Jane the Actuary Retirement

Forbes post, “‘Tuesday Is A Yes-Or-No Moment’ – The Ill-Fated 2013 Illinois Pension Reform”

Originally published at Forbes.com on February 27, 2022.

So far in the history of Illinois pension legislation that I’ve been recounting, the public and the press have little to no role, between the lack of interest and the backroom dealing.

But, however much the Chicago Tribune editorial board, among others, worried in 2012 that voters would be fooled into thinking that the pension crisis would be “fixed” with the (ultimately unsuccessful) Illinois constitutional amendment, there was finally real discussion underway on the topic of pension reform. In the spring of 2012, both then-governor Pat Quinn and House Speaker Michael Madigan promoted reform plans making cuts to retirement benefits of current, not just new, state employees, though neither of those plans ever went anywhere. Then, in the fall, after the constitutional amendment failed, Quinn attempted to get greater grass-roots support for the cause of pension reform, with a mascot, Squeezy the Pension Python, and a video highlighting the problem, “The Pension Squeeze.” It was not well-received, but nonetheless this was a period when real efforts were underway.

There were two camps among the reformers. In the House, led by Madigan, the approach was a set of unilateral cuts to pensions, on the basis that cuts are permissible, even in light of the Pensions Clause of the state constitution, because the toll that the required contributions being made to the plan take, in terms of cuts made to social welfare spending, places “the health, safety and welfare of Illinois residents . . . in jeopardy.” Consequently, “the bill would not violate the Pension Clause because the legislature purportedly retained the power to cut pension benefits to address the State’s fiscal crisis, preserve the pension system, and protect the public welfare as detailed in the bill’s preamble” — as described by Eric Madiar in a 2014 report, summarizing the opinion of the Civic Federation of Chicago, a supporter of this approach.

(I cite Madiar because his report is a comprehensive description, but, it turns out, the report he cites, a Civic Federation blog post, does not take a stand but simply describes positions it attributes to unnamed supporters.)

This bill was debated on May 2, 2013, and Rep. Elaine Nekritz seemed to voice the general consensus when she said,

“I just want to spend a couple of — say a few words about the constitutional question because that’s been a very, very important part of this debate. I believe we have a very strong case in this Bill before us as to why this Bill is constitutional. Just as though — just like under the First Amendment, which is a very absolute statement that you’re — that your freedom of speech cannot be abridged, you can’t, under that, still be allowed to shout fire in a crowded theater. And I believe that the courts will not force us, in this instance, to put pension payments above every other constitutionally required and constitutionally encouraged priorities that — that this state has. We are striking a balance here and for me, throughout this entire debate, this has been about balance, about seeking balance.”

The bill then passed by a vote of 62 – 51 (two voted present), with tight margins among both Democrats and Republicans (based on Wikipedia’s party affiliations). Among Democrats, 40 voted yes and 27 no; among Republicans, 22 and 24. One presumes there are a mix of reasons for opposition — from a conviction the bill didn’t go far enough, to the opinion it went too far or would be judged unconstitutional.

The second reform effort was led by Senate President John Cullerton, through Senate Bill 2404. As explained, again, by Madiar, it used a legal theory of “consideration,” believing that reductions in pension benefits would pass constitutional muster if employees and retirees were given “consideration” for benefit reductions: in this case, they would have their COLA rate reduced but receive “among other things, a contractually-binding pension funding guarantee by the State, retiree healthcare access, and legal treatment of all future salary increases as pensionable income.” What’s more, these provisions were intended to be offered to each employee, with the belief that the plan to cut those employees not electing the deal from health insurance in retirement and freeze their pensionable pay, would be acceptable and outside the guarantees of the state constitution. (It turned out that the Illinois Supreme Court would decide otherwise, but that’s another story.)

The Senate debated the bill on May 9, 2013, and, yes, they had a real debate, with a fair amount of attention on the question of whether the bill would be deemed acceptable by the Supreme Court, and, it seems to me, somewhat less confidence in the matter, but in the end it passed with firmer margins, 40 – 16.

And, having two competing bills, for the first time in this overview of the history of Illinois pension legislation, the factions made their case publicly with open disputes about the best path forward, and with a proper conference committee with public hearings. Ultimately, the House approach, and their conviction, or desperate hope, that the Illinois Supreme Court would rule in their favor, won the day, and a sweeping bill was passed on December 3, 2013, which included such provisions as a delayed retirement age, a holiday on COLA increases, and a pay cap applied to existing employees rather than just new hires. The bill received strong support, with the Chicago Tribune, the day of its passage, urging,

“Tuesday is a yes-or-no moment. . . . Lawmakers: be the solution. Stabilize this state’s future, its credit rating and its business climate. Vote ‘yes.’ Or declare that you’re the problem.”

Again, there was significant opposition, with the Senate adopting the bill 30 – 24 (3 present) and the State House 62 – 53 (1 present). But this was not simply a matter of demanding the status quo. Some legislators went on the record with their reasons for opposition, in the debate transcript, for instance; or in news reporting (the Dubuque Telegraph-Herald reported on December 5 that its local legislators voted against it because they didn’t believe it would be accepted by the Supreme Court); or in op-ed columns, such as that of Jeanne Ives, who wrote that “it’s not the best we can do, since it’s not good enough.” She also pointed to the short time, only 24 hours, available for legislators to review the conference committee’s bill. Of the Republicans running for governor in the coming election, ultimate winner Bruce Rauner opposed it because it didn’t go far enough; others were skeptical of the constitutionality. And a December 11 Chicago Tribune editorial claimed that “The most significant reason why so many Republicans opposed this bill is that they represent districts that have large constituencies of state workers and teachers who fought this and every other pension reform bill. It didn’t matter that the business community overwhelmingly supported the bill.”

We know how this ended — in 2015 the Illinois Supreme Court firmly declared that the state had no fundamental obligation to fund pensions in advance, so that the only sort of crisis that would justify pension cuts would be the dire need of the state being unable to pay pensions as they come do in a pay as you go fashion. If you live in the real world, this is pretty appalling — as it is, the state’s funding target of 90% funding in 2045 requires 25% of the state’s general revenue to go to pensions, crowding out other essential services. But to take the court’s logic to its bitter end, imagine that the state had indeed discarded its funding plan, but the state of Illinois’ population continues to decline, and suddenly a new generation has to pay even more, or slash pensions far more dramatically than modest cuts made earlier.

But what I cannot find, in any of the debate transcripts, or in any of the news reporting, or any editorials, is any consideration of ought to have been — acknowledging that hindsight is 20/20 — the obvious solution: if it’s iffy at best that the Supreme Court would accept this legislation in light of the state constitution, and if everyone agrees in the need for reform and some of the apparent opposition is skepticism that the bill will succeed, why wasn’t an Arizona-style constitutional amendment on the table?

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Uncategorized

Forbes post, ““Don’t Be A Chump”: The Story Of The Illinois Pension Reform That Wasn’t”

Originally published at Forbes.com on February 28, 2022.

How did an Illinois pension reform plan get the key unions of state and local public sector employees lined up in opposition alongside a conservative think tank, the Illinois Policy Institute? That’s the story of the 2012 proposed constitutional amendment intended to require a supermajority before passing any pension benefit increase.

To pick up our story after the Tier 2 pension reform of 2010, Illinois legislators by 2012 recognized that the state’s pensions were in trouble, and that it was imperiling the state’s credit ratings, so they offered an amendment, which, in the Illinois system, must be passed by the General Assembly before being put on the ballot for voters to approve. The bill was passed unanimously by the House, and nearly so in the Senate in May of 2012. The text was long and cumbersome, requiring a 3/5ths vote for any pension benefit increase, “except [in] a bill for appropriations,” and a similar supermajority for any “emolument increase”— a provision that no one seemed to know what to make of, though in the (only public) debate before the bill’s passage, House Speaker Michael Madigan explained (if I follow correctly) that this has to do with ensuring that local employers don’t boost employees’ pension benefits by creating new pensionable fringe benefits.

At the time, again, looking at the debate, Madigan himself acknowledged that votes in the past would not have been impeded by this additional requirement but claims that this proposed amendment would give opponents “a better chance” to make their case, and suggests that efforts to boost Tier 2 pension benefits would arise soon enough that this proposed amendment would be needed to fight them off.

Not surprisingly, the Illinois Education Association criticized the amendment for reducing their ability to negotiate higher retirement benefits, framing it in particular as a change that would “make it nearly impossible to reduce the Tier 2 retirement age of 67 to a more reasonable age.” The Chicago Teachers Union went further, calling it an “attack on workers.”

Here’s what the Illinois Policy Institute had to say about it at the time:

“History shows that a supermajority voting requirement would have made virtually no difference in preventing the pension benefit increases and sweeteners approved by the legislature during recent decades. Nor would it have prevented the pension crisis the state now faces. Such measures have passed by overwhelming margins in both houses of the legislature, far surpassing the supermajority mark (which is 71 votes in the House and 36 in the Senate).

“The conundrum voters face is that to support the amendment is to further the fallacy that it actually means something, while to oppose it may send the wrong message to state and local decision makers who are already spending beyond the taxpayers’ means, who knowingly passed this “do nothing” amendment so they could say they did something toward pension reform. . . .

“[I]f the General Assembly was truly interested in advancing pension reform, it would have referred a constitutional amendment that prohibits pension and retirement system benefit increases unless and until they are fully funded (using risk-free discount rates).”

And the editorial writers at the Chicago Tribune went even further, calling out the toothlessness of the proposed amendment, then suggesting an alternative, as follows:

“The Pension Clause of the Illinois Constitution shall not be deemed a suicide pact requiring any government to let retiree benefits reduce it, and its taxpayers, to penury. Life is long, circumstances change, and what looks affordable today might be unaffordable a few decades from now.”

(Chicago Tribune, April 16, 2012.)

Subsequently, just before the election, they further reiterated their opposition to the amendment in an October 29 editorial headlined, “Pension Head-Fake.” They called the amendment “a misleading gesture — essentially worthless” and “both diabolical and feckless,” designed to convince voters to “think fond thoughts of all those legislators who, golly, must have passed pension reforms.”

“Don’t be a chump,” the editorialists wrote in bold, and offered voters these concluding thoughts:

“Whatever the outcome Nov. 6, voters need to tell their lawmakers that — eyewash amendment or no — Illinois needs real reforms. A constitutional amendment that clarifies the pension protection clause would help. As is, the unions contend a worker is entitled, until death, to the pension scheme that was in force on the first day he or she reported for work. We know, that’s ridiculous. The Illinois Constitution needs to say so.”

As it happened, the amendment didn’t pass — specifically, Illinois law requires that voters approve amendments by a three-fifth’s majority, and the amendment fell short by 4%, with a margin of 56% approving of the amendment.

Were the 44% of voters who voted no, expressing their true desire to maintain the simple majority vote because they want to ensure that supported the unions’ desire for easy benefit increases? Was it an instinctive opposition to new amendments? A general lack of trust that legislators would put something genuinely useful on the ballot? Or were they indeed attempting to send a message that this was meaningless and that Illinois was due for true reform instead? And were the editorialists’ and the Illinois Policy Institute authors right that the state legislature wished by putting this amendment on the ballot to convince Illinoisans that they were solving the pension crisis, while having no intentions to do anything of the sort, or it that far too cynical an explanation?

It is difficult to know, but here’s a bit of context: Illinois legislation on ballot measures is much tighter than other states. There is no means of placing legislation on the ballot, as in California, for instance, and the ability of citizens to place an amendment on the ballot is also very narrow; in almost all instances, potential amendments must be passed through the General Assembly first before making it to the ballot. In 2012, this was the only measure on the ballot; in 2010, in the wake of the Blagojevich ouster, voters approved a provision allowing for the recall of the governor. In 2008, based on a provision in the existing constitution requiring this periodically, Illinoisans voted against a new constitutional convention (there was a long list of opponents, asserting it would be costly with no real benefit). The next most recent amendment was a decade prior — meaning that it’s very easy to believe that voters had been conditioned to be skeptical of amendments such as this.

In any case, of course, this is all just a prelude to the first — and perhaps last — attempt by the Illinois legislature to truly reform existing pensions the following year, about which, more to come as I finish off this little series of “more than you ever wanted to know about the legislative history of Illinois pensions.”

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “‘We Don’t Have Actuarial Numbers Relative To This Amendment’: Illinois’ Tier 2 Pension In Their Own Words”

Originally published at Forbes.com on February 21, 2022.

Earlier this month and late last month, I shared the bipartisan history of Illinois’ legacy of pension plan underfunding, as a broad overview as well as looking at specific pension boosts and the comments of the legislators at the time, via the floor debate transcripts. Of course, the story doesn’t end there, and the pension-boosting came to a (temporary) end when the combination of the crash in funded status after the dot-com bust and again after the “Great Recession” paired with the new attention to funded status with new financial reporting standards (GASB 67 and 68) and with the Tea Party’s call for financial restraint (more about this in another article).

In Illinois, this resulted in a Blue Ribbon Pension Commission under Gov. Rod Blagojevich, which issued a report in 2005 with some recommendations which were adopted and others which, well, never saw the light of day. As might be guessed, the changes actually implemented were small scale, but included an anti-spiking measure, a reduction in the guaranteed interest rate used to calculate a minimum pension benefit, and a reduction in the categories of state employees eligible for the more generous alternative formula. This legislation, Public Act 94-0004, also required that any new benefit increase henceforth must be paired with a corresponding funding increase, and must sunset after five years (though recall that this didn’t stop the legislature from increasing benefits for Chicago Firefighters or non-Chicago Police and Fire pensions, both of which involve the state dictating benefits and localities funding them).

In recognition of the small nature of these changes and the very large debts still remaining, the bill also created yet another commission, with no effect, and in subsequent years, still more commissions met. In 2009, the Illinois Pension Modernization Task Force held a series of public meetings, but produced no majority-approved report, only a work product with findings and minority reports.

It is in that context that the Illinois Tier 2 pension system came into being — which avid readers will recall is a new set of benefits for public-sector employees in Illinois hired after January 1, 2011, a set of benefits with changes made that “looked good” to legislators at the time but had no actuarial review, and as a result will sooner or later fail the “safe harbor” test, in which state and local public pensions must provide better benefits than Social Security in order to opt out of the Social Security system. And why didn’t the law have an actuarial review? Because it was created behind closed doors — which makes it all the more worthwhile to repeat the exercise of reading the legislative transcripts of the day it was brought to the floor of the Illinois State House and Senate for a vote.

Here are the details:

This law, Public Act 96-0889, started out as Senate Bill 1946 (SB1946), introduced in February of 2009, as a small change in how pensionable pay is calculated for leaves of absence. It sat, having been referred to the rules committee in December. Then on March 24, 2010, a new amendment was filed which replaced the entirety of the preceding text. Within a single day, sponsors were added and removed and the bill was passed, 92 to 17, with 7 voting present, in the House, and 48 – 6 (3 present) in the Senate, and the bill was signed by the governor shortly thereafter, on April 14th.

In the House, that day began with the invocation, pledge, roll call, welcoming of visitors, some housekeeping items. Its first vote was to allow a nonprofit group which wished to step up, to print brochures on Fetal Alcohol Syndrome for distribution when couples apply for marriage licenses, which caused a bit of confusion and need for clarification that the state’s existing law mandates the distribution of a brochure but various counties can’t afford to purchase the copies to hand out, and while it might be a worthy question as to whether the mandate makes sense, that’s not under discussion. A long series of additional noncontroversial bills (or bills presented as noncontroversial) were likewise passed, a group of student nurses from Harper College and hair braiders from Chicago in the gallery were recognized, and then SB 1946 was brought up for discussion, with then-House Speaker Michael Madigan announcing that amendments 2 and 3 were being withdrawn, and beginning discussion on Amendment 4.

Madigan describes the new legislation’s key provisions, all for new employees only: an increase in the normal retirement age to 67 with 10 years of service, or reduced benefits at age 62; a salary cap growing at 1/2 of CPI; a change in salary averaging from 4 to 8 years; new limits on the alternative/higher formula for high-risk jobs; a shift from compound to simple interest for the COLA, and based on 1/2 the CPI; a prohibition on double-dipping; and a partial contribution holiday and re-amortization of the pension debt for the Chicago Public Schools pensions. In addition, he says, there are separate changes for the General Assembly and Judges’ pensions.

Rep. Tyron objects to the fact that his Amendment 3 had been withdrawn by Madigan. It turns out that the Chicago Teachers’ contribution holiday had been paired with the pension reform, and Tyron’s amendment intended to remove it, but Madigan had quashed that to allow the contribution break to go ahead. Madigan defends the break because of longstanding complaints that the pension system is unfair regarding teachers (long story short: the city of Chicago is responsible for funding its own teachers’ pension and feels they’re being shorted the amount of contributions the state is paying into the pensions for teachers in the rest of the state).

Rep. Roger Eddy (R) supports Tyron in splitting the pension reform from the contribution break. Rep. Stephens objects to the out-of-order rush with which the bill was moved to the Third Reading. Tyron again calls for support from other members to override Madigan’s decision to pair the two items, and receives substantial — but not enough — support when this is put to a vote: by a vote of 70 to 47, the contribution holiday was kept in the bill. Not surprisingly, this was exactly the partisan breakdown (with one missing Republican) at that time.

After that vote, Rep. David Reis (R) has this to say:

“This looks like Washington D.C. Throw out a Bill, take it or leave it, no time to go back home and talk to your constituents, no time to go home and talk about the school districts and the teachers and the state workers that this is going . . . is going to effect [sic]. This Bill was dumped out today as an Amendment. We barely had time to look at it in committee. Teachers are in school all day. What a perfect way to do this. I think it’s shameful . . . . [H]ow can you go home and face your voters and not even had time to discuss this with them, had a town hall meeting, had time to e-mail them, is beyond my comprehension. . . . At a minimum, Mr. Speaker, I think we should postpone this vote until after we’ve had time to know what’s in the Bill, go home and have some town hall meetings [and] so that everybody in this floor actually knows what they’re voting on.”

Eddy raises concerns about the effect the bill would have on retired workers returning to substitute teach, then returns again to the Chicago pension holiday, as does Rep. Dave Winters (R), who points out that the holiday now will been trouble later, then asks:

“What are the total savings, first year-savings, if this Bill comes to fruition?”

And Madigan answers:

“We don’t have actuarial numbers relative to this Amendment. We would say that we would expect that the savings would be over a hundred billion dollars.” (Of course, that’s not first-year savings, and it is not at all clear what time period Madigan was talking about or whether such a round number had any sort of math behind it.)

Whereupon Winters, again, as did Reis, asks for a delay “until we can actually get some actuarial numbers back.”

Rep. Kevin McCarthy (D) responds to this with a long rambling speech which appears to justify the backroom dealings as necessary because stakeholders weren’t willing to make a deal in public — though no one attempts to justify the rushed nature of this final vote.

Rep. Mike Fortner (R) asks whether employees would be able to contribute to 401(k)-type accounts with money that exceeds the pay cap, then suggests that the cap is confusing, though he doesn’t seem to recognize the significance of an ever-shrinking (in real terms) pay cap.

Another member, Rep. Raymond Poe (R) is concerned about whether too many people have been cut out of the higher-benefit pensions.

And after some additional discussion on the details of the anti-double-dipping provisions, the vote is taken, with 92 voting in favor, 17 against.

On the Senate side, it was evening when the bill came up for a vote. Senate President John Cullerton (D) again introduces the bill with a brief description, this time omitting the ever-decreasing pay cap, but pointing as well to the risk of a bond downgrade “if we don’t show that we’re trying to address our structural deficit.” The tone continues to be positive as the other Senators speak, with Senator Murphy’s statement seeming to speak for others, just before the vote was taken:

“To paraphrase Vice President Biden, this is a really big deal. I want to commend the [Illinois Senate] President for his work on this and his courage in carrying this and working with us in a bipartisan fashion.”

So here ends the take of the approval of the Tier 2 pension system, with no actuarial review, no opportunity for anyone but the backroom negotiators to assess the changes before the vote was taken, and the need to take on faith the claim of $100 billion in savings. Is there anything in here that is a surprise? No. Is this sort of legislating unique to Illinois? Also no. But I think there’s still some value in observing our legislators in action.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “‘The Pension Bill Has Something For Everybody’: A Look Into How Illinois Lawmakers Justified Their Pension Benefit Boosts”

Originally published at Forbes.com on February 9, 2022.

In my prior article, I laid out the Illinois General Assembly’s repeated unanimous, near-unanimous or strong bipartisan majority support for a series of bills increasing pension benefits for public employees from 1989 – 2000.

But what more can we learn from what the senators and representatives themselves said about the bills? Their comments are quite instructive, as, repeatedly, they deem bills “paid for” solely because there exists a plan to fund them by future generations, and they congratulate themselves for their willingness to provide additional benefits to public employees.

Transcripts can be viewed at the same GA website.  And be warned: this is a lot of material, so strap in!

Going bill-by-bill, again, working backwards, we have the “Rule of 85” in PA 91-0927 or HB1582. In the Senate transcript of the November 30, 2000 legislative session, sponsor Senator Robert Madigan states that the “rule of 85” “was a portion of the employees – or, the bargaining agreement that was reached between the Executive Branch and the state employees this past spring.” After a bit of clarifying back-and-forth, he continues,

“I would just point out that, as far as I’m aware of, Floor Amendment No. 1 represents something – or, the language that is noncontroversial. . . . As far as the rule of 85, that’s something that I’m not aware of that anyone who would be affected by that has a problem with it.”

There was no further discussion before the bill was passed.

On the House side, again, Rep. Barbara Currie again repeats that this is a wholly noncontroversial bill because this provision was already agreed to by the Governor’s office in AFSCME negotiations, and “All this measure does is to codify those terms in the agreement.”

Rep. Douglas Hoeft affirms his support: “I . . . urge all of the individuals to uniformly support this so we can support our workers in the State of Illinois.”

Rep. Mike Bost expressed a concern that only the rule of 85 was being passed, and not other pending benefits.

And Rep. Terry Parke questioned Rep. Currie about the cost of this provision, to which Currie replied that the increase to the state’s accrued liability would be about $280 million, but that “this isn’t gonna cost any more than the money that the Governor has already committed to when he negotiated and signed the AFSME contract.” Parke and Currie then had a long discussion in which Currie insisted that this would not increase the state’s pension contributions “until we reach the year 2010” because “the system is in such excellent financial shape” (she’s not wildly wrong here, based on the then-prevalent guideline of 80% funding; and she would have had no way of knowing that the SERS plan, at 82% funded, was at its peak in 2000 and would drop to only 43% in three short years, thus demonstrating the folly of relying on an 80% funding guideline).  In any case, Currie asserts that “the statutory contribution rates will in fact cover more than the cost of this Bill.”

Presciently, Parke then finishes his comments: “We are spending ourselves into a serious problem with our pension system and with our appropriation process. One of these days this state is not gonna have enough money to meet the needs of the citizens and I want all of you to remember the days like this when you vote to increase your pension systems to come up with a pension, with a tax bill to increase somebody’s taxes to pay for these systems that you keep passing here in this General Assembly.”

Next, again working backwards, we have the 2.2% formula bills.

With respect to the SERS benefit increase, the Senate debate centers around collective bargaining. As Senator Jones says in the May 31, 1997 transcript, “I think Senator Collins had worked hours, and many hours and years to sponsor this piece of – this legislation so that we can arrive at the point we are today. So I – I stand up gladly and proudly to – to support you in this endeavor, but I think we should know where the real, real support originally came from and how it all came about. And it came about as a result of collective bargaining legislation.” (Again, all transcripts can be viewed online.)

On the House side, there was more discussion. The CGFA’s summary notwithstanding, there were a number of benefit boosts, including a “30 and out” provision. It was explained by Rep. Poe that the bill was “funded” by the fact that during the AFSME contract negotiations, the union accepted a reduced wage increase (relative to what they’d otherwise have demanded) in order to achieve this pension benefit increase, and it was taken on faith that the bill was indeed therefore truly “paid for,” when it ought to simply have been met with incredulity instead.

And, as in the Senate, there was much celebration of the bill. Here’s Rep. Schakowsky:

“I want to congratulate the Sponsors of this legislation and all those who worked so hard to bring this about. And, as we go home to our districts and tell the state employees that live there, how much we did for them and how much we appreciate them, I think it’s also very, very important that we acknowledge how we got here today. And, it seems to me that as important as all of us and you may have been, it’s also important to acknowledge that the . . . that organized labor, that the state employees themselves who sat at the table with the collective bargaining process, sat as workers with the administration, working out all of the details, spending the hours that it took, crunching all the numbers, compromising when they needed to, pushing forward when they saw an opportunity, and it is they who should also be congratulated and should congratulate themselves for today, bringing forth a piece of legislation that is going to provide some dignity to state workers when they retire, going to provide a substantial increase in their benefits that they so sorely need and so well-deserved. So, I think that it’s . . . that this Bill, we ought to be thanking AFSME and all of the members of organized labor who participated in bringing us here today.”

This is, of course, exactly the core of the reason why public sector unions are fundamentally so ripe for abuse, when the individuals who nominally have the role of “employer” gain so much politically from providing these generous benefits.

This brings us to the Teacher’s equivalent and the transcripts of May 21 – 22, 1998. Here the path of the bill was not as simple, as the speaker delayed moving the bill out of the Rules committee.

In the House, the May 21 transcript begins with Rep Cross complaining that the lack of progress on the formula boost was “discouraging and insulting” state teachers and prospective teachers.

Subsequently, Rep. John Turner reports that teachers are calling their offices and lobbying to get the bill passed, and he asserts that “the 2.2 plan provides a reasonable and affordable increase for teachers’ needs,” which is only fair because judges and other public officials are getting pay raises.

And Rep. John Jones referenced the benefits already approved for the SERS plan the prior year, and said “the plan we’re currently debating would only raise Illinois’ school teachers’ pension benefits to that same level. By ignoring our requests to bring it to a vote, you’re telling the teachers that they’re not as valuable, not as deserving of an adequate retirement system.”

The next day, the bill finally came up for a vote, after (according to Rep. Hannig) the conclusion of negotiations with the governor’s office, the Chicago and state teachers’ unions, and the Senate Republicans.

Rep. Hoeft summarized the costs: an increase to the state of Illinois of $5.8 billion, plus costs to school districts of $10.1 billion. What’s more, he said, “we don’t know how much this is gonna impact our school districts.”

And, again, Rep. Schakowsky praises this benefit as the long-overdue remedy to a “retirement package that thus far has been, not only inadequate, but when you compare it to others around the country and others in the State of Illinois, inequitable, unfair.”

Still others lined up to praise teachers and profess the need to expand their benefits to demonstrate how valued teachers are. And others, including Reps. Woolard and Hannig, justified the bill by promised cost savings for local school districts who anticipated seeing long-service teachers be replaced with lower-paid junior teachers.

In the Senate, in contrast, there was no such celebration of their generosity toward teachers. They simply passed the bill without discussion.

Finally, we have transcripts of the 1989 COLA/pension funding bait-and-switch bill to read. Again recall that this bill was wholly rewritten through negotiations, and presented in its final form on the day it was voted upon, June 30, 1989.

In the Senate transcript for June 30, Sen. Jones describes the bill: a funding plan paired with the compounding cost of living.

Then Sen. Schuneman speaks:

“The pension bill has something for everybody, folks. It’s been designed in such a way that everybody’s got something in here.”

But as Schuneman continues to speak, it is clear that he is cynical about this design and in fact he is concerned about the cost, and he continues talking about the pension debt as the equivalent to paying the minimum payment on a credit card – but gets no traction. The next speakers are far more interested in clarifying the (even more generous) benefit boosts for General Assembly members, and after some side-tracking Jones picks up his “something for everything” point but not with Schuneman’s cynicism but sincerely calling for passage, citing the governor’s support (and with no mention of costs or the funding plan):

“Sure, there is something in here for everyone. The Office of the Governor came out very strongly for the workers of the State of Illinois and in strong support for the compounding of the increases for State Employees and retirees. So, let’s give me a favorable vote on this bill, and we will do good for the people who work hard for the State of Illinois.”

And just like that, the debate is over – other than Schuneman, none of the 12 “no” votes wanted to be on the record with the reason for their objections.

Separately, at the House, again on June 30, 1989, the bill was brought up for debate. And, well, there was no debate. Of course, there was surely debate between the negotiating parties, and there may have been debate on prior days about prior bills/iterations of this bill, but once those negotiations were complete, all but seven members of the State House dutifully voted yes.

Did they support the funding plan, and consider the compounding COLA an acceptable concession to achieve this goal? Did they support the compounding COLA and figure that the lack of enforcement mechanisms in the new funding plan meant it was a suitable cover for their objectives? There’s no way to know – and that’s all the more the case given, again (see yesterday), the lack of reporting in the Chicago Tribune.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “More On The Illinois Pension Combine: The Bipartisan History Of Illinois’ Public Pension Benefit Boosts”

Originally published at Forbes.com on February 9, 2022.

“It’s all the fault of those irresponsible people from that other party, who voted for unaffordable benefit increases!”

That’s pretty much the standard narrative when it comes to underfunded public pensions. In Illinois, specifically, we all like to point to the law implementing the 3% compounded annual increases as a source for the unaffordable benefits now.

But the story, it turns out, is not that simple, because, well, politics in Illinois rarely is.

The annual report from the Commission on Government Forecasting and Accountability is as good a place to start as any, as it lays out a history of the legislation affecting the five state systems, starting in 1989 with the bill implementing compounded guaranteed 3% annual pension adjustments. (To be clear, this wasn’t the first pension benefit increase, but merely the first one outlined in this summary.) This was followed, in 1997, by benefit formula increases for SERS (state employees) and TRS (teachers) up to a flat rate of 2.2% annual accrual, or 1.67% for those state employees who are covered by Social Security (for reference, in the days when private sector employers commonly sponsored pensions, 1.67% was a typical accrual rate for a plan which reduced benefits by proportionate Social Security amounts, but here the 1.67% is in addition to Social Security). For the state employees, this increase was effective for all years of service; for teachers, service prior to the effective date could be upgraded with additional contributions.   Finally, in 1999, early retirement benefits were made more generous for state employees, implementing a “Rule of 85,” providing unreduced benefits when age + service points totaled 85.  These were some of the last benefits expansions, not counting early retirement incentives that were touted as money-savers, before, at last, the legislature started paying attention to benefit costs.

So what was the vote for these bills? It requires a bit of digging, and I’ll “show my work” as I do so.

To work backwards, let’s start with the “Rule of 85,” which is PA 91-0927. Using the Illinois General Assembly website, we can take a look at the Public Acts for that session, and look at the text for the bill, which tells us it was originally HB1582, so from there we can search for the general bill status, which tells us that after initially being stalled in 1999, it was revived in the fall veto session of 2000 and passed unanimously in the Senate and with two dissents in the House.

Backing up a few years, let’s examine the increase to 2.2% annual accrual.

Again, the CGFA report tells us the bill numbers: PA 90-0065 for SERS and PA 90-0582 for TRS.

PA 90-0065 is HB0110, or the Public Employee Pension Equity Act, which was passed on May 31, 1997, unanimously, in both the House and the Senate.

PA 90-0582 is SB0003, which was passed by both houses on May 22, 1998, with a vote of 113 – 3 – 2 in the House and 56 – 2 in the Senate.

And going further back still, the bill PA 86-0273, or SB 95, created compounding 3% increases in the 1989 legislative session. This is a bit harder to track down online, as only the transcripts of the floor debate are available at the General Assembly website. To follow the path a bill took to becoming law, it’s necessary to dig further, into the Illinois Legislative Synopsis and Digest as scanned in by the University of Illinois, and specifically to page 65 of volume 1 of the 1989 session. This bill was passed on June 30, 1989 by a vote of 108 – 4 – 3 in the State House and a somewhat less unanimous 41 – 12 – 6 in the State Senate. (I am unable to find any particulars about the partisan split of that State Senate vote; the Democrats held the majority but it appears to have been much closer then than now, to the point that in 1992, Republicans took control.)

But this bill was about more than just the compounding COLA. The bill started with numerous small changes but subsequent to the conference committee process, the final form of the bill was described as follows:

“Deletes all [prior text]. Amends numerous provisions of the Illinois Pension Code. Increases benefits and makes numerous administrative changes. Amends the State Mandates Act to require implementation without reimbursement.”

As readers will recall from my prior article, 1989 was also the year that the state, for the first time, passed pension legislation with an explicit funding goal – a seven year ramp and an ultimate goal of 100% funding in 40 years. The bill creating a compounding COLA was the very same bill as that with the new funding plan (which, as it turned out, had nothing binding in it so the money was never appropriated). Yet both these changes were largely invisible to the public. A Chicago Tribune article on July 2, 1989, “How various key issues fared in the spring session,” listed even such new legislation as the designation of the big bluestem as Illinois’ official prairie grass, but had nothing to say about the pension legislation. Only when then-Gov. James Thompson signed the bill in August, it came to the Tribune’s notice on August 24th, with a brief description of the changes and no indication of any reason for concern.

Should any of this be a surprise? Perhaps not. But I wonder whether today’s Illinois Republican Party, so appalled at the degree of underfunding of Illinois pensions, quite understands that their own predecessors, and not merely their Democratic opponents, cast their votes to create and compound the problem.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “The Pension Combine? Illinois’ Public Pension Unfunding Has A Long And Bipartisan History”

Originally published at Forbes.com on February 1, 2022.

In 2008, then-Chicago Tribune columnist John Kass wrote a column about corruption in Illinois, “In Combine, cash is king, corruption is bipartisan.” Commenting in the middle of the trial then underway for political fixer Tony Rezko, Kass relates a conversation with former-Senator Peter Fitzgerald, “the Republican maverick from Illinois who tried to fight political corruption and paid for it [by being] driven out of Illinois politics by political bosses, by their spinners and media mouthpieces, who ridiculed him mercilessly.”

“’What do you call that Illinois political class that’s not committed to any party, they simply want to make money off the taxpayers?’ Fitzgerald said. ‘You know what to call them.’

“What?

“’The Illinois Combine,’ Fitzgerald said. ‘The bipartisan Illinois political combine. And all these guys being mentioned, they’re part of it.’ . . .

“’In the final analysis, The Combine’s allegiance is not to a party, but to their pocketbooks. They’re about making money off the taxpayers,’ Fitzgerald said.”

Newcomers to the state of Illinois may find it odd to see the word “bipartisan” show up anywhere in reference to Illinois, but they forget that the state’s history includes jailed governors from both political parties.

And this is a bit of a preface to the history I want to share on Illinois pensions.

Here’ another preface: over the past decade, there have been a handful of scholarly articles on pension underfunding and pension reform attempts, each attempting to determine what causes some states to have well-funded and other states, poorly-funded plans. Unfortunately, the only readily available data on the topic starts in 2001, but these scholars run their regressions and try to find correlations: is it Democrats? Is it Republicans? Is it single-party control? Is it split control? Is it the influence of public unions?

Nothing especially persuasive emerges from these studies, except for one: “Polarization and Policy: The Politics of Public-Sector Pensions,” by Sarah Anzia and Terry Moe, published in 2017 at Legislative Studies Quarterly.

Their main argument: before the Great Recession, in those states with un/underfunded pensions, both parties were the cause of the underfunding. Simply put, the public at large simply had no interest in pension funding, but was very much interested in a high level of government services and a low level of taxation. There was therefore no incentive for politicians of either side to fund pensions. As they write,

“[Politicians] are in the position of being able to promise public workers and their unions much-valued benefits without having to pay the true costs—for if they fail to make the necessary contributions, the bills won’t come due for many years, when other politicians and generations of taxpayers will be responsible for paying them. Thus, current politicians have incentives to behave myopically: by increasing benefits, keeping contributions lower than they should be—and relying on others, in the future, to pay the full costs. . . . This is an alluring calculus that knows no party lines.”

Only after the Great Recession, when a crash in the stock market combined with the emergence of the Tea Party (and, I would add, the pending implementation of GASB 67 in 2014, which required that state and local governments disclose their pension liability more visibly, along with increasing attention by rating agencies), did a split emerge, in which Republicans were more likely to support pension reform/pension funding measures, yet even still without a complete partisan divide.

And a review of the history of Illinois’ pension funding is a case study in how this pre-Great Recession bipartisan pension funding indifference played out. The whole history was outlined in great detail in a 2014 report by Eric Madiar, who at the time served as Chief Legal Counsel to Illinois Senate President John J. Cullerton; while the objective of much of his document is to argue a political point, his history lesson is extremely helpful, and starts with a 1917 report by the Illinois Pension Laws Commission lamenting that pension plans were not being funded and calling for the legislature to begin to fund pensions when benefits are earned. Throughout the 40s, 50s, and 60s, dire reports were issued by similar commissions, to no avail, with the result that the Illinois constitution of 1970 essentially treated the pension protection clause as an alternative to funding pensions.

But it gets worse: the low levels of pension funding were not the result merely of haphazard pension funding, but an intentional funding policy. In 1973, under Democratic Governor Dan Walker, the state legislature explicitly adopted a “pay-as-you-go” policy, contributing into the plan only as much as was needed to pay out benefits for the year. And in 1982, under Republican Governor Jim Thompson, as a budget-savings measure, even this level of contribution was abandoned, with the contribution level reduced to only 60% of benefits, where it remained until 1995. The only reason that pensions did not become insolvent was that at the same time, they shifted from investments only in low-risk, low-return investments such as government bonds, to more aggressive investments of the sort we expect today.

As the 80s continued, it was widely recognized that this policy was unsustainable, and in 1989 the state passed new legislation with a 7 year ramp and a goal to reach full funding in 40 years’ time. But the legislature never actually appropriated the funds to make these contributions.

Then, in the 1994 election between incumbent Republican Jim Edgar and Democratic candidate and current state comptroller Dawn Netsch, the underfunded pensions became a political issue, and Netsch criticized Edgar for failing to implement the 1989 funding plan. Each candidate had a competing plan: Edgar’s was a 50 year plan with a 20 year ramp, and Netsch offered a 10 year phase in. After Edgar won the election, the legislature enacted a bill modeled on his proposal, with a 50 year 90% target and a 15 year ramp. But even based on projections at the time, this plan would have taken until 2034 to begin to reduce the unfunded liability, as until then the contributions would not have covered the full cost of each year’s new benefit accrual and interest on the debt.

And the story doesn’t even end there: in 2003, under Democrat Rod Blagojevich, the state issued $10 billion in Pension Obligation Bonds (POBs), and counted the repayment principal and interest as part of its pension contribution. Then, during 2006 and 2007, the state took two contribution holidays. Note that this preceded the Great Recession. And in in 2010 and 2011, now under Democrat Pat Quinn, the state issued more bonds, in this case using the proceeds not merely to boost the funded status but to cover part of the annual required contribution. (This last part of the story comes from Jeffrey R. Brown and Richard F. Dye’s “Illinois Pensions in a Fiscal Context: A (Basket) Case Study.”) To be fair, it was under Quinn that Illinois for the first time implemented a pension reduction, the Tier II benefit, and none of what I’ve chronicled pairs together the legacy of benefit increases and who bore responsibility for these — simply because there is no similarly convenient summary of this history.

So there you have it: a century-long legacy of unfunded pensions in Illinois.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Illinois Pensions Update: 5 Key Quotes And A Statistic That Speak For Themselves”

Originally published at Forbes.com on December 22, 2021.

 

Deputy Gov. Dan Hynes, 2019, in a Chicago Tonight appearance (as discussed in a prior article):

“We need to look at the funding schedule that was put in place 25 years ago, that at the time thought we would be spending about $4 billion on pensions and now it’s asking us to put $9 billion in. That is 20 percent of our revenues. And I don’t think the designers of that plan ever envisioned the state of Illinois putting 20 percent of its revenues into the pension systems. So we need to take a hard look at that.”

Hynes, again, at a briefing with bond rating agencies in August 2021:

“A slide was presented to the agencies showing that by next fiscal year the state will have more employees in the much less costly Tier 2 pension program than in Tier 1. ‘That’s why the trend is our friend,’ Hynes said. ‘If we just continue to make the same payment, over time, the demographics are going to work in our favor.’

“Hynes explained that the ‘same payment’ didn’t mean the dollar amount would level off, but payments would remain at about 25 percent of the state’s budget into the future. While that’s a huge chunk of the budget, ‘75 percent of a growing revenue pie is still a lot of money to do the things we need to do and want to do,’ Hynes said. And planning will be easier. Of course, that assumes no major revenue crashes and no successful legal action on Tier 2.” (Emphasis mine.)

Matthew Strom, FSA, writing on behalf of Segal, advising the Illinois Commission on Government Forecasting and Accountability, November 15, 2021:

“The employer contribution rates are determined in accordance with the funding policy specified under the Illinois Pension Code. The employer contributions are determined such that, together with the member contributions, the plans are projected to achieve 90% funding by 2045. We strongly recommend an actuarial funding method that targets 100% funding of the existing Unfunded Actuarial Accrued Liability (UAAL) over a time horizon not to exceed 25 years and preferably less than or equal to 20 years. Generally, this implies payments that will ultimately cover normal cost, interest on the unfunded actuarial liability, and the principal balance. Furthermore, we recommend that the funding method be changed such that the contribution is equal to the Normal Cost of current active members plus the amortization of the existing UAAL. Under the current funding method, contributions are determined based on a projection of liabilities and assets to 2045 that includes future hypothetical Tier 2 members with lower Normal Cost.

“The State’s Actuary, Cheiron, has also recommended that the funding target be modified to 100% and we concur with their recommendation.” (Emphasis in the original.)

Alexis Sturm, Director, Governor’s Office of Management and Budget, undated, in the November 2021 Special Pension Briefing:

“Given the current fiscal pressures facing the state, this too is inadvisable to consider until Illinois can eliminate the unpaid bill backlog, borrowings undertaken to pay off the debts remaining from the budget impasse and the COVID-driven recession and address the underlying structural deficit.

“Therefore, at this time, the 90% percent funding ratio continues to be a reasonable and achievable goal for the State of Illinois pension systems.”

The statistic:

On December 21, the U.S. Census Bureau released its 2021 national and state population estimates and components of change.

Illinois was third highest in terms of absolute population decline, at 113,776; only New York and California had higher population losses.

And in terms of percentage of population, Illinois came in at -0.9%, with only New York and the District of Columbia experiencing larger percentage population decreases. The population decline is due to a dramatic degree of domestic outmigration, only slightly offset by additional births and international migration.

Why it matters

If the state of Illinois had funded its pensions at the point in time at which they were accrued, it would not matter whether the state’s population is now increasing or declining.

But that didn’t happen.

Instead, the state depends on future generations of taxpayers. What’s more, especially for the Teachers’ Retirement System, on future teachers paying their contributions into the retirement system to support current and future retirees. A declining population needs fewer teachers and pays less in taxes — and the most recent IRS analysis found that the domestic outmigration was associated with the third-worst net loss of Adjusted Gross Income in 2019. And that’s in a single year — these numbers add up over time, the more this decline continues. And the more the population declines, the greater the per-person burden that remains for everyone else.

Readers who spend particularly much time online will have seen the meme of a dog drinking coffee in a room engulfed by flames, saying, “this is fine.” It’s used to point to a person/a public figure seeming to simply deny reality. And at a recent talk, I characterized the approach of Pritzker and his administration as being the “’this is fine’ approach” because of their insistence, after much earlier talk about the need for reform, that there’s nothing of any particular concern regarding pensions in Illinois.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Uncategorized

Forbes post, “How Did Arizona Succeed With Pension Reform? With One Weird Trick . . .”

Originally published at Forbes.com on May 13, 2021.

 

It’s a tired story by now in Illinois: the graduated income tax state constitutional amendment on the ballot this past November failed because of a fundamental lack of trust by the people of Illinois in their elected officials. That’s not just my own claim; new House Speaker Chris Welch said as much, according to the Chicago Tribune, in making a pitch for another try at an amendment in which they would pinky-swear to use new tax money only for good purposes:

“In evidence by the failure of the progressive tax, folks don’t trust us . . . If we can rebuild that trust, it’ll be amazing what voters will help us do.”

And this same lack of trust is at least part of the reason why an amendment to the state constitution to eliminate the “pension protection clause” is a nonstarter. Yes, some Illinoisans believe that under no circumstances should benefits be altered for anyone, even the fat cats taking home more in pension benefits than they ever earned in public office, as was the subject of a WGN report on Tuesday. But others have been persuaded that any changes to pensions will impoverish the elderly, and are understandably worried — in other words, the electorate has as little trust in Illinois’ Republican legislators as in Democrats.

That’s why I had suggested in my Tuesday article a constitutional amendment that builds in protections for low- or even middle-income state workers, for example:

“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, for any plan participant whose salary or retirement benefit is less than the median salary or retirement benefit, respectively, in the state of Illinois” (addition in italics).

Does this sound off, too narrow and detailed? Should constitutions provide general principles and leave the specifics for legislation? Sure, yes, in principle, it would be nice to simply remove this clause from the Illinois constitution, but that’s not a realistic option.

And, in fact, the experience of Arizona five years ago suggests that the most pragmatic path, with the best chances of success, is exactly this very narrow, clunky, amendment.

Alexander Volokh chronicled the path Arizona took to its constitutional amendment, a change to its pension clause which, prior to the amendment, was essentially identical to that of Illinois: “Public retirement systems shall not be diminished or impaired.”

In 2016, Arizona’s Public Safety Personnel Retirement System (PSPRS) was almost as unfunded as Illinois’ pensions, at 48% funded. Key stakeholders from both parties, and including the public safety unions themselves, recognized that change was needed, and the Pension Integrity Project team at Reason Foundation worked together with them to create a set of changes, primarily focused on reforming its out-of-control cost-of-living adjustment system, as well as instituting a risk-sharing system for new hires (with a proper actuarial analysis conducted at the time!), and new governance reforms, all of which together comprised S.B. 1428.

But how did Arizona ensure that this bill, which did, after all, cut (future) benefits for existing employees, would not be overturned by the Arizona Supreme Court? Through a constitutional amendment, Proposition 124. The text of this amendment? The italicized portion of the following:

“Public retirement systems shall not be diminished or impaired, except that certain adjustments to the public safety personnel retirement system may be made as provided in Senate Bill 1428, as enacted by the fifty-second legislature, second regular session.”

Honestly, I find this a bit mind-blowing.

This is nothing at all like what we expect from a constitutional amendment. It’s clunky, awkward. It feels like defeat, to acknowledge that this is the best we can do rather than the “pure” change of removing the trouble-making clause entirely.

But it worked. It passed by a 70-30% margin.

Would Illinois voters (or the Democrats who currently fully control the state) be willing to approve an amendment narrowly-tailored enough to ensure pension cuts only apply to the highest earners in the state?

Could Pritkzer have passed his graduated tax amendment if there had been guarantees built into the amendment itself, rather than having voters write a blank check to the legislature? The proposed amendment, after all, merely struck the requirement that any income tax be non-graduated; it was neat, clean, but should it have been more detailed to offer voters assurances that it would neither attempt to boost taxes one bracket at a time, divide-and-conquer style, nor attempt to fund government through such high rates on higher earners that they leave the state?

I don’t know. But I continue to mull over the question of whether this sort of amendment, which fully acknowledges voter mistrust and constrains the legislature as a result, is what Illinois, and states similarly trapped, need to be able to move forward.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Public Pension Roundup: Reform And Regression”

Originally published at Forbes.com on February 19, 2021

 

A round-up of reports across the country.

Florida: ending pensions for new employees?

From Tampa Bay Times,

“After years of discussions about the tricky issue of overhauling Florida’s retirement system for government employees, a Senate committee this week approved a proposal that would shut future workers out of a traditional pension plan.

“The proposal, sponsored by Senate Governmental Oversight and Accountability Chairman Ray Rodrigues, R-Estero, would require new employees as of July 1, 2022, to enroll in a 401(k)-style “investment” plan. Employees currently are allowed to choose whether to take part in the pension plan or the investment plan. . . .

“The pension plan was considered fully funded from the 1997-1998 fiscal year to the 2007-2008 fiscal year but then started running actuarial deficits, said Amy Baker, coordinator of the Legislature’s Office of Economic & Demographic Research. The deficits began during a major recession that hammered investments.”

Now, generally speaking, when an employer switches from a traditional pension to a defined contribution plan, this means a significant drop in plan benefits for employees. In Florida, that’s not the case — at least nominally not so: the employer contribution rate is the same for either type of plan, and varies only by employment class. (Of course, this doesn’t take into account any additional contributions needed to remedy funded status.) In addition, regular readers will know that I insist whenever the opportunity arises that state and local employees should participate in Social Security just as much as the rest of us do; as it happens, that is already the case for public employees in Florida. In addition, unlike the 8 year vesting of the traditional pension plan, the employer contributions to the defined contribution plan vest after only a year of service.

Kentucky: a new hybrid pension plan?

From WDRB,

“A bill creating a new pension tier for future teachers that will require them to pay more toward their retirement and work longer before they can earn full benefits passed the House Thursday.

“House Bill 258, sponsored by Rep. C. Ed Massey, moved to the House floor on a 14-4 vote and cleared the lower chamber hours later on a 68-28 vote. The measure, if passed, would put teachers and others covered by the Kentucky Teachers Retirement System hired after Jan. 1, 2022, into a new hybrid pension plan that includes foundational and supplemental benefits.

“Massey, R-Hebron, said the proposal would keep future hires from joining an already burdened and overtaxed’ defined-benefit pension system at KTRS, which actuaries expect will have unfunded pension liabilities totaling $14.8 billion and have 58.4% of the money needed to cover pension costs for current retirees and workers by fiscal year 2023.”

As described by WDRB as well as by the Louisville Courier Journal, the bill is not without opponents but there is a degree of consensus that reform is needed. However, unlike Florida, teachers do not participate in Social Security in Kentucky, so much more is at stake.

Illinois: pension spiking is back, baby

From The Patch, a local news publication in suburban Chicago:

“The Hinsdale High School District 86 board on Thursday approved a two-year agreement with the teachers union, including a “pension spiking” provision and relatively small pay raises.

“The agreement is retroactive to the beginning of the 2020-21 school year. Over the two years, teachers are expected to see base salary increases amounting to 2.2 percent.

“Under the agreement, the teachers will now get 6 percent annual increases in the last four years of their careers, up from the current 3 percent.

“This change will mean higher pensions for teachers, a practice that critics call ‘pension spiking.’ In Illinois, the state foots the bill for local districts’ pension contributions. So District 86 won’t suffer the long-term costs of the end-of-career pay hikes.”

Of course, the pension boosts won’t be free — but it will be Illinois taxpayers who will bear the cost, and quite substantially so. Receiving a guaranteed pay increase of 6%, rather than the current 3%, for four years, will mean one’s final salary is 12% higher than it otherwise would be, and one’s lifetime pension benefit (a four year average), 8% higher.

New York and Massachusetts: early retirement incentives on tap, boosting pension costs

From Spectrum News (Albany),

“Public workers in New York could have an incentive to retire early under a proposal by a pair of state lawmakers unveiled on Thursday.

“The bill backed by Sen. Peter Harckham and Assemblyman Tom Abinanti would create early retirement incentives for workers 55 and older who have 10 years of service with state or workers with 25 years of government service. A separate bill that covers early retirement for public workers in New York City was previously introduced. . . .

“To be eligible, a worker would have to be in a position that can be eliminated. . . .

“’It is better that longtime employees retire with guaranteed income than governments be forced to lay off employees who then seek unemployment benefits,’ said Abinanti. ‘Retirements in the short term will cut local payrolls, and in the long term, open jobs for those who want to work in government.’”

What is the incentive, specifically? Up to 3 years of additional service credit, based on current years of service, plus, for employers in “an optional retirement program,” additional retirement account contributions of as much as 45% of pay. In addition, employees at least 55 years old with 25 years of service would be spared the early retirement reductions that would otherwise apply — reductions which are as high as 27%, depending on age.

Not surprisingly, the bill comes with no actuarial analysis of the long-term cost of these benefit increases. And, although the plan is fully funded (based on the public plan funding methods), the new costs still must be paid by taxpayers.

Finally, according to MassLive, in Massachusetts,

“A bill that would allow teachers who are eligible to retire to purchase up to five years of service, age or a combination of the two in order to make room for new teachers has been backed by state Sen. John Velis, D-Westfield, and state Rep. Carol Doherty, D-Taunton.

“If approved, the bill known as ‘An Act to provide a retirement enhancement opportunity to members of the Massachusetts Teachers Retirement System,’ would be voted on by each city or town’s School Committee before teachers in those communities would be eligible. . . .

“The proposal was created by the Massachusetts Teachers Association as a way to provide an early retirement opportunity for teachers who have struggled to adapt to the remote teaching model and those who are at high-risk for COVID-19 and do not want to return to or continue teaching in-person while also giving opportunities to younger teachers in need of work.

“’With the money saved from allowing teachers with higher salaries and advanced degrees to retire early you could hire two teachers and then some,’ said Lori Lyncosky, president of the Westfield Education Association and a spokesperson for the Massachusetts Teachers Association which drafted the bill.”

This bill would increase the retirement benefit of an eligible teacher by adding 5 years to the teacher’s age and 5 years to the teacher’s service, or by some combination of each up to a total of 10 years. In principle, participating teachers would be required to “purchase” these credits based on a calculation of the costs; however, these calculations tend to understate the true cost, for instance, by the way assumptions are selected, or by using flat costs without regard to age, even if employees who “win” from this cost-setting are more likely to take the benefit.

It is, of course, an indicator of a broken salary schedule system at any particular school district if long-service teachers earn pay that’s double their new hire counterparts without adding double the value in terms of their experience, ability to mentor younger teachers, and the like. And this sort of incentive, even ignoring the question of whether the buy-in cost is fairly set, boosts the costs of pensions, which assume, in terms of such assumptions as retirement age, that even though teachers generally have very young retirement eligibility, a significant number of teachers will continue teaching to an older age, with the side benefit of less cost in pensions.

The bottom line: we have 50 states and 50 different pension systems, and significant differences in the reform-mindedness of those states’ legislators.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.