Latest Post | Last 10 Posts | Archives
Previous Post: Showcasing the Retailers Who Make Illinois Work
Next Post: Investment In Carbon Capture Technology Will Help Grow Illinois’ Corn Industry, Spur Job Creation, And Keep Nation ‘Fed and Fueled’
Posted in:
* The usual bluster from a Wall Street Journal editorial earlier this month entitled “Illinois Pension Suicide Pact”…
The Constitution isn’t a suicide pact, but the same can’t be said for the way government unions run Illinois. Behold the new union strategy to kill the state’s pension reforms using Social Security as the political cudgel.
Following state credit downgrades, Illinois Democrats in 2010 reduced pension benefits for new state and local government workers. Current workers weren’t affected. The modest reforms raised the retirement age to 67 from 60, capped the final earnings that are used to calculate annual pension benefits, and reduced retiree annual cost-of-living adjustments.
These so-called Tier 2 modifications are saving the state and its localities billions of dollars a year. Yet unions now claim they violate a 1990 federal law that requires government worker pensions to be at least as generous as Social Security benefits. Otherwise, public employers and employees must pay the 12.4% Social Security payroll tax.
* Fitch Ratings has a new report out entitled “Illinois Tier 2 Pension Basic Policy Option Likely Neutral for State Credit”…
For many public sector employees in Illinois, their pension serves as a Social Security replacement, meaning they (and their employers) do not pay Social Security taxes (Federal Insurance Contributions Act, FICA, taxes). The IRS establishes a minimum standard of benefits replacement that plans must provide to maintain this FICA exemption. Analysis by CGFA and other organizations suggest Tier 2 is unlikely to meet the safe harbor requirements, primarily because the pensionable earnings cap is lower than the Social Security wage base (SSWB).
If Tier 2 does not meet safe harbor requirements, the state risks paying (and requiring employees to pay) FICA taxes, likely at significant expense. Proposals that simply raise the pensionable earnings cap will likely result in modest increases in the pension liability and budgetary demands .
The governor’s proposed budget for fiscal 2025 suggests that Illinois’ pension boards and the legislature consider raising the Tier 2 pensionable earnings cap to match the SSWB. A CGFA-commissioned actuarial analysis from June 2023 estimated this would slightly increase the state’s unfunded pension liability by $285 million (less than 1%) and raise the 2045 annual contribution by $625 million, roughly 3% higher than under current law. Total cumulative annual contributions from 2023 to 2045 would rise $5.6 billion, or 1.7%, if the state raised the Tier 2 earnings cap to the SSWB. This level of changes would not shift Fitch’s perspective on the credit implications of the state’s long-term liability burden or high carrying costs.
* More from the Bond Buyer…
“Being in violation of IRS rules is generally never a good place to be, so addressing this potential safe harbor [issue] is something that the state recognizes [it needs to do] — the governor has put a proposal in his legislative budget; the legislature has been talking about this,” Eric Kim, head of U.S. state ratings at Fitch, told The Bond Buyer. “The state and the local governments do need to address the Tier 2 issue. It’s just a question of how they do that.”
Kim noted that Cook County confronted the issue last year with House Bill 2352, which brought the county into alignment with IRS safe harbor provisions.
For the state, “there are a number of different options,” Kim said. “Our view is that the most basic option, simply raising the pensionable earnings cap to match the Social Security wage base, seems like it would be the most credit-neutral. Getting rid of Tier 2 entirely does pose some risks from a credit perspective.” […]
Fitch’s Kim had some laudatory words for one of the governor’s other policy proposals regarding pensions: a plan to add three years to the amortization cycle and target 100% funding of the pension liability.
“We think [that] would be potentially a significantly positive move,” he said. “We’re waiting to evaluate and see, one, is the legislature open to that … and what does an actuarial analysis look like? But we have consistently said that one of the challenges for Illinois is its significantly large long-term liability burden.”
posted by Rich Miller
Tuesday, May 21, 24 @ 12:02 pm
Sorry, comments are closed at this time.
Previous Post: Showcasing the Retailers Who Make Illinois Work
Next Post: Investment In Carbon Capture Technology Will Help Grow Illinois’ Corn Industry, Spur Job Creation, And Keep Nation ‘Fed and Fueled’
WordPress Mobile Edition available at alexking.org.
powered by WordPress.
“Yet unions now claim … .”
Now? Been hearing about this from the beginning, along with other problems. Remember Mike Madigan and David Vaught being “stumped” by Raymond Poe during a hearing before it became law?
Comment by Anyone Remember Tuesday, May 21, 24 @ 12:07 pm
This line stood out to me:
“Other proposals aimed at more broadly enhancing Tier 2 pension benefits, including eliminating the distinction between Tier 1 and Tier 2, could materially increase the state’s pension challenges and affect Illinois’ credit rating.”
Sounds like Fitch isn’t a fan of the bigger Tier 2 fix/Tier 1 enhancements being pushed in the House
Comment by Blazzzer Tuesday, May 21, 24 @ 12:11 pm
It’s time to further uplift teachers whose resignation can be rejected because of state statute.
Comment by Macon Bakin Tuesday, May 21, 24 @ 12:13 pm
===being pushed in the House ===
By a few people. That is not gonna be the solution.
Comment by Rich Miller Tuesday, May 21, 24 @ 12:16 pm
==The Constitution isn’t a suicide pact==
translation: The WSJ is okay with individuals and corporations making use of the contract clause…just not unions.
Comment by Jocko Tuesday, May 21, 24 @ 12:22 pm
Honest Question, how many state workers aren’t covered by Social security? I’m not suggesting Tier 2 shouldn’t be tweaked but it seems like a small percentage of the Tier 2 employees.
Comment by Mason Born Tuesday, May 21, 24 @ 12:51 pm
“… how many state workers aren’t covered by Social security?”
Mostly, but not entirely, educators (Teachers’ Retirement System).
Comment by Anyone Remember Tuesday, May 21, 24 @ 12:55 pm
“Behold the new union strategy to kill the state’s pension reforms using Social Security as the political cudgel.”
Left unspoken here is that there is not one person writing for the WSJ editorial page who believes that Social Security should even exist. Your prize for a lifetime of toil is knowing that obscene wealth isn’t being taxed too much. You can’t seriously believe you’re also entitled to afford food.
Comment by Larry Bowa Jr. Tuesday, May 21, 24 @ 12:56 pm
Mason Born, we’re mostly talking about teachers with this issue. Mostly but not entirely.
Comment by Friday Addams Tuesday, May 21, 24 @ 12:57 pm
Just have the pension systems run the numbers of what their pension liability would look like if Tier 2 became Tier 1. That should scare everyone once and for all.
Comment by City Zen Tuesday, May 21, 24 @ 1:20 pm
–Mostly, but not entirely, educators (Teachers’ Retirement System).–
–Mason Born, we’re mostly talking about teachers with this issue. Mostly but not entirely.–
Thank you both for the clarification. I was thinking SERS not teachers.
Comment by Mason Born Tuesday, May 21, 24 @ 1:29 pm
Raising the contribution cap has always been the answer that made the most sense. That the IFT/IEA are pushing to move everyone into Tier 1 or something closer is not surprising and, frankly, probably in line with their job to advocate for membership. The governor seems like he and his staff are on the issue and addressing it properly.
The WSJ op ed seems to be playing fast and loose with the truth (shock of all shocks. Retirement wasn’t raised from 60 to 67. The formula never required 60, but a combination of years of service and age. After 20 years of service you can begin collecting a pension at 55 for TRS annuitants(RNUG can/will please correct me if I am wrong.
SSI isn’t being used as a cudgel, the fact is that if we fell out of safe harbor the expense would be a budget buster given how many teachers are in Tier 2 now.
=Yet unions now claim=
Not a claim, it is a fact.
Comment by JS Mill Tuesday, May 21, 24 @ 1:30 pm
“Honest Question, how many state workers aren’t covered by Social security?”
SURS isn’t covered by Social Security either.
Comment by CU Info Pro Tuesday, May 21, 24 @ 1:54 pm
Any fix for Tier 2 needs to lower the age for retirement. Having educators work until 67 does not benefit anyone (you can retire at 62 but with a steep penalty).
Comment by Common Sense Tuesday, May 21, 24 @ 2:23 pm
Raising the contribution is a tough one for a profession that pays at the bottom of the heap. Social Security beneficiaries only pay 6.2% into the fund from their paychecks and many, if not most, have employer sponsored retirement plans the employee can contribute to. In addition, there is money left for individual retirement contribution of person’s choice (because professionals the education equivalent of teachers are paid more than teachers)
Teachers contribute 9%
Another reason not to become a teacher. The shortage exists for a reason (many, actually) College students have options
Comment by A Tuesday, May 21, 24 @ 2:43 pm
@Rich and yet….a pension bill to increase Tier 1 benefits is scheduled to be voted on by the house. why make house members choose between voting with their municipalities versus voting with labor on a bill that is not part of the solution and won’t become law? heavy snark.
Comment by Blazzzer Tuesday, May 21, 24 @ 2:59 pm
“Any fix for Tier 2 needs to lower the age for retirement.”
That’s one of the worst aspects of Tier 2. Illinois is a higher income state that attracts top workforce talent. This is bad for the state workforce and should be reversed or improved substantially. Doing Tier 2 improvements within the framework of Illinois’ financial improvement would be the Pritzker/DPI type of way.
Comment by Grandson of Man Tuesday, May 21, 24 @ 3:03 pm
==Teachers contribute 9%. Another reason not to become a teacher.==
There are 49 other states in which to teach.
Comment by City Zen Tuesday, May 21, 24 @ 3:14 pm
“pension bill to increase Tier 1 benefits”
Bill number?
Comment by Huh? Tuesday, May 21, 24 @ 3:24 pm
=“pension bill to increase Tier 1 benefits”=
See HB 3765 as amended by House Amendment #3.
Comment by Davos Tuesday, May 21, 24 @ 3:55 pm
==There are 49 other states in which to teach.==
That’s well and good. Just don’t tout ‘Good Schools (exclamation point)’ when selling your home.
Comment by Jocko Tuesday, May 21, 24 @ 4:30 pm
=== Any fix for Tier 2 needs to lower the age for retirement===
This. I’m in my 30s and had been offered six figure C-Suite positions at DPH, DoIT, and CMS while sitting in C-Suite positions at other agencies under the last three governors (obviously Democrat and Republican). I enjoyed the work and thought the pay was fair, but left for the private sector in year 3 of Pritzker because
- the bureaucracy was maddening
- I had no interest in being in a double exempt position until I was 67.
Comment by AD Tuesday, May 21, 24 @ 8:03 pm