In recent weeks, Illinois legislators have considered several major pension reform proposals. Several pieces of legislation were considered by legislators that attempted to take some positive steps towards controlling costs and increasing worker contributions, but many of them came woefully short of the comprehensive reform that is needed to ensure the long term solvency of the plan.
Nekritz-Biss Bill Fails in Senate
The piece most seriously considered recently was Senate Bill 35, sponsored by Reps. Elaine Nekritz (D-Northbrook) and Dan Biss (D-Evanston). This bill, which failed in the Senate 23-30, would have increased the amount teachers, university workers, state employees and lawmakers paid toward their retirement accounts, limit cost of living increases while placing a cap on the size of pensionable salaries.
In a January 10 Heartlander article, I examined several of the pension proposals being considered, including the Nekritz-Biss bill:
“Their bill would have frozen cost-of-living increases for all state workers and retirees. After the freeze ended, cost-of-living increases would have applied only to the first $25,000 of pensions. Adjustments for inflation would not have been awarded until a worker reached the age of 67. Most government workers in the state retire much before reaching 67 years old and receive annual pension increases right away.
The Nekritz-Biss bill would have gradually increased the amount employees would have contributed to their pensions, increasing by 1 percentage point the first year and 1 percentage point the second year. The proposal also would have placed a cap on the size of the pensionable salary with two standards: a worker’s current salary or a level based on a Social Security wage base, whichever is higher.”
An Alternative Proposal Attacks the Problems
The Nekritz-Biss bill is not the only pension reform bill receiving attention. Today the House will be holding a hearing on House Bill 3303, sponsored by Representatives Tom Morrison (R-Palatine) and Jeanne Ives (R-Wheaton). Based on a model from the Illinois Policy Institute, this proposal would cut the states’ unfunded pension debt in half, move new hires into a 401(k)-style defined contribution plan while protecting already-earned benefits for government workers.
Under a defined-contribution plan, employers pay a fixed amount during the course of a worker’s career, this amount is then deposited into a personal account which the workers controls and manages, This allows the worker greater control over their retirement and the ability to customize it to their own needs. These plans not only give worker’s more control over their own money, but give more budget certainty to taxpayers.
Scott Reeder of the Illinois Policy Institute outlined in a Daily-Journal article several key points in the proposal:
Reduces the fiscal year 2014 unfunded liability by $46 billion, a 46 percent reduction. This brings the unfunded liability down from $101 billion to $55 billion.
Reduces fiscal year 2014 state contributions to $4.7 billion, a nearly 30 percent drop from $6.7 billion under current law.
Protects constitutionally guaranteed benefits already earned by retirees and current workers.
Empowers current workers to control their retirement savings going forward with 401(k)-style plans modeled after the existing State Universities Retirement System’s 401(a) plan.
Reduces the state’s annual pension contribution by more than $2 billion in the first year and eliminates the state’s unfunded liability by 2045. Ends the repayment ramp and instead moves to level annual payments.
Freezes cost-of-living adjustments until retirement systems return to healthy funding levels.
Aligns the retirement age with Social Security’s retirement age while still protecting workers who are nearing retirement under current law.
Promotes accountability and fiscal responsibility by requiring local governments to pay the employer share of their employees’ retirement savings plans.
Makes government workers’ retirement savings plans portable, giving workers more flexibility and freedom to move their plan from job to job.
In a statement on his proposal, Morrison argues that in order to maintain pension benefits in the long run, workers need additional control over their retirement funds.
“This bill reforms pensions in a constitutional way,” commented Morrison. “It protects the pension benefits workers have earned to date. The pension formula will simply apply to their current service and their current salary. They will receive a basic pension as if they had left government employment today. But in order to fully protect those benefits, we have to change how future benefits are earned. And while we’re making those changes, let’s do it in a way that empowers workers with real control, rather than keeping the power in the hands of this legislative body.”
Any efforts to reform Illinois’ pension system is made more difficult by the states’ constitution: Illinois’ constitution prohibits fundamental reform of pensions for existing public-sector employees. It is likely that any pension reform bill that makes it through the General Assembly will be challenged in court.
The legislature’s inability to reach agreement on any form of pension reform is troubling. Without an overhaul of the current, unsustainable pension system, Illinois taxpayers will continue to be burdened by substantially higher taxes to bail out the state for its imprudent policies. If state workers and union representatives cannot accept sensible changes to the pension system, more state workers will be laid off, taxes will increase, and the state’s economy will decline even further.
The Morrison-Ives proposal takes many of these steps that the state needs to manage its’ pension obligations while managing costs. Illinois legislators should give the bill serious consideration.