Illinois Pension Reform Scheme
Posted November 30, 2013
by burypensions in Politics, Public
Pensions - General
Illinois politicians needed to come up with something that they could pass
off as fully funding the state pension systems before the year 2045.
Ideally they would have wanted to go with:
- Eliminate all employee contributions
- Eliminate all state contributions
- Put in $1 trillion in 2044.
The proposal they put out comes damn close. Below, in order of
importance, is what I see them trying to accomplish based on the points
laid out officially:
Collective bargaining: All
pension matters, except pension
pickups, are removed from collective bargaining.
Presumably this deal, designed to fail, would need to get union approval
but next time when the serious Detroit-ish reforms come the unions wonft get a
voice.
Thatfs it for the sequencing by importance. Getting rid of collective
bargaining looks like what they really wanted to get through this round and
the remaining proposals are a series of distractions listed in the order of
the official release with comments below.
Funding schedule and method for certifying contributions:
Establishes an actuarially sound funding schedule to achieve 100% funding no
later than the end of FY 2044. Contributions will be certified using the entry
age normal actuarial cost method (EAN), which averages costs evenly over the
pensionerfs employment and results in level contributions.
EAN with level payments is better than EAN on compensation with a salary
scale but still a far cry from straight Unit Credit which private plans have
had to use since 2008. Also, no mention of what actuarial assumptions
need to be used.
Supplemental contributions: The State will contribute (i)
$364 million in FY 2019, (ii) $1 billion annually thereafter through 2045 or
until the system reaches 100% funding, and (iii) 10% of the annual savings
resulting from pension reform beginning in FY 2016 until the system reaches 100%
funding. These contributions will be gpure add on,h which means State
contributions in any year will not be reduced by these amounts.
Apparently Illinois has the worst funded plan in the nation even when
including Pension Obligation Bond revenue. When these bonds are due to
be paid off (by taxpayers who donft realize theyfre funding pensions) that
revenue item will remain on the books though taxpayers would now see it as
funding pensions.
Funding guarantee: If the State fails to make a pension
payment or a supplemental contribution, a retirement system may file an action
in the Illinois Supreme Court to compel the State to make the required pension
payment and/or supplemental contribution set by law each year.
Good luck with that court case.
Employee contribution: Employees will contribute 1% less of
their salary toward their pension.
Shameless attempt to court union rank and file support.
Annual annuity adjustment (COLAs): Future COLAs will be
based on a retireefs years of service and the full CPI. The annual increase will
be equal to 3% of years of service multiplied by $1,000 ($800 for those
coordinated with social security). The $1000/$800 will be adjusted each year by
the CPI for everyone (retirees and current employees). Those with an annuity that is less than their years of service multiplied by $1000/$800, or whatever
the amount is at the time of retirement, will receive a COLA equal to 3%
compounded each year until their annuity reaches that amount.
Additionally, current employees will miss annual adjustments depending on
age: employees 50 or over miss 1 adjustment (year 2); 49-47 miss 3 adjustments
(years 2, 4, and 6); 46-44 miss 4 adjustments (years 2, 4, 6, and 8); 43 and
under miss 5 adjustments (years 2, 4, 6, 8, 10).
It will probably be less than 3% unless someone mis-programs the algorithm
for calculating it.
Pensionable salary cap: Applies the Tier II salary cap
($109,971 for 2013), which is annually adjusted by the lesser of 3% or ½ of the
annual CPI-U. Salaries that currently exceed the cap or that will exceed the cap
based on raises in a collective bargaining agreement would be grandfathered
in.
Tweak impacting those who will be retiring so far in the future that they
wonft be getting anything anyway.
Retirement age: For those 45 years of age or under, the
retirement age will be increased on a graduated scale. For each year a member is
under 46, the retirement age will be increased by 4 months (up to 5 years).
Tweak impacting those who will be retiring so far in the future that they
wonft be getting anything anyway.
Effective rate of interest (ERI): For all purposes, the ERI
for SURS and the rate of regular interest for TRS will be the interest rate paid
by 30-year U.S. Treasury bonds plus 75 basis points.
That rate would then be about 4.5% based on current
rates but will that really be used for funding?
GARS Tier 2 fix: Brings GARS Tier 2 salary cap and annual
adjustment in line with other Tier 2 benefits.
Tweak impacting those who will be retiring so far in the future that they
wonft be getting anything anyway.
Pension abuses: Prohibits future members of non-governmental
organizations from participating in IMRF, SURS, and TRS. Prohibits new hires
from using sick or vacation time toward pensionable salary or years of service
(applies to SERS, SURS, TRS, IMRF, Cook County, and Chicago Teachers).
Tweak impacting those who will be retiring so far in the future that they
wonft be getting anything anyway.
Defined Contribution plan: Beginning July 1, 2015, up to 5%
of Tier 1 active members have the option of joining a defined contribution plan.
The plan must be revenue neutral and employee contributions will be equal to
those for the defined benefit plan. If a member chooses to opt into the defined
contribution plan, benefits previously accrued in the defined benefit plan will
be frozen.
If itfs elective then the only ones who would be joining would be those who
make out better under the 401(k) or else nobody would join unless they were
confused or lied to.
Healthcare payments: Prohibits the State pension systems
from using pension funds to pay healthcare costs.
If theyfre doing that now then who who will be making those payments
henceforth? So I take it paying salaries out of the pension trust would
be OK.