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RNUG begs to differ

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* A Sun-Times story on last month’s Illinois Supreme Court pension decision…

The ruling also states, “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.”

The Emanuel administration seized on that as charting a path forward.

“Obviously, we would have preferred a win, but we don’t think the door is completely shut. They left the door open to collective bargaining,” said a top mayoral aide who asked to remain anonymous.

“Individual employees get to decide whether to make future pay hikes pensionable. In exchange for that, they agree to modification of pension benefits. Or, they get to keep the current benefit structure and give up future pay increases being pensionable.”

Illinois Senate President John Cullerton has applied that same “consideration model” to the state’s pension crisis. He called Thursday’s ruling “more than a glimmer of hope” for Chicago.

“We have a clear path on how to solve it. This is a positive decision. The court is basically saying if you do that in a collective bargaining setting, that’s a contract and you can ratify it,” Cullerton, Emanuel’s closest ally in Springfield, said Thursday.

“They could go in and renegotiate the same bill we passed, ratify it in a collective bargaining setting and it would be fine. Reduce certain pension benefits. Increase contributions. They could go back to the table and negotiate the same thing and that contract would be constitutional where the bill was not.”

* I asked our resident pension expert RNUG to address these points…

Çullerton is misunderstanding the road map the court is pointing at.

I’ve argued several times that they can’t make raises to salary non-pensionable by playing games and calling it a bonus or something else. You can refuse to give a raise, but if you do, it has to be pensionable.

I’ve also previously noted that all the unions can do is negotiate a framework within which each individual employee can make a voluntary decision, with one of the choices being keep current benefit structure, including benefits yet to be earned under the existing formula.

I think the IL SC is saying something just a bit different from the way Emanuel and Cullerton are reading it. The court is saying it IS a contract and you can change it with the consideration model, but it has to be done voluntarily. In other words, if the employee is foolish enough to agree to a bad deal, OK. If you can offer something of enough perceived value to get the employee to surrender the benefits and protections they already have, then buyer beware.

One possibility would be to offer some kind of benefit, like shorter hours for same salary or immediate cash, in exchange for changing the terms of the pension contract.

Another possibility would be to offer even better benefits (better formula, earlier retirement, improved survivor’s as examples), but make the cost (contribution rate) extremely high or a lower rate contingent on surrendering something, say the 3% AAI for some kind of reduced COLA.

There are a couple of past models for this in previous pension changes. One was when the State moved new hires to the coordinated plan (state plus Social Security) circa 1970-1972 where people already in the system had to choose to either keep what they already had or change to the new plan with a different benefit structure and contribution rate. Another time was when the AAI was implemented; it required an additional contribution that, in theory, you could have opted out of … but it was a no brainer to take that deal. Model a new offer in a similar manner. I think the coordinated plan was State initiated but the AAI was a union contract initiative.

I didn’t mention health insurance because I’m not sure anyone would trust the State to keep any promises in that area, but it is a possible negotiating point. The State will probably lose money in the long run, but promise zero premiums for dependents of retirees and zero deductibles and co-pays and a limited COLA in exchange for surrendering the 3% AAI. That would, I believe, be valid.

It may seem like I am splitting hairs with where Emanuel and Cullerton are coming from, but those nuances are the difference that would make it constitutional.

Discuss.

posted by Rich Miller
Monday, Apr 4, 16 @ 2:38 pm

Comments

I think the key words here are VALID and VOLUNTARY consideration. Good work RNUG!

Comment by Facts are Stubborn Things Monday, Apr 4, 16 @ 2:42 pm
By the time any pension “reform” plan actually makes it through the courts, all Tier 1 employees will have retired.

Comment by CharlieKratos Monday, Apr 4, 16 @ 2:47 pm
After this latest string of pension rulings, on what planet would a union negotiate away pension benefits anyway. Current workers are tomorrows retirees.

Comment by Facts are Stubborn Things Monday, Apr 4, 16 @ 2:48 pm
What I’ve been saying for several years now — and RNUG mentions it here — is to allow employees to work a shorter work week for same salary — in return for less benefits at retirement.

Instead of a 37.5 hour week over five days? Work a 30 hour week over 4 days or a 22.5 hour week over 3 days.

I suspect lots (and lots) of folks would trade time for money (especially since it’d be possible to work a second job for those newly free hours).

Comment by Formerly Known as Frenchie M Monday, Apr 4, 16 @ 2:49 pm
All of these gyrations and dubious interpretations by the legislative and executive branches appear to be denial/stalling of the inevitable. -
Repaying the debt and program funding going forward.

Comment by Qui Tam Monday, Apr 4, 16 @ 2:49 pm
=By the time any pension “reform” plan actually makes it through the courts, all Tier 1 employees will have retired.
=

By the time any pension reform actually makes it through the courts, the pension system will be bankrupt.

There, fixed it for you.

Comment by allknowingmasterofracoondom Monday, Apr 4, 16 @ 2:49 pm
@CharlieKratos - Monday, Apr 4, 16 @ 2:47 pm:

=By the time any pension “reform” plan actually makes it through the courts, all Tier 1 employees will have retired.=

Your correct, and by then tier 2 will have taken care of the pensions.

Comment by Facts are Stubborn Things Monday, Apr 4, 16 @ 2:50 pm
@allknowingmasterofracoondom - Monday, Apr 4, 16 @ 2:49 pm:

=By the time any pension reform actually makes it through the courts, the pension system will be bankrupt.=

Would not matter, the ISC ruled that it is the government entity and not the fund that is responsible for the pension payment.

There, fixed it for you.

Comment by Facts are Stubborn Things Monday, Apr 4, 16 @ 2:51 pm
People are nuts if they think taxes are going to solve the problem. Folks are fleeing Illinois by the hundreds of thousands now. If we keep increasing taxes no one will be left. This is state is not that great, one of its benefits has been a low income tax. It will be a mass exodus if we push taxes higher and higher.

Comment by Tone Monday, Apr 4, 16 @ 2:52 pm
I can tell that a couple more nails in the pension coffin are going to have to be hammered in. It is getting harder to find fresh wood to make room for any more nails.

Comment by Facts are Stubborn Things Monday, Apr 4, 16 @ 3:00 pm
Terrific info RNUG.

Comment by Belle Monday, Apr 4, 16 @ 3:03 pm
===People are nuts if they think taxes are going to solve the problem.===

Rauner’s own budget outline requires revenues.

That’s … requires.

===If we keep increasing taxes no one will be left.===

I’ll keep that in mind next time revenue, needed revenue, is signed, lol.

Oh - Tone -, it’s delightful when you expound. It’s endearing. Thank you.

Comment by Oswego Willy Monday, Apr 4, 16 @ 3:14 pm
Consideration does not mean what it normally means to the Governor/ILGA. I doubt the Governor would take less than actual or increased value in exchange for one of his assets, but apparently he sees that as ok for employees that he did not personally hire.

=By the time any pension reform actually makes it through the courts, the pension system will be bankrupt.=

True, unless math matters. If math matters, you are completely in fantasy land. People continue to contribute to the pension system and investment gains continue to roll in. Tier II counts as well.

What many fail to grasp is that this is a DEBT issue and not a pension issue. That does not fit with the traditional “conservative” or modern tea party narrative. Thus their new “bankruptcy” narrative (otherwise known as skipping out on your debt aka Don Drumpf) which is the antithesis of personal responsibility. Pay the debt. The annual cost of the pension is not only manageable, it is decreasing significantly.

Comment by JS Mill Monday, Apr 4, 16 @ 3:16 pm
Let’s see, the big boys want to hang their pension reduction hat on a consideration plan where folks can choose to have their pay raises count as pensionable in exchange for reducing their future benefits.

RNUG appropriate laid out the legalistic argument. I would like to discuss the practical ramifications. Who thinks there will be significant pay raises in the foreseeable future - excepting Rauner staff? Bueller?… Bueller?… Bueller? I doubt this will get a lot of takes among Tier 1 people even if it somehow passes Supreme Court scrutiny.

The other glimmer of hope taken by the pension reducers is that a collective bargaining agreement can be used to reduce benefits. Let’s see, Rauner wants to eviscerate unions and others want to limit pension negotiation rights. The Supreme Court has made it clear that pensions can’t be reduced. Do you really think a bargaining unit would negotiate a reduction? Bueller?… Bueller?… Bueller?

Comment by Norseman Monday, Apr 4, 16 @ 3:24 pm
I have said it before- only way left to reign in the pension problem is to attack compensation. Legislating all future wage increases at the lower of 2 percent or inflation would significantly reduce the unfunded liabilities which anticipate a higher future wage environment

Comment by Sue Monday, Apr 4, 16 @ 3:27 pm
Any state worker that accepted any kind of deal in exchange for a shorter work week would be insane. Everyone already hates state workers for having a negotiated 37.5 hour work week. Can you imagine the vitriol that would be spewed if someone were to take a diminished pension and 30 hour work week?

Comment by CharlieKratos Monday, Apr 4, 16 @ 3:28 pm
“It may seem like I am splitting hairs with where Emanuel and Cullerton are coming from, but those nuances are the difference that would make it constitutional.”

Um, none of this is nuanced at this point. This is obvious stuff. Why Cullerton and Emanuel keep trying is the question. Are they stuck in a 1990’s narrative that tax increases are always a killer? If so, I wonder if they have noticed the Trump and Sanders campaigns. Push a progressive tax amendment and forthrightly raise taxes. End of game: end of problem. Unless one of the political guys on this blog wants school me, I don’t see voters whining about a progressive tax.

Return to question one: what is Cullerton’s problem? Rahms? WEalthy donors? I don’t get it.

Comment by Anonymous Monday, Apr 4, 16 @ 3:39 pm
The hypotheticals of what would likely be Constitutional are a favorite past time of some pols and political junkies.
But the leaders like Cullerton have a good understanding of it and some smart lawyers. It is time to quit with press release arguments and time to draft a bill. Until we have an actual, written proposal we are all contributing to the great noise that has no relevance.
It may be ” Just a Bill” to get this moving, but until someone introduces one, our analyses are meaningless.
Time for a call to action?

Comment by PI (Politically Incorrect) Monday, Apr 4, 16 @ 3:57 pm
== what is Cullerton’s problem? Rahms? ==

IMO, the perception that raising taxes will cost you the next election. It’s easier to take something away from a vilified group (State employees) than to make everyone mad with higher taxes.

Specifically to Cullerton, it’s a given Rauner will run “tax and spend” ads non-stop against every Democrat who votes for a tax increase.

Comment by RNUG Monday, Apr 4, 16 @ 4:01 pm
== But the leaders like Cullerton have a good understanding of it and some smart lawyers. ==

The smartest person on the pensions, Eric Madiar, no longer works for Cullerton.

Comment by RNUG Monday, Apr 4, 16 @ 4:04 pm
To RNUG it is true that Madiar is no longer there, but he wrote a pretty good road map. And I do believe Cullerton is a smart guy. What he lacks is the political will to commit to paper a proposed solution. Everyone hopes to find some consensus that assures passage before filing something.
I think you mentioned it above — what on earth can they offer that is better than the current benefit structure? I can think of a few things but none that make up much deficit.

Comment by PI (Politically Incorrect) Monday, Apr 4, 16 @ 4:12 pm
Why can’t these political “leaders” just realize that the pensions are a contract and MUST be paid as-is. Instead, they keep trying to find some little way wiggle out of it.

Comment by Christopher Monday, Apr 4, 16 @ 4:14 pm
What do schools, universities, social services, and pensions all have in common? They all require money for funding. If Emanuel, Cullerton and Rauner would simply acknowledge that and focus on how to generate the needed revenue, the State could move forward. All this other noise is simply a distraction

Comment by Anonymous Monday, Apr 4, 16 @ 4:23 pm
Rahm has one ace up his sleeve. “”Privatization”“ . That’s how he got the 30 out of 32 unions to sellout their retirees. Garbage collection and lawn maintenance in the parks could be bid out in just a few months. Rahm does not rely the Daley “machine” to get most things done. He thinks he’s above the Chicago people. He wants to be back in D.C. so bad but he can’t leave here with his tail between his legs. He will fix the problems before he leaves one way or another or the courts will do it for him. I think the ISSC will be sick of hearing these cases very soon. I look for them to slap down the city hard, very hard the next time they get an appeal.

What part of no don’t they (the city of Chicago) understand?

Comment by Rollo Tamasi Monday, Apr 4, 16 @ 4:31 pm
==Who thinks there will be significant pay raises in the foreseeable future - excepting Rauner staff?==

No one, but it does provide something of a retirement disincentive for a small subset of employees. For folks on the 1.67% formula, as of the 35th year, without a raise their annual 3% as a retiree would exceed the amount their pension would increase solely due to length of service.

Comment by AC Monday, Apr 4, 16 @ 4:42 pm
AC, you lost me. Wouldn’t this be a retirement incentive in your example.

Comment by Norseman Monday, Apr 4, 16 @ 4:49 pm
It is clearly obvious to me that nothing is happening until after the November elections. Everything is just sound and fury.

Comment by Ratso Rizzo Monday, Apr 4, 16 @ 4:50 pm
I think RNUG’s analysis is excellent. In order to have true “consideration” something of value must be offered in return for, assuming for the sake of argument, the 3% AAI (since that is what provides the biggest “bank for the buck”). Additionally, I suspect that more state employees will be leaving state employment as the current impasse continues in Springfield. Most of the replacement employees will be Tier II and they will end up subsidizing the pension systems (unless Tier II is modified or fails for social security reasons). One other point, not all state employees are unionized. Question: Can a union bargain away an exempt employee’s pension rights? I think the answer is No.

Comment by Semi-Retired Pension Lawyer Monday, Apr 4, 16 @ 5:15 pm
== Can a union bargain away an exempt employee’s pension rights? ==

A union can’t even bargain away union members’ pension rights. All the union can do is bargain to create a framework, ie, a set of choices, that the member or non-member could possibly choose between.

Comment by RNUG Monday, Apr 4, 16 @ 5:45 pm
RNUG - Touche!

Comment by Semi-Retired Pension Lawyer Monday, Apr 4, 16 @ 5:55 pm
the teamsters bonus payments are not considered for pension calculations

Comment by foster brooks Monday, Apr 4, 16 @ 6:44 pm
Given recent court decisions, even prior to the IL. stuff, are these proposals even real, or just eyewash for the voters?

Comment by weltschmerz Monday, Apr 4, 16 @ 6:52 pm
RNUG, on a different post, you commented about the conspiracy theory and state bankruptcy. The RAUN Man types of the world do NOT play by typical political rules. I do believe this will drag on til after the November election. If the Gov can keep veto proof numbers, this will drag on til 2018. CPS going on strike next fall will strengthen him. AFSCME going on strike after impasse will strengthen him. Illinois politics will be as interesting as the GOP convention.

Comment by blue dog dem Monday, Apr 4, 16 @ 7:23 pm
The state already tried a variant of this and lost.

Under Blago the state tried to eliminate future COLAs that had not been earned from the supreme court judges salary.

The court held the constitutional protection against diminishment included those future unearned raises. same language. you cant remove future raises without diminishing.

Comment by Ghost Monday, Apr 4, 16 @ 7:46 pm
On a side note, the State could agree to guarantee paying step increases and future colas at CPI, or a flat rate of 2% or, whatever, in exchange for switching to a CPI based AAI. so guaranteed raises at X in exchange for reduction of AAI. That would be allowed, but there would have to be a statutory guarantee of the raises, and the statute would need a nasty poison pill, i.e. I the State fails to fund or pay the promised increases the employees is immediately moved back into the AAI, since there has been a failure of the consideration.

Comment by Ghost Monday, Apr 4, 16 @ 7:50 pm
== The state already tried a variant of this and lost.

Under Blago the state tried to eliminate future COLAs that had not been earned from the supreme court judges salary. ==

The difference is that the Judges were not given a choice and no consideration was offered for the exchange.

Comment by RNUG Monday, Apr 4, 16 @ 7:53 pm
== For folks on the 1.67% formula, as of the 35th year, without a raise their annual 3% as a retiree would exceed the amount their pension would increase solely due to length of service. ==

Actually, if there are no raises, you hit that point in SERS Tier 1 1.67% formula when (a) you have not had a raise in the last 3-10 years so your Final Average Compensation is no longer increasing and (b) have reached either the rule of 85 or age 60.

It definitely occurs at 44 years and 9 months when you have maxed out at 75%.

Comment by RNUG Monday, Apr 4, 16 @ 8:03 pm
== the teamsters bonus payments are not considered for pension calculations ==

And that is fine as long as it does not increase the base pay for the next year (ie, one time payment) … then it is salary. But if it looks like a raise and acts like a raise, I’ll bet the courts will call it a pensionable raise.

Comment by RNUG Monday, Apr 4, 16 @ 8:06 pm
== Given recent court decisions, even prior to the IL. stuff, are these proposals even real, or just eyewash for the voters? ==

Emmanuel and Cullerton’s proposals are just pie in the sky for the voters. If they refined it to match my lines about, it should be real … but it’s not likely many Tier 1 would take a deal, so it would not reduce the unfunded liability (debt) by any significant amount of dollars.

Comment by RNUG Monday, Apr 4, 16 @ 8:16 pm
== the State could agree to guarantee paying step increases and future colas at CPI, or a flat rate of 2% or, whatever, in exchange for switching to a CPI based AAI. ==

That’s another possibility as long as plain old merit raises are allowed so it’s not targeted at only a certain class or seen as punitive. But the step increases only apply to union positions. You would have to come up with an equivalent for the non-union / management titles.

Comment by RNUG Monday, Apr 4, 16 @ 8:21 pm
I’m tired of comments being eaten. This comment will probably make it. Rich needs a new spam filter.

Comment by AC Monday, Apr 4, 16 @ 9:24 pm
Thanks to RNUG (as usual) for what is obviously another correct and insightful analysis.
My own take – (another way of saying “this is only my opinion,” grin) is that we need to remember that appearances matter. The average voter (unfortunately) does not understand any of the nuances of the pension issue, statewide, or in Chicago. And, they do not know the history (the years of “pension holidays” and underfunding, to essentially borrow from the system to keep taxes – especially income taxes — as low as they are.. Still appearances matter. The only way this whole thing can play out is as follows:
1) A bill is passed, which DOES offer up a choice: Choice A: keep what you got, or Choice B: go with our new, super-duper offer of convert to a 401K, or retire early, or take a 30 hour week for your current salary, or guarantee pay raises, or whatever, perhaps in combination, even… A very few would take it. True. Those terminally ill, those who fail to see themselves staying until retirement, those who think they need that magic bean or that reduced work schedule. The offer is made, but it is a choice. Consideration is there, in every carrot that is dangled. REALITY – a few will take it, but very few. Very few. It will not save the state much, but – again appearances matter.
2) The bill is then coupled with an income tax increase, back to close to what it was last year, probably a half point higher (?) and property taxes night even have to be adjusted, but probably only slightly… And, Chicago has to somehow become a part of this, or have a similar mirror image deal… None of it matters, monetarily, since few will take the deal above, but the public accepts it as the “great Compromise” of 2018 (or 2019, God, I hope not!) And, it is coupled with another alteration of the Worker’s Comp stuff…
3) The deal is coupled with a few cuts, of course. I know, there is very little left to cut. Maybe almost nothing… Find a bit of fat (it does still exist), there are still some patronage jobs that exist out there, some duplication of services (township governments that are duplicating the same as… school districts that are obviously in need of consolidating… forest preserve guys that are still living in provided housing to “care for” their plot of land, it still does exist.
4) SELL it, to the public. Really has to be sold. To the general public. We solved the pension crisis. We won! Dems: We won. Yeah, we had to endure some cuts, but we preserved social services, universities, the middle class, the common good! And, we are finally raising the revenue to pay for those services that matter! Republicans: We won! We passed pension reform (cough!) We broke the backs of those union thugs who are retiring with too much $$. Rauner: Winnin? Won! I got what I wanted – my Reforms! My Worker’s Comp changes – I shook ‘em up, now that’s good governin’! And, I still got my Carrharts!
Appearances matter. The public does not understand or care how many will actually TAKE the new Pension reform options. They just care that is has been (cough) resolved).

Okay, I can dream, right?

Comment by Justin Observer Monday, Apr 4, 16 @ 9:30 pm
Cullerton is trying to keep the CEOs happy.

Comment by Liberty Tuesday, Apr 5, 16 @ 12:31 am
Did anyone notice that the Senate President lifted the brick from Chicago’s police and fire pension reform bill last week and sent it to the Governor. It’s SB 777.

Comment by GA Watcher Tuesday, Apr 5, 16 @ 9:10 am
From the ruling: “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.”

I think the word additional is key. Consideration requires that something of value be added in exchange for giving up something that you currently have and of course could keep if you wished. For consideration to work it must be Viable, Valuable and Voluntary.

Trying to use consideration to reduce the pension costs is by definition not going to result in much savings. The real benefit to consideration would be to give workers retiring real options that would be close to revenue neutral for the state but might offer real value to the individual. I suppose it might also provide some political cover for the legislature. snark

Comment by Facts are Stubborn Things Tuesday, Apr 5, 16 @ 9:13 am
RE SB-777: it’s basically an Edgar Ramp plan the first 5 years, followed by actuarially determined payments the rest of the time out to 2055. It includes a new (kind of) dedicated tax and also directs casino revenue to the police pension fund. Gives the right to sue if payments not made but there are enough weasel words to any court order that the value is somewhat questionable. Explicitly says bonds come ahead of the pension fund payments and leaves more loopholes about current or FUTURE statutory transfers (presumably to pay the bonds). Not perfect but better than today and an actual attempt at proper funding.

Comment by RNUG Tuesday, Apr 5, 16 @ 9:53 am