all that we buy are not going to waive higher prices because workers can’t keep up. Many state workers are probably barely able to keep their heads above water in trying to live a so-called middle class life.
I would like to see what a revenue analysis looks like with a 6% state income tax. I think that is what Kentucky and Missouri pay. It’s not radical. We could combine it perhaps with some other reforms that would help taxpayers and businesses in other ways. In this political climate, and with this governor, it’s impossible.
Comment by Grandson of Man Friday, Mar 25, 16 @ 10:16 am
- Norseman -
Not sure it is an equal protection problem to give some employees raises and not give them to others, as long as the differentiation is not on the basis of a suspect class (e.g., race) and has some reasonable basis (which would be the economic differentiation that already exists between Tier I and Tier II). However, excluding the Tier 2 employees certainly makes it look more like coercing a diminishment in constitutionally-protected rights as opposed to a valid voluntary agreement. I didn’t say that I thought the state would win; I actually think that is highly unlikely. I only said that the Court’s language in the current opinion leaves a crack in the door that unfortunately lets the Legislature try yet again to shirk it’s responsibilities.
Comment by jdcolombo Friday, Mar 25, 16 @ 10:17 am
Sorry to state the obvious, but if the third option, “Keep what you have,” is offered, then the bulk of employees would choose it, and the pension funding problem would hardly be addressed.
The courts really have left no option, beyond the already passed Tier 2 change, but to get the money, and pay the overdue bill.
Comment by walker Friday, Mar 25, 16 @ 10:20 am
RNUG is correct.
Has been correct.
Still correct.
The difference between RNUG and the Four Tops is politics. RNUG isn’t letting politics interfere with the facts and court orders. The Four Tops are unable to spin the facts and court orders in a way that is politically beneficial to them.
The solution is for the Four Tops to find a way to face the facts and push off any negative consequences of solving this problem into an indefinite future.
There is no reason why the State cannot add a tax to retirement income. No reason it cannot raise taxes by dumping the Flat Tax. No reason it cannot raise taxes by implementing the 5% Temporary Income Tax, helping reduce our budget crisis enough to borrow and bond sell the pension increase.
Fact is - there would be no crisis if the GA did what it was to do to prevent the crisis. They painted themselves into a corner. They are now out of room.
Comment by VanillaMan Friday, Mar 25, 16 @ 10:29 am
addng to what RNUG has said about the AAI, as heme tiined the employees oay for it. so any change to it become its own diminshement issue.
you could add casinos licesne sale for chicago, and future gaming rec towards the retirment sustems, the. order the current bond payments be directed to pay down the debt when the bonds are retired, legalize and tax marijunan and put the tax rev towards the unfunded liability etc. this can be fixed without new taxes if people woild just focus. also redo the ramp.
that said you could offer employees real choice, not just machiavelli ones. the current employee acounts only show the employee contribution, not the states share. offer to give the employees a 1x time payment of three times that amount to change. they get chnk of cash today and long term the state saves 10 times that amount.
offer to give the employees years of service and age if they change. that lets them retire sooner but the state saves money over the life of the retirment.
BUT there has to be real sonsideration, not a take away and then an offer to return the hostage for a dininshed benefit.
on a side note, those retirees spend money, and our economy needs older citizens to have income to not bly survive, but to spend on extras to keep going. long term we want those folks shopping and spending, not drawing on social services.
Comment by Ghost Friday, Mar 25, 16 @ 10:31 am
Thank you Professor Colombo.
Comment by Norseman Friday, Mar 25, 16 @ 10:32 am
Ghost, I love you man, but grab some caffeine. Your typing is a little off this morning.
Comment by Norseman Friday, Mar 25, 16 @ 10:37 am
The state will never stop coming after your pensions until they are successful. Next move elect judges that see it their way
Comment by Foster brooks Friday, Mar 25, 16 @ 10:41 am
I’d like to see RNUG respond directly to jdc’s points on what I am inferring he thinks is a right to perpetual wage increases, especially since the court has now made that subject to approps.
Comment by Vibes Friday, Mar 25, 16 @ 10:49 am
Vanilla Man- tea all of your suggestions will reverse the outflow of people flooding out of the Stsre. Yikes you don’t seem to have a clue. Illinois is already one of the worst states in terms of growth and job creation. Why not add to our problems because it’s the unproductive types who don’t pay the bills and are the ones hit the worst when we can’t afford to pay for any services other then odndions
Comment by Sue Friday, Mar 25, 16 @ 10:50 am
Anonymous @ 10:15 am: “This is where the real fight is. Eliminating collective bargaining on wages in the future. This is a legal, however, probably near impossible task.”
Teachers and university professors make up a large number of public employees receiving state pensions. School districts and universities compete for the best teachers and professors and will not want to freeze wages.
Comment by Enviro Friday, Mar 25, 16 @ 10:53 am
- Vibes -
Hopefully I’ m not mis-stating jdc’s position.
jdcolumbo and I are in basic agreement; we’re just quibbling over specific details and interpretations. I agree there is no inherent right to a raise, just an anticipatory expectation … but if you give a raise, I think it must be pensionable. jdc thinks it might be possible to give a raise without it being pensionable by calling it a bonus or using an individusl waiver. YouI concur that may be possible one aone-time or intermittent basis, but not on a regular or scheduled or widespread by class or category basis.
In other words, when is a raise not a raise but a bonus? Where is the line between the two? And can you treat two people in the same situation differently if, instead of just two people, it is a pattern of unequal treatment of two groups or classes?
Such nuances make for late nights at the bar and interesting court cases …
Comment by RNUG Friday, Mar 25, 16 @ 11:09 am
RNUG - Are public employee pensions subject to IRS regulations on anti-cutback rules? One of the regs does not allow the elimination of an option for benefits.
Comment by nadia Friday, Mar 25, 16 @ 11:12 am
A law that increases employee pension contributions as a percentage of wage increases would aid in the funding part of the equation. The part of the equation never addressed by any legislative proposal to date. A gradual increase in employee contributions is the only sure way to get additional funding that can’t be skipped.
Comment by Sense of a Goose Friday, Mar 25, 16 @ 11:14 am
Vanillaman:
I think you are incorrect.
I think the House Democrats are going to spin this constitutional opinion as an absolute barrier to the Cullerton plan. I suspect Cullerton is going to say we need to go back to the drawing board as well.
There is no appetite in the General Assembly for a Constitutional amendment, on either side of the aisle. As others have pointed out, it doesn’t reduce the current unfunded obligation. Secondly, its hard to imagine it would have much impact on future spending obligations…defined contribution plans would be the extreme, and only increase financial pressures.
Because it wouldnt reduce the need for a tax hike or free up funding for other programs, amending the Constitution doesnt have a lot of momentum behind it in either caucus.
And keep in mind, the House Republicans couldn’t even get the majority of their caucus behind SB 1. An amendment would require 2/3 majority in both chambers, and it would require every or almost every GOP vote to pass.
That’s not going to happen because it would impact not just members of the judiciary, legislature, state employees, university employees, and teachers, but also every mayor, city councilman, police officer, firefighter, garbage hauler, librairian, park district employee, county road worker, etc, etc, etc.
To be blunt: a recall of the governor would be less of a lift, and that is not happening either.
This. Isn’t. Wisconsin.
Comment by Juvenal Friday, Mar 25, 16 @ 11:21 am
Appreciate the thoughtful commentary by RNUG and Prof. Columbo.
Goose, as we discussed here yesterday, employee contributions can’t be raised without the employee receiving some “benefit” from the increase. Federal law.
Comment by Arthur Andersen Friday, Mar 25, 16 @ 11:21 am
1. Adjust the “ramp”.
2. Put income tax back to where it was at 5%.
3. Pay state contributions in full each year.
Pension problems solved!
Comment by DuPage Friday, Mar 25, 16 @ 11:22 am
Here is an easy revenue fix- outlaw employer pick-ups statewide but force the employers to contribute dollar for dollar the amounts they previously picked up. You would double the amounts going into the plans for most employees and 100 percent for TRS particupants
Comment by Sue Friday, Mar 25, 16 @ 11:29 am
- nadia -
I was thinking specifically about the fact that these type of pension changes are normally considered an irrevocable (and voluntary) choice by the IRS because there could be tax implications to doing it undoing such a deal.
I doubt the changes proposed would affect the “safe harbor” status enjoyed by the State’s non-coordinated plans, so the IRS would be less likely to intervene in any changes or swaps.
Comment by RNUG Friday, Mar 25, 16 @ 11:31 am
Thank you, Dupage. Yours is a plan incorporates a true shared sacrifice by all with a responsible way of paying the debt that is owed.
Comment by Enviro Friday, Mar 25, 16 @ 11:36 am
- Vibes -
RNUG @11:09 is correct. We really don’t disagree on much of substance. The question for me is whether the ILSC would buy the following argument by the state:
1. We don’t have to give raises at all.
2. Therefore, we can condition any raise we do give on either the raise not being pensionable or on the employee’s agreement to waive constitutionally-guaranteed pension rights.
I think this argument is a loser for all the reasons RNUG and I stated. The problem is that the ILSC’s language in the Chicago case said that circumstances exist in which a waiver would be valid. That in turn means certain folks in the Legislature and/or Governor’s office could seize upon this language to push a version of Cullerton’s plan, maybe as part of an eventual (?) grand bargain on the budget. As a result, I think we eventually are headed for yet another pension case. I would much prefer the state simply face the problem and solve it by raising taxes (including, by the way, taxes on pensions over a certain exclusion amount; my own pension will be high enough when I retire that I shouldn’t be given a pass on state income taxes - but I’m not going to voluntarily send a check in, either).
Comment by jdcolombo Friday, Mar 25, 16 @ 11:38 am
“Here is an easy revenue fix- outlaw employer pick-ups statewide but force the employers to contribute dollar for dollar the amounts they previously picked up. You would double the amounts going into the plans for most employees and 100 percent for TRS particupants”
Sue, I hope you are not a math teacher.
Comment by Enviro Friday, Mar 25, 16 @ 11:39 am
=== Time to make a thoughtful change to the constitution. ===
There is one thoughtful constitutional change that would solve the pension problem and several others as well: repeal the flat income tax provision.
A progressive income tax, adjusted so that there was no tax increase for the first 90% of taxpayers and the top 10% paid the same overall state and local tax rate as middle-income taxpayers, would be roughly equivalent to a permanent 33% increase in state-wide personal income under the current flat tax.* We could surely solve our budget problems with money to spare to improve the state’s future with that much additional revenue.
If you’re in the first 90% and resentful of state employees, think carefully about where the real problem lies and whose interests are served by distracting you from that.** If you’re in the top 10%, you can afford it. It won’t cramp your style all that much, and you’ll sleep better at night.
——————————–
* Based on top 10% of taxpayers commanding about 50% of Illinois personal income while their overall state and local tax rate is roughly half that of the bottom 90%. These numbers aren’t exact, but they’re close enough for understanding the big picture.
** The political evidence suggests that the leadership of both parties in Illinois defer to the interests of the same income group. Are we surprised? Campaign finance reform, anyone?
Comment by X-prof Friday, Mar 25, 16 @ 11:49 am
X-Prof could not have said a more true comment. There is a serious flaw in collecting revenue in this state and it’s existed for a long time. Hence, raiding and skipping owed compensation to public employees. Everyone in the lower 90% (and that would include public employees and retirees who actually know this information first hand) should be angry that those who can pay aren’t being expected to. More than anything in this state, we need a progressive tax, like the vast majority of states in the union.
Comment by AnonymousOne Friday, Mar 25, 16 @ 11:53 am
RNUG, Thank you for the great analysis!
The same ole song and dance from the politicians on the pensions; will we be hearing the same for the State’s other contractual obligations? One thing is certain, spending so much time trying to find a “legal” way to skirt an obligation instead of solutions to meet the obligation is hurting Illinois.
“We dance ‘Round in a ring and suppose, but the Secret sits in the middle and knows.” –Robert Frost
Comment by Jimmy H Friday, Mar 25, 16 @ 12:08 pm
Noreseman your going the wrong way, i need less caffeine
Comment by Ghost Friday, Mar 25, 16 @ 12:12 pm
Here is a consideration model that may very well be constitutional and save the state significant costs going forward.
I would agree, as a future retiree, to pay more toward my pension. Say, an additional 4%.
In return, I receive an additional .25% per year worked (going forward) - so, instead of 1.67% per year it would be 1.92% per year - this being the amount used to figure pension earnings.
Comment by Consideration Friday, Mar 25, 16 @ 12:18 pm
As usual, RNUG has analyzed it correctly.
Cullerton’s plan still requires Tier 1 employees to give up something- to diminish their benefit.
He is not offering a real chose except “Heads You Lose, Tails You Lose”. This makes no real sense to anyone and Cullerton knows it. But he can try.
Comment by Federalist Friday, Mar 25, 16 @ 12:25 pm
Going back to my example of 9:27 am, I think one thing that might pass muster is this: Offer a one time non-pensionable “bonus” paid right now, of say $20,000, to voluntarily switch from a compounded AAI to a simple AAI. Costs money on the front end to the state but saves much more on the unfunded liability (to the tune of $17k a year in year 25 of the example retirement). Employee still gets a decent pension, and if they don’t live too long in retirement, they haven’t lost that much. And the $$ now might be an incentive to many who have bills, college for kids, etc. hanging over their heads. The state would need to offer the minimum bonus that would pass muster as valid “consideration”, whatever that might be.
Comment by Six Degrees of Separation Friday, Mar 25, 16 @ 12:31 pm
When people say retirement income should be taxed, I have a few questions. Are the contributions to whichever state pension from the employee before or after tax? If it is before, that would be fine since he or she has yet to pay taxes on that income. If it is after, then it is double taxation; taxed once when earned and again when actually receiving it.
The other would be does taxing retirement income include ROTH accounts that contributions were made to after-tax earnings. Taxed distributions from this type of an account would negate its purpose, correct?
Comment by Jay Dee Friday, Mar 25, 16 @ 12:42 pm
Enviro. If the districts now pay the 9 percent but instead the employees paid their own 9 lush the districts kept paying the 9 they previously picked up- you would double what is now contributed excluding whatever the State annually puts in
Comment by Sue Friday, Mar 25, 16 @ 12:50 pm
-Jay Dee -
Pension contributions are pre-tax.
Roth IRA’s are a federal plan, in which you make after-tax contributions but the earnings are forever exempt from Federal tax. Withdrawals are therefore completely tax-free from federal income tax. States don’t necessarily have to follow the Internal Revenue Code in their own income tax, though most do. It would be up to the state to determine how to tax Roth IRA withdrawals, but one would assume that at least the contributions (which were already taxed) would not be included. Most likely, though, Roth’s would simply be treated for state purposes like they are for federal purposes.
Comment by jdcolombo Friday, Mar 25, 16 @ 12:57 pm
RNUG 10:12
If you’re referring to HS, he is.
Comment by Original Rambler Friday, Mar 25, 16 @ 12:57 pm
“Here is an easy revenue fix- outlaw employer pick-ups statewide but force the employers to contribute dollar for dollar the amounts they previously picked up. You would double the amounts going into the plans for most employees and 100 percent for TRS particupants”
Sue, I believe that to double the amount is the same as a 100 percent increase.
Comment by Enviro Friday, Mar 25, 16 @ 1:01 pm
-Sue-
The school districts, as the employer, are putting zero in because the State, not the school district, is responsible for the pensions. (Exception is CPS)
I know, it’s the screwiest way to fund it but someone decided it made no sense to send the money to the school district to just have it sent back.
The only pension money the district has to pay as employer is for end of career salary bumps in excess of a certain set percentage.
Comment by RNUG Friday, Mar 25, 16 @ 1:09 pm
I know that SERS benefits (like all retirement benefits in Illinois) are exempt from Illinois payroll tax. Suppose Illinois changes the current exemption on retirement income so that the exemption only kicks in once you turn 65. That might be able to pass the constitutional test.
Comment by Chicagonk Friday, Mar 25, 16 @ 1:12 pm
- Original Rambler -
Good to know. Mom used him in a claim she had … and, obviously, won because it’s tough to out argue the person who wrote the rules.
Comment by RNUG Friday, Mar 25, 16 @ 1:16 pm
- Chicagonk -
Taxing retirement income would be legal if done equitably. You could tax all of it, but you couldn’t selectively tax just public pensions.
Comment by RNUG Friday, Mar 25, 16 @ 1:21 pm
The difference between a simple 3% increase and a compounded 3% increase is about a 4% reduction in cost (for the simple). The cost of a pension is the actuarial accrued liability - so the present value of the final pension (in the year benefits are earned) comes into play.
Bottom line, going to 3% simple isn’t going to be a major reduction in pension costs or the unfunded liability.
The Cullerton Plan is a further reduction to 1/2 of CPI (simple increase) - call it 1.5% simple increase per year. This would likely be almost a 15% reduction in the cost of pension (and a significant reduction in unfunded liability). However, the Cullerton Plan only impacts active employees - so the savings in the annual Normal Cost would match the percentage cost reduction. But the unfunded liability reduction would be quite a bit less (since retirees are not affected).
Reducing the cost of the pensions is not a panacea for the state budget. Even Senate Bill 1 (which had quite a bit more savings) was only saving about $1 billion a year for the first 20 years. That could easily be offset by taxing retirement income (about $1.5 billion a year if you exempt those with less than $50,000 income).
Comment by archimedes Friday, Mar 25, 16 @ 1:21 pm
jdcolombo
Thanks for the clarification
Comment by Jay Dee Friday, Mar 25, 16 @ 1:25 pm
RNUG- schools for decades have aid the 9 percent employee share. It should be prohibited. The teachers actually pay ZERO
Comment by Sue Friday, Mar 25, 16 @ 1:41 pm
As others have stated more eliquiently than I, thank you RNUG annd Dr. Columbo for your analysis.
However, if Dr. Columbo is correct and the State makes the argument that no raise unless you agree to the reduced AAI, how can this be enforced on members of TRS and SURS? We do not depend on the State for our salary a d we do not negotiate with the State.
Comment by G'Kar Friday, Mar 25, 16 @ 2:04 pm
-Sue-
It wasn’t a gift. It was part of contract negotiations; various districts agreed to pay it in exchange for either no or a smaller wage increase at one time. It actually helped reduce the pension liability because it held down the Final Average Compensation used to calculate the pension by the raise percentage given up, compounded going forward. Schnorf can explain all the math; he did a similar deal for SERS that was later reneged on.
Comment by RNUG Friday, Mar 25, 16 @ 2:07 pm
Sue, it is not that cut and dried. In about 1/3 of the K-12 districts, the teachers make some or all of the pension contrbution. For example, my sister and brother in law pay half and their district pays the other half. At community colleges most of the faculty and staff pay 100%.
Comment by G'Kar Friday, Mar 25, 16 @ 2:09 pm
==It should be prohibited==
Why? Because you don’t like it?
It’s always easy to want to take something away from someone else isn’t it Sue.
Comment by Demoralized Friday, Mar 25, 16 @ 2:25 pm
== However, if Dr. Columbo is correct and the State makes the argument that no raise unless you agree to the reduced AAI, how can this be enforced on members of TRS and SURS? We do not depend on the State for our salary a d we do not negotiate with the State. ==
Maybe the State intends to use their funding strings (like the Feds with welfare and highways) to impose the rules on local government units.
Comment by RNUG Friday, Mar 25, 16 @ 2:25 pm
Rich,
Sometime soon you should do a QOTD to the effect of what would you like to see offered as compensation for altering the existing pensions?
Comment by RNUG Friday, Mar 25, 16 @ 2:31 pm
I cannot imagine any circumstance under which the current Supreme Court would substantially disagree with RNUG.
The fact that Cullerton, Madiar and Rauner are even talking about this suggests that they are either ignorant or disconnected from reality in a Norma Desmond–Sunset Boulevard sort of way.
Comment by Harry Friday, Mar 25, 16 @ 2:36 pm
Why do people believe that if one district does something, every district does it? Does every district in Illinois have the same programs, classes? Hear of local control, anyone? I personally paid in 8% of my retirement “donation” when the rate was 8%. Imagine my shock when I was told my first contract paid me $9K/year and 8% was missing! Oops. Forgot to mention that, I guess. If some people have the district pay it for them, it’s been negotiated by that particular district. And furthermore, why put that money in the paycheck, only to deduct it again(as my district did)? Teachers are not “state” employees.They are certified by the state but they are local employees and paid by local. The retirement fund is paid to and (mis)managed by the state. The state of Illinois doesn’t sign paychecks of teachers. I know, I know, it’s just too complicated for some.
Comment by Anonymous Friday, Mar 25, 16 @ 2:44 pm
One thing I left out of the analysis I did last night is that Rauner is still clinging to the Sidley-Austin “benefits earned to date are protected but benefits can be changed going forward” theory. He’s probably the only person in the state who still believes the IL SC will buy that theory.
Comment by RNUG Friday, Mar 25, 16 @ 2:48 pm
Sue, in addition to being incorrect about school districts paying employee contributions to TRS, you also “forgot” that schools and all TRS employers make a contribution for the 2.2 benefit formula, for ERO retirees, and for employees funded from Federal sources. FY 15 for the latter totaled about $145 million.
Comment by Arthur Andersen Friday, Mar 25, 16 @ 3:10 pm