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* When you’re dealing with pensions, it’s all about where you start and stop counting…

- Gov. Pat Quinn’s plan to overhaul government pension systems to save money actually would cost Illinois taxpayers $95 billion extra over the next three decades, according to documents obtained by The Associated Press.

Wrestling with an $11.6 billion budget deficit, Quinn wants to cut in half the amount of money the state would put into retirement systems for state employees in the next five years. […]

The total cost would be $532 billion through 2045, up from $437 billion under the current pension plan. […]

Quinn spokeswoman Katie Ridgway countered that, ultimately, Illinois pension systems would wind up owing less to retirees under the governor’s proposal because benefits would be scaled back. In 2045, for instance, the amount owed under Quinn’s plan would be $150 billion less than under the current system.

The same goes for the return on investments. The pension systems use a start and end date which shows great returns, which is how they justify charging the state 8.5 percent interest every year for underpayments.

* The Question: Should the General Assembly pass pension reforms in order to justify skimming over $3 billion next fiscal year to patch the budget deficit? If not, how would you close that gap? If so, justify it, please.

posted by Rich Miller
Wednesday, May 20, 09 @ 10:45 am

Comments

This doesnt answer your question really but I don’t see how cutting the benefits for new employees lowers the amount owed to the system for current and past employees. Hopefully all new employees pensions will be fully funded and they are much smaller in number to current and previous. The issue is paying off the debt already incurred and reducing payments just prolongs that.

Comment by Reality is Wednesday, May 20, 09 @ 11:03 am
Yes, I do believe that the state must phase-in changes in the pension system that in the long run will reduce costs. These changes, however, must be made over time and be directed at new employees, or employees with, for instance, less than 10 years service. Everyone needs to bear in mind, however, that a reduction in pension benefits will almost certainly require increases in salaries. Pols and patronage hacks get all of the media coverage, but it is really a core group of professionals (engineers, accountants, biologists, health-care workers, etc.) who run state government, and most of them willingly trade higher salaries in the private sector for the comparitively good non-salary benefits of government work. Remove the benefits and salaries will inevitably have to rise to attract and keep these types of persons.

Comment by Skirmisher Wednesday, May 20, 09 @ 11:21 am
If the 8.5% rate of return didn’t reflect the long-term rate of return that the systems realize, then the actuaries would be compelled to change it when they do their experience studies. The fact that they haven’t indicates that 8.5% is an appropriate rate to apply to the unfunded liabilities.

Having said that, no, the GA should not enact reforms to justify a short-term skim. I will not regurgitate the arguments made by the unions, but the most compelling reason is that the gov’s plan does nothing to stop the growth of the unfunded liabilities in the near term. There is also no guarantee that the GA will not restore the current benefit structure when the lower-tier employees retire - that has happened in other states, namely New York. If you’re going to enact a two-tier system, then you need to implement a funding plan that recognizes those savings in the years that they occur.

As long as we’re unwilling or unable to put in enough money to stop the unfunded liabilities from growing, then we should just face reality and come up with a new funding plan that includes a new ramp. Quinn and the leaders need to forget about 2045. We’ll all be just as dead in 2059 as we will be in 2045. As long as we’re unwilling to raise the kind of money needed to stop the unfunded liabilities from growing (and with the realization that nobody has missed a pension check yet), let’s come up with a new 50-year plan.

Comment by The Unlicensed Hand Surgeon Wednesday, May 20, 09 @ 11:22 am
They should eliminate pensions for all new hires starting in 2010 and freeze existing pension benefits from accrual of existing employees. They could also offer a cash buy out for vested EE’s to eliminate the burden

Comment by HR Guy Wednesday, May 20, 09 @ 11:44 am
They should pass it to make future state pensions more like private sector retirement benefits.

No money should be skimmed.

Comment by Cal Skinner Wednesday, May 20, 09 @ 11:45 am
HR Guy. You do that and you have to put every teacher into Social Security and that move will cost the state more than the current pension systems do.
When you look at what the pension systems actually cost the state on a yearly basis, they are cheaper than what the private sector offers. I haven’t seen anyone produce data that disputes this. I challenge someone to do so. To anyone who wants to cut pension benefits, I ask, how much should the employer (the state) be paying into the retirement sysytems? Should it be comparable to what the private sector contributes for its employees? Comparable means Social Security and an average of %4.95 on top of that. (according to the Bureau of Labor Statistics March 2009 report) That’s an 11% cost of salary average in the private sector. The state’s cost for new teachers is around 6.5%.
To answer the question, no we shouldn’t push the debt off to future years so lawmakers can avoid the tough choices and try to create political cover by saying they “reformed” the system. There’s no benefit to the taxpayer in this in the long or short term. They have to raise revenue and yes that means increased taxes.

Comment by DC Wednesday, May 20, 09 @ 12:01 pm
Should the General Assembly pass pension reforms in order to justify skimming over $3 billion next fiscal year to patch the budget deficit?

Absolutely not.

Let’s dispense with the Orwellian “pension reforms” language. These are pension CUTS.

The only viable argument for CUTTING the pensions would be if they were too expensive to the state, or too generous to the retiree.

Current benefit levels are neither.

The normal cost to the state right now is about 8% of payroll. Under changes approved a couple years back, that cost is already set to go down to 6% of payroll. That’s far less than the 7.2% FICA plus average 5% 401(k) contribution private employers pay.

The average benefit for a retired state employee is $18,000 a year. For a retired teacher it’s about $34,000 - and they don’t get Social Security.

What’s caused the huge pension liability is NOT the 8% (headed down to 6%) normal cost, which is far lower than private employers.

What’s caused the huge pension debt is NOT the $18,000 a year for someone who spent their working life protecting abused kids or caring for disabled vets.

The cause of the huge pension debt is the state’s past practice of shorting or skipping its required payments.

As the first comment above notes, you could WIPE OUT future benefits entirely but not reduce past debts by a single cent.

The only way to pay off the debt is … to pay it. And the sooner it’s paid, the cheaper it is.

The state should pay its required share into the pensions, this year and every year, just like teachers and state and university employees do.

Yes that will take an additional $3 billion this year. There are lots of ways to get there. Raise the income tax to 5 instead of 4.5, raise the corporate income tax to 8 instead of 7.2, change the gov’s proposed tripled personal exemption for all, apply the sales tax to services for just a few from the menu of revenue raisers.

Comment by Reality Check Wednesday, May 20, 09 @ 12:02 pm
==The pension systems use a start and end date which shows great returns, which is how they justify charging the state 8.5 percent interest every year for underpayments. ==

This is a misundertanding of the effect of the rate of return assumption. Simplistically, the estimates start with how much money the state is going to need to pay pensions into the future, and then figures out how much you would have to invest today to reach that amount, given the return on your investment. A higher rate of return means a lower contribution today. If they decided the funds would all be invested in 2% treasuries, the state would have to contribute lot, lot, LOT more to meet its obligations. Deferring contributions is the same as investing at 0% — it means you have to contribute more later to catch up.

Once you understand that, the answer is you would never raid the pension funds because you are forgoing investment returns of 8.5% or whatever your best guess is, compared to borrowing at whatever the current market rate is, which is a lot lower than 5%. Raiding the pension is nothing more, nor less, than borrowing at a high rate.

Comment by Anon Wednesday, May 20, 09 @ 12:08 pm
Sorry, my 12:08 post should say “a lot lower than 8.5%”

Comment by Anon Wednesday, May 20, 09 @ 12:10 pm
Instead of deferring and deferring, why not take a one-year bitter pill? Freeze salaries and programs, do a temporary one year state income tax bump, square it up as much as possible, and then go on your merry way by sticking to the 1990’s catch-up schedule.

Comment by Six Degrees of Separation Wednesday, May 20, 09 @ 12:14 pm
DC you assume Soc. Sec. will still be around? That’s a laugh. My point is that the rest of us in the real world have already had pensions eliminated or frozen and that Illinois public employees should be treated the same. Don’t give me the nonsense that they’re “underpaid” either as when I reviewed the online databse of salaries of state employees I saw highway workers with salaries in the $60,000-$69,000 range which is insane.

Comment by HR Guy Wednesday, May 20, 09 @ 12:15 pm
Great QOTD, but I’m still trying to figure out how to answer “have you stopped beating your wife”

Comment by steve schnorf Wednesday, May 20, 09 @ 12:16 pm
HR guy- I guess you are an “if I can’t have it, nobody should have it” kind of guy, instead of an “if they can have it, why shouldn’t everyone have it” kind of guy.

Comment by Six Degrees of Separation Wednesday, May 20, 09 @ 12:23 pm
It’s not “I” it’s more of a “we” the taxpayers have already had this happen to us and it is the way of the world. In the face of potential tax increases why should we continue to subsidize or sustain hefty pensions for well paid state employees?

Comment by HR Guy Wednesday, May 20, 09 @ 12:29 pm
HR guy, private sector employers pay the employer cost for S.S. today. Whether or not it will be around is a separate issue. Again, how much should the state (employer) pay? Why should it be less than everyone else in the private sector?
You dodged the question.

Most private sector companies still pay for some retirement benefits besides Soc. Security.

Nearly 80 percent of U.S. employers provide some sort of employee-contribution match, according to a fall 2008 survey by the Profit Sharing/401k Council of America in Chicago.

Fewer than 1 percent of companies nationwide have suspended their 401(k) matches over the past few months, said Pamela Hess, director of retirement research at Hewitt Associates, a human resources consulting firm in Lincolnshire, Ill.
That’s well below the estimated 5 percent that reduced or suspended matches during the 2001-2003 downturn, Hess said. But she expects the number to rise to between 3 percent and 5 percent in 2009. (http://denver.bizjournals.com/denver/stories/2009/01/12/story4.html)

Other companies provide a pension system or a retirement benefit other than a 401K match. The bottom line is that the statistics show that around 80 percent of emplyers still pay for more than Soc. Security.

Comment by DC Wednesday, May 20, 09 @ 12:30 pm
I think Six is dead on with his idea. I would also note that the current pension payment schedule was crerated by the legislature to repair previouse skiming. The new schedule called for increased payments near the later portion of the shedule, but is technially an artificial construction or payment plan of a decades gone GA.

In other words, we can re-do the payment schedule to account for the current fiscal crisis.

Comment by Ghost Wednesday, May 20, 09 @ 12:43 pm
DC look at total compensation including benefits and state employees generally exceed private sector and have additional job protection. I look at the whole picture not just the “pension”.

Comment by HR Guy Wednesday, May 20, 09 @ 12:53 pm
schnorf - “There has been no change in my actions with regards to that”

Comment by Leroy Wednesday, May 20, 09 @ 12:58 pm
Steve, LOL.

The problem with the pension problem is not unlike that of many homeowners facing foreclosure. When times are good, the payment (normal cost) is manageable. But once you get behind and the back interest starts piling up, it’s hard to get even, particularly if your income is shaky.

I fervently disagree with the Quinn pension proposal. The last thing the pensions need on the wake a recent pension holiday and serious investment losses is another skim.

As the funds have calculated, but hasn’t been widely reported, the Quinn plan is its own Doomsday scenario for all five systems, with insolvency occurring in the next 10 to 20 years for all. The 3 State systems go first, then TRS a few years later, followed shortly after by SURS. That means the State pays the pensions directly, more or less.

Six, believe it or not, a temporary tax would have to run for at least 5 to 7 years in order to really make significant progress on improving the aggregate funded ratio to 70-75%. It’s that bad.

As the other posters have noted, the normal cost of the state pensions is reasonable. The benefits are not inherently generous. However, besides underfunding, one place for example where the funds are losing money is in the 3% COLA-the 1% member contribution doesn’t cover the full cost of that fairly good benefit. Instead of tossing an illegal contribution rate hike on everyone, Quinn would have been much better served to have “chosen his targets” on narrower issues like the COLA and had some dialogue with the funds and their unions up front.

With Filan out the door, perhaps next year will be better.

Comment by Arthur Andersen Wednesday, May 20, 09 @ 1:03 pm
HR.. You still haven’t answered the question. Should the state have to spend at least as much as the private sector is required to spend for Social Security?
So, you’re saying you’d be ok with putting teachers in Social Security, even if it cost taxpayers more, just to make you feel better?

Comment by DC Wednesday, May 20, 09 @ 1:04 pm
The state pensions do need to be scaled back. I even had one of our own state senators tell me that the exceptional generous pensions that state elected officials receive is outrageous. He was always astounded that the taxpayers /voters were willingly taking it in the ear from our state elected officials. Keep in mind that this guy was talking about “his own pension”!
He said that many of the elected officials “game” the system by having themselves assigned to a higher paying position within the senate/house just before they retire so that they can greatly increase their pension payments just before they retire. This senator was ashamed of how the system was abused by many of his fellow elected state officials. He asked me, “Where else in the state of Illinois do you find an employer who will pay you up to 130% of your base salary upon retirement?” He mentioned the names of a couple of these “legal manipulators of the pension system” to fatten their retirement pensions as they left.
Oh, by the way, I wonder how Emil is enjoying his “long overdue” retirement? And, the beat goes on.

Comment by John Doe Wednesday, May 20, 09 @ 1:07 pm
HR Guy, you must work at Dunder Mifflin.

Steve, do you know where these fat salaries and perks are in State Government ex-higher ed? I was in 31 years and never found them. Didn’t even have a State car most of the time. Finally got free parking and thought I was in Hog Heaven.

Comment by Arthur Andersen Wednesday, May 20, 09 @ 1:09 pm
No more skimming. The State should pay its share. Period. Fund it with a tax on cell phone and text messages or a 1% increase in sales tax. Both increases should be in the form of dedicated constitutional amendments.

Comment by Enemy of the State Wednesday, May 20, 09 @ 1:23 pm
The state pensions do need to be scaled back. I even had one of our own state senators tell me that the exceptional generous pensions that state elected officials receive is outrageous.

Pensions for lawmakers (in the General Assembly Retirement Systems) are one thing.

State employee, university and teacher pensions (SERS, SURS and TRS respectively) are quite another.

Don’t be confused.

The average SERS standard benefit right now is $18,000 a year.

By no measure is this “Cadillac” (as Quinn called it on Milt Rosenberg the other night). 18 K won’t even get you a Ford.

Maybe that’s why, when Rosenberg followed up on Quinn’s “Cadillac” comment - asking “How much are we talking about exactly?” - the governor dodged.

Comment by Reality Check Wednesday, May 20, 09 @ 1:27 pm
Two separate questions:
Should we re-do the pension plan for future hires? Answer: yes, there is no reason that healthy able-bodied people should begin collecting pensions at age 55.
Does that re-do justify underfunding the pension system this year? Answer: no

Comment by jake Wednesday, May 20, 09 @ 1:40 pm
Leroy, I had never heard that before; its the perfect answer.

AA, I think the widely held-belief comes from 2 places; higher ed, and k-12 in the Chicago metropolitan area. I don’t know what you say to people about that. When I was in government, the UIUC people always said they need wages and benefits to compete with Big Ten and other high-level universities for faculty, and I believe that.

I worked in government for more 25 years. I thought I was well paid. My pension is nowhere near six figures. I’m very happy with it.

I didn’t know other people in SERS that had six figure pensions and i always figured when people would talk about it there were probably a few docs that actually got six figures but not many.

Think about it. If you work 30 years under SERS AND your final 4-year average salary is $120,000, your pension will be about $60,000. That’s very nice, but it cetainly ain’t six figures.

Comment by steve schnorf Wednesday, May 20, 09 @ 1:55 pm
I appreciate the comments re the actual costs involved in the pensions as compared to private 401ks and SS along with comparing the benefits we state employees get during our career and retirement. Putting off the pain will only make it worse. I agree that we should move to the types of retirement packages that are offered in private industry for new hires and it seems like full medical for people who retire before 65 should be looked at as well. That would hurt me since I will retire in about 6 years, before I am 60. Oh well.

No skimming! Just another sh*tty plan to put off the pain. Might as well have stuck with RodB since this new gov ain’t much better.

Comment by dupage dan Wednesday, May 20, 09 @ 2:01 pm
A rational discussion on pension reform in Illinois is impossible until we have an accurate picture of all salaries, pension benefits and other retirement benefits. According to the Illinois Division of Insurance, there are over 600 public employee pension plans in Illinois. And I suspect that the terms of these plans vary wildly, allowing advocates and critics to cherry pick data. Right now we are discussing the economic load posed by the underfunded state plans. The failure of local plans probably pose a much more serious problem because they will result in astronomical local sales and property tax increase which will make Gov Quinn’s proposed income tax incease pale by comparison at the individual level.
Rational discourse on the topic requires two things:
1. Full and accessible disclosure of each public employee’s salary and job duties; and
2. Full disclosure for the terms of each public pension plan in Illinois with assets valued at actual market value instead of some cooked up “acturial value”.
This data will provide an accurate comparison of current salaries to real world salaries for similar jobs and put to rest once and for all whether public employees are underpaid. Maybe some and maybe some aren’t. The Department of Labor says they receive more than in comparable private sector jobs. Also, this info will allow third parties to make accurate calculations as to underfunding and future liabilities. The present data is skewered with self interest.
My suspicion is that this sort of diclosure would send the voters into a frenzy when they see what they are paying for and compare it to what they have.
But any discussion is merely hypothetical without full and complete disclosure by all government bodies.

Comment by Cook County Commoner Wednesday, May 20, 09 @ 2:22 pm
We need to consolidate all 5 pension systems and that would reduce duplicate admin costs by millions. Then we need to make the Legislators and Judges have the same pension as the normal state employees. Why should Legis/Judges get 5% a year when normal state employees get 1.67%. HR Guy is full of hot air. The average state employee pension is only $1,800 per month while the Legis/Judge pension averages $8,250 per month. If HR thinks state employees make so much, maybe he should try a position. However, since HR jobs are filled with Blago staff he would be able to get one.

Comment by EBCDIC Wednesday, May 20, 09 @ 2:38 pm
No, do not touch pensions. It is the state’s underfunding in the past that solely caused this to occur at all. Instead, pass a pernament income tax as proposed, and a special income tax and/or services sales tax that phases out over three years dedicated to funding the pensions and debt shortfall until the recession improves.

Comment by Bobby Wednesday, May 20, 09 @ 2:45 pm
No they should not pass “reforms” and then use the 3 billion dollars because that is fiscally irresponsible. They promised to pay into the pensions and they have not payed in their fair share for over 30 years. We need a government that solves problems and not pass it on to the future generations, or worse, collapse the pension system.

Comment by Better Government Wednesday, May 20, 09 @ 3:01 pm
I can see from our current scenerio, need for services, pension and care expenses etc how the idea for soylent green was formed.

Comment by Ghost Wednesday, May 20, 09 @ 3:26 pm
This thread is an excellent analysis that clearly shows what the GA should do with the pension system. I’d wish they all would read it. It won’t happen, but they should act like adults and stop the skim and pay up with a temporary tax increase, even if it’s 8 years. Remember what Rich said about the leaders allowing them to avoid difficult votes for 25 years? So true.

Comment by Mr. Wizard Wednesday, May 20, 09 @ 3:50 pm
This is a pressing subject.What can be done since there are constitutional limitations holding some changes back.Here’s a list.Those who haven’t retired yet shouldn’t be able to get a pension until they are 65(eventually raise it to 67).All new hires go to a 401A plan(the 401K’s for government workers).Raise the employment contribution to 12% of their paycheck.Do I expect much change in the near future? No.I don’t see Mike Madigan and Pat Quinn taking on the public employee unions.

Comment by Steve Bartin Wednesday, May 20, 09 @ 4:44 pm
When are we going to see legislators and elected officials change their pension benefits?

Comment by Deadhead Wednesday, May 20, 09 @ 5:13 pm
Steve Bartin:

Raising the retirement age for current workers would bring a lawsuit faster than you can say boo. Cutting 10 or 15 years of potential pension payments could very well be considered a “diminishment” of benefits that is constitutionally prohibited. Remember, the IL judges successfully argued when their cost of living raises were cut out that it was a “diminishment” of their pay (even though it didn’t take away what they were already getting) which is also constitutionally prohibited.

Comment by Six Degrees of Separation Wednesday, May 20, 09 @ 5:27 pm
Mr. Bartin - a huge part of the problem with your 12% employee contribution does not change a simple fact. State employees are paying into the pension and the State of Illinois tries every way possible NOT to make their payments. Get Real!

Comment by Walk In My Shoes Wednesday, May 20, 09 @ 5:53 pm
Lack of progress on pension funding is not for lack of study, CCC. Pensions have been a front-burner issue each budget year since at least 2003 at the State level. A handful of watchdog groups, public and private, have routinely examined pension costs and benefit levels, including local police and fire, for at least the past 15 years.

Lack of transparency and salary levels overall generally hasn’t made the list of major causes, but I suppose opinions vary.

If one was to compile a list of major causes of the unfunded liability problem, they would include:

1) Having 600 pension plans.

2) John Filan.

3) Paying for everything under the sun out of dough that should have done to pensions.

4) The failure to hold back unfunded benefit improvements for local employees.

5) Letting Crook County and Chicago run their own pensions.

Comment by Arthur Andersen Wednesday, May 20, 09 @ 9:35 pm
I was just offering solutions.A Chapter 9 bankruptcy is the best answer.More and more people are beginning to realize there’s no effective way to defeat the powerful who contribute money to politicians.

Comment by Steve Bartin Wednesday, May 20, 09 @ 10:04 pm
You have to raise funding to cover the costs, skimming off funds to help out even for the short term, is way beyond irresponsible,
If a private business were to do this, the owners would be facing either lawsuits or jail time.

Comment by downstate dem Wednesday, May 20, 09 @ 10:42 pm
What they need to do is stop the gravy train where an employee can boost their pay for the last year worked and then retire at that pay. They should use the average pay for the years worked, adjusted for inflation.

As it now stands, someone can serve on a county board, for example, and be paid $100 per meeting for 19 years and then become chairman of the board for one year or a township supervisor and retire at 80% of the last year’s pay.

If people in the private sector don’t have retirement security, why should our taxes go to pay for such security for government employees? Contrary to popular belief, the private sector on average earns less, not more, than those in the public sector.

Comment by MikeintheSuburbs Thursday, May 21, 09 @ 8:43 am