Superintendents Toolkit 2013

Pension Reform

Background: The State’s unfunded pension liability is approaching $100 billion according to estimates from the Governor’s Office of Management and Budget. The biggest part of that liability is the result of the

state either underpaying or skipping entirely its payments to the five state pension systems – the Teachers Retirement System (TRS), the State University Retirement System (SURS), the State Employees Retirement System (SERS), the General Assembly Retirement System (GARS), and the Judges Retirement System (JRS). The second biggest part of the unfunded liability is the 3 percent compound cost-of-living adjustment (COLA) that Tier 1 retirees currently get. The unfunded liability figure is based on living up to a ramp that was adopted in 1995 calling for all five of the pension systems to be 90 percent funded by 2045. The systems currently are funded at about 40 percent. There are three main buckets of money that fund the state’s pension systems: 1) Employee contributions, 2) Employer (the state) contributions, and 3) income derived from the investment of pension assets. The pension plan was changed in 2010 to create a Tier 2 category of employees. Employees hired after January 1, 2011 contribute a higher percentage of their salaries and receive a reduced COLA. The Illinois Constitution was amended during the 1970 Constitutional Convention to add a pension protection clause (Article XIII, Section 5) that states: “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.” Issue:

Various pension reform bills have been proposed the past few years, most of them aimed at reducing the compound COLAs of Tier 1 employees and retirees, a provision estimated to save the state about $30 billion of the unfunded liability. The current piece of legislation that seems to be the primary vehicle during this session of the General Assembly is Senate Bill 1. Governor Pat Quinn endorsed SB 1 as his preferred pension reform bill during his State of the State address February 6. SB 1 actually has two distinct parts to it: Part A is essentially the Nekritz-Biss-Cross bill (referred to as the “NBC Bill”), while Part B is the so-called “choice” plan that is designed to be used as a constitutional backstop to take effect in case any part of Part A is ruled unconstitutional. Part A includes:  The pensionable salary cap set at the higher of an employee’s salary when the bill is signed or the Social Security cap ($113,700).  An increase in employee contributions of 2 percent over a two-year period.

Resources:

The Great Pension Debate: Detailed analysis of the Illinois

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Constitution’s Pension Clause

Martire: Blame “Pension Ramp” for state’s liability Eric Madiar Abstract: Is welching on public pension promises an option for Illinois?

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