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What are Illinois’ real pension options now? – Blogs On Politics – Crain’s Chicago Business

18 Jul

Though the subject of state pension reform has sort of dropped from the headlines lately, buried by tons of other news, the reality is just as big and ugly as ever, with unfunded liability in Illinois’ five pension systems alone hitting $111 billion as of Dec. 31.

Now comes a new paper on what realistically can—and can’t—be done about it from a guy who in some ways has been the most accurate pension prognosticator in the state.

He’s Eric Madiar, who as chief counsel to Illinois Senate President John Cullerton, correctly predicted that courts would turn thumbs down on a plan pushed by Speaker Mike Madigan and others to unilaterally cut benefits and raise costs for workers.

In his view, there’s still a way to cut costs, somewhat, though others strongly disagree. He also sees promise in buying out annuitants and workers with lump-sum payments, or shifting some costs from the state down to local school districts.

But other proposed solutions, including amending the state constitution or allowing local units of government such as Chicago Public Schools or the city itself to go bankrupt, aren’t likely to work even if they made into law, he asserts.

Madiar outlines his views and takes a good look at how we got where we are in an article in the new issue of Illinois Public Employee Relations Report, published by IIT Chicago Kent College of Law and the University of Illinois School of Labor and Employment.

Madiar starts by looking at how the Illinois Supreme Court rejected both a state pension fix and one for the city of Chicago. Both became law, with the state arguing that it had a right to use its “police powers” to reduce payments, and the city asserting that was offering new guarantees in exchange for lesser benefits. But the court pretty much laughed, saying the Illinois Constitution means what it says when it describes pensions as a contractual right that “cannot be diminished or impaired.”

Madiar sees more hope in a plan pushed by Cullerton and backed by Gov. Bruce Rauner to force workers to chose between keeping their 3 percent annual compounded pension cost-of-living hike or having their wages frozen for pension purposes at today’s level.

His argument: Since no one is guaranteed a raise, except perhaps as a result of collective bargaining, the state has every right to put strings on future raises, i.e. a lesser COLA.

Labor groups have laughed at that, and I suspect they’re right. Refusing anyone a raise indefinitely unless they cave on pensions comes pretty close to extortion, in my book.

But the legal theory has enough going for it that it could make its way through the General Assembly as part of a budget/tax-hike deal next year.

Madiar also plugs another idea that quite probably would pass legal muster. That’s offering workers a choice between keeping their pension rights (and wondering if the state or city really is able to pay) or taking lump sum a buy-out of, say, 75 cents on the dollar.

If just one worker in five in the state’s largest pension funds took such a deal, the state would save $160 million a year and $7 billion total over term, Madiar says. That’s not huge, but it’s something.

For those who want to hold out for something bigger, Madiar looks at amending the constitution and passing a law to allow local-government bankruptcy.

The first isn’t constitutional, Madiar argues, since it is premised on the same “police powers” theory the court already has rejected. And bankruptcy effectively would overrule the will of voters who approved the state constitution, knowing that it made pensions a right effectively guaranteed by a first lien on state resources.

Read it for yourself. But it’s a good summary of one particularly informed view of the state of the Illinois pension world. And remember: If something doesn’t happen, both the state and city will have no choice but to pay until the pensioners are made whole.

Illinois Public Employee Relations Report

Source: What are Illinois’ real pension options now? – Blogs On Politics – Crain’s Chicago Business

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Rauner claim of pension deal quickly shot down by Madigan, Cullerton – Chicago Tribune

21 Jan

Republican Gov. Bruce Rauner once again attempted to triangulate the Democratic legislative leaders he has been warring with in Springfield, announcing Thursday that he had struck a deal with Senate President John Cullerton on pension legislation while blasting House Speaker Michael Madigan as “unreasonable” and “irresponsible.”

But the claim of a deal was immediately rejected by Cullerton, who said in a statement that the pension legislation outlined by Rauner “goes beyond what we discussed and beyond what I support.”

Rauner, who is less than a week away from delivering a state of the state address while he presides over a government that has gone seven months without a budget, summoned reporters to his 16th-floor office at the Thompson Center in Chicago to announce what he billed as a “first step” “in the spirit of compromise.”

Rauner said he was dusting off and endorsing pension legislation that Cullerton had first proposed years ago. But there was a catch: Rauner said he wants the legislation altered to exempt salary increases from collective bargaining rights.

The governor said Cullerton had agreed to that change, but Cullerton disagreed.

“The governor called me this morning to say he was going to back my ideas for pension reform,” Cullerton said in a statement. “The plan he outlined at his news conference isn’t what we talked about. It’s not my plan. It goes beyond what we discussed and beyond what I support.”

Madigan also weighed in, saying in a statement that he was opposed to the proposal, and even going so far as to speak for Cullerton.

“Despite the governor’s desire to drive a wedge between Democrats in the House and Senate, neither President Cullerton nor I will agree to make changes proposed by the Governor that will hurt the middle-class families of our state,” Madigan said.

Source: Rauner claim of pension deal quickly shot down by Madigan, Cullerton – Chicago Tribune

State Pension Case May Not Be Done; It Could Go To U.S. Supreme Court | WNIJ and WNIU

28 Jul

Illinois may not be done with the 2013 law reducing state employees’ pensions after all. Attorney General Lisa Madigan appears to be readying an appeal to the U.S. Supreme Court.

Many thought the question of whether Illinois could save money by reducing state workers’ and retirees’ pensions was resolved in May, when the state’s Supreme Court justices unanimously ruled the answer is “no.”

Illinois has until Aug. 6 to appeal to the nation’s highest court. Although Madigan hasn’t actually filed an appeal, it may well be on the horizon. On Monday, her office asked the U.S. Supreme Court for an extension of that filing deadline until early September.

John Fitzgerald, an attorney for retired public school teachers, says they’ll fight the appeal.

“This is entirely a matter of Illinois state law,” he said. “There is no basis for the U.S. Supreme Court to intervene.”

The Attorney General’s petition says the pension case “raises important questions” about states’ rights to use police powers to modify contracts, like public pensions.

“The principal questions presented are (1) whether the reserved powers doctrine prevents a State from abdicating its police powers authority to modify its own contractual obligations in extreme circumstances that imperil the general welfare and (2) if not, whether the Illinois Supreme Court identified the correct standard by which the validity of a State’s exercise of its police power is judged.”

The Attorney General’s office cites Illinois Solicitor General Carolyn Shapiro and Assistant Attorney General Clifford Berlow’s caseloads, vacations and other duties in its request for a 35-day extension.

Illinois has roughly $100 billion in long-term pension debt.

via State Pension Case May Not Be Done; It Could Go To U.S. Supreme Court | WNIJ and WNIU.

Gov. Rauner pension proposal: Cut benefits for cops, firefighters, teachers

8 Jul

Gov. Bruce Rauner announced on Wednesday a massive pension overhaul bill that would cut benefits for police officers, firefighters and public teachers while saying it would save Chicago billions of dollars.

Rauner said the more than 500-page pension reform bill includes changes to Chicago’s fire and police pension plans as well as to the Chicago Teachers pension. Rauner said the bill included suggestions from Senate President John Cullerton about cost of living increases as well as suggestions from Cook County President Toni Preckwinkle.

“What we tried to do is incorporate the ideas of all the various leaders to create an opportunity for significant cost-savings in the pension systems throughout the state of Illinois,” Rauner said.

Rauner’s new pension bill gives Emanuel much of what he wants, but not all of it

But Rauner’s bill may include some ideas from other leaders, the proposal was a far cry from negotiated deal and appears to have been put together with little or no input from organized labor. A closer look at the governor’s proposal raises questions over whether its constitutionality, since it appears to offer workers the choice between one diminished benefit or another. The Illinois Supreme Court had struck down a previous pension overhaul offered under Gov. Pat Quinn, saying that the state could not reduce employee benefits once an agreement was entered into.

“President Cullerton recognizes that the governor is accepting of many of the principles he’s outlined but the specifics that the governor is advancing is faraway from policies that Cullerton could support,” said Cullerton spokeswoman Rikeesha Phelon. “To simply co-opt language that the Senate President has used and call that negotiation, really does change the definition of negotiation and compromise. You can’t simply co-opt language and pay lip service to someone’s leadership and call that a negotiation.”

In his news conference, Rauner characterized Illinois House Speaker Michael Madigan, D-Chicago, as the odd man out.

Madigan spokesman Steve Brown characterized the pension proposal as “a hodge podge.”

“I don’t know how it stacks up to the court opinion,” Brown said, referencing an Illinois Supreme Court decision that earlier this year struck down a landmark pension reform compromise plan passed in 2011. “We’ll have to take a look.”

Rauner called on Madigan to either pass the governor’s reforms or pass a tax increase to have a balanced budget.

“Go ahead and pass a tax hike. He’s gotta make a choice. He’s in charge. He controls the General Assembly. He’s gotta make a choice,” Rauner said.

When asked if he would sign off on a tax hike, Rauner said he didn’t need to, because Democrats had enough votes to do it without him. Rauner said he remains fundamentally opposed to passing a tax hike without reform.

For his part, Madigan has said that lawmakers gave Rauner a $36 billion spending plan that he could have signed, line item vetoed, or spent below the levels authorized by the General Assembly. Rauner instead vetoed the entirety of the budget bills with the exception of education.

Rauner was pressed on why he didn’t line item veto the budget so that state employees could continue receiving their paychecks. Rauner only said he rejected the full budget because it was out of balance.

“He ignores the fact that he’s totally responsible at this juncture that employees weren’t paid on time,” Brown said of Rauner’s budget veto. ”He is singularly responsible. He held that power.”

The remarks came as the Democratic-controlled General Assembly and the governor remain at a stalemate over the state’s budget. Illinois has been without a budget since the fiscal year began July 1. The pressure is mounting after a court on Tuesday ruled that only certain state workers could only be paid — and only be paid minimum wage.

In addition to announcing the pension bill, Rauner said Republicans on Wednesday would reintroduce five new reform proposals offered up by the governor’s office.

“These are five pieces of legislation that reflect compromise, that we have negotiated with leaders in the General Assembly as well as with the mayor of Chicago, reflecting their ideas and their concerns,” Rauner told reporters.

The legislation addresses: term limits, redistricting reform, property tax freeze, changes to workers compensation laws and lawsuits reform.

Various versions of the proposals have either failed in the General Assembly or have not been called. Brown noted that statewide, local governments rejected adopting Rauner’s ideas, saying “160 cities voted against his schemes.”

“It’s amazing that he doesn’t recognize he’s been unpersuasive on a statewide basis with all these ideas,” Brown said.

via Gov. Rauner pension proposal: Cut benefits for cops, firefighters, teachers.

Capitol Fax.com – Your Illinois News Radar » *** UPDATED x1 – Rauner react *** AG Madigan seeks dismissal of Rauner’s fair share suit

9 Mar

Attorney General Lisa Madigan today filed a motion to intervene in Governor Bruce Rauner’s federal lawsuit that challenges the constitutionality of “fair share” fees as allowed under the Illinois Public Labor Relations Act. Madigan issued the following statement outlining her role in this litigation:

“Last month, Governor Rauner issued an Executive Order seeking to stop the payment of ‘fair share’ fees used to support non-political union activities such as contract administration and collective bargaining. On the same day, he also sued over two dozen unions in federal court in anticipation of a legal challenge to his Executive Order in state court.

Last week, the unions filed suit in state court seeking to prohibit Governor Rauner from implementing his Executive Order and breaching their contracts and to restore the ‘fair share’ fee payments.

Today, I filed a motion to intervene in the federal lawsuit to defend the constitutionality of Illinois’ law. Along with the motion to intervene, I have submitted a motion to dismiss the case, arguing that the Governor does not have the legal authority to sue to challenge the law in federal court.

As Attorney General, it is my job to represent the state and defend our laws when their constitutionality is challenged in court. Because the Governor’s case questions the validity of the Illinois Public Labor Relations Act, I moved to intervene to provide the court with arguments regarding the law’s constitutionality.” More…

via Capitol Fax.com – Your Illinois News Radar » *** UPDATED x1 – Rauner react *** AG Madigan seeks dismissal of Rauner’s fair share suit.

How will Illinois court rule on pension reform? >Crain’s Chicago Business

27 Jan

How will Illinois’ high court rule on pension reform?

After years of contentious debate and a close vote in the General Assembly, resolving the Illinois pension crisis is now up to seven men and women who do most of their work behind closed doors.

The members of the Illinois Supreme Court are difficult to predict on any one issue but tend to follow clear voting patterns, according to Crain’s statistical analysis of decisions. They are also politicians, four Democrats and three Republicans, who face the voters every 10 years in increasingly costly elections in which business interests, personal injury lawyers, unions and political parties play key roles, the publication found.

Legal experts say it’s a tough call whether a majority of the justices will uphold the ruling in November of a circuit judge in Springfield who voided the pension law, saying it violated the Illinois Constitution.

Beyond the legal issues, the reality for a former Chicago Bears kicker, the wife of a powerful Chicago alderman and the other justices is that Illinois as well as Chicago and many other localities will need staggering budget cuts or steep tax increases—more likely, both—to cope with woefully underfunded pension plans if the law is struck down.

“This is one of the court’s most important decisions, if not the most important decision in probably the last 25 to 30 years, because the enormity of the pension crisis is just overwhelming,” says James Thompson, senior chairman of law firm Winston & Strawn in Chicago and Illinois’ governor from 1977 to 1991. On further reflection, “I can’t remember any one as important as this” in his 55-year legal career, he adds.

Story continues below . . .



Click to see each justice’s top contributors and how much they gave


The debate over the constitutionality of the pension law began before it was passed in December 2013 with the support of Gov. Pat Quinn. Benefits for four state retirement plans are projected to exceed assets by $111.18 billion. To help close the gap, the law reduces benefits in exchange for guaranteed, increased contributions by the state.

Public employee unions opposed the law, arguing in part that it violates the state constitution, which says pension benefits for public employees cannot be “diminished or impaired.”

Some experts say the court tipped its hand last year with its 6-1 decision in Kanerva v. Weems, which held that health care benefits for retired state workers are constitutionally protected. However, that case didn’t address the question of whether the pension law was justified by the state’s police powers, which give broad authority to the General Assembly to act for the general welfare, for example by properly funding education, health care and public safety, especially in light of a pension crisis that threatens to engulf the state’s finances.

While the justices say they base decisions on the law, there’s a political dimension to their roles in a system where judges are elected. Three justices represent Cook County, while four districts in the rest of the state elect one each.

“To get on the Supreme Court of Illinois, you have to be very good with politics, the people and the press,” says Michael McCuskey, a retired federal district judge in central Illinois who was a state circuit and appellate judge in the 1990s. He is back as a circuit judge in Peoria, where he began his career.

• • •To gauge the influence of contributions, Crain’s examined the records of the Supreme Court campaigns of each justice, going back to 1989, when Charles Freeman began his run for the high court.

Union-related groups were four of the top five contributors to Justice Thomas Kilbride, accounting for nearly $750,000, or 20 percent, of the $3.7 million he has raised. The Rock Island Democrat was elected in 2000. Ten years later, he won retention, in which voters cast “yes” or “no” votes on whether to keep a judge on the bench.

It’s hard to say whether—or how—the Pension Reform Litigation, as it is called, will be viewed through a partisan lens by the justices. Backed strongly by business, the law passed with crucial votes from Democrats but scant support from Republicans after GOP Gov. Bruce Rauner, elected Nov. 4, opposed it.

The Illinois Democratic Party has been the largest contributor to Kilbride and Freeman, who once shared law offices with Harold Washington. A third Democrat, Anne Burke, wife of Chicago Ald. Ed Burke, chairman of the Chicago City Council’s Finance Committee, raised so much money that she gave partial refunds totaling $660,400, which were factored into Crain’s calculations. She was appointed in 2006 by the justices, who fill between-election vacancies, and ran unopposed in 2008.



Click for a larger version of this graphic


Since 2000, two justices—Kilbride and Republican Lloyd Karmeier—have faced tough races to get elected and retained (see the PDF). Each won in districts that long had been represented by the other party, in races that pitted business interests against trial lawyers and unions.

In his retention race last year, Karmeier barely won the 60 percent needed after a group of trial lawyers funded a $2 million ad campaign to unseat him, answered by a nearly $1 million counteroffensive from a Republican group.

“I would caution you from trying to draw conclusions from campaign contributions,” says Joseph Tybor, the court’s spokesman.

• • •The court sits in Springfield, where the justices live in apartments on the third floor of the courthouse, eating meals together and generally avoiding the state capital’s bars and restaurants filled with lawyers, lobbyists and lawmakers. At $216,000 a year, their salaries were second only to California justices’ as of 2013, according to the National Center for State Courts.

In court, disputes among the justices are rare. They were unanimous in 185 cases, or 61 percent, of the 302 appeals they’ve decided since October 2010, when the court’s newest member, Mary Jane Theis, was appointed. That includes 19 cases decided by 6-0 or 5-0 votes. Forty-three cases saw only one dissent, according to Crain’s analysis.

Roughly half the time they reversed the appellate court.



Click for a larger version of this graphic Click to see the actual percentages


The publication’s analysis included cases in which the court issued written opinions but did not include cases decided with unpublished orders, where the rate of unanimity is even higher.

A 4-3 split is rare, occurring in only 5 percent of the 302 judgments handed down since Theis joined the court. A few more also were decided by four votes, but recusals or concurring opinions reduced the number of justices who didn’t join the majority. Four votes are needed for a decision, but the makeup of those four votes varies widely.

The three Republicans—current Chief Justice Rita Garman, former Chicago Bear Thomas and Karmeier—voted with each other at least 73 percent of the time.

The swing vote often comes from Theis, a Democrat whose father, Kenneth Wendt, was a longtime Cook County judge with a playlot park named for him in Lakeview. Among 23 cases decided by four votes, she was in the majority 16 times, more than any other justice.

“You hope to begin with a centrist core of Garman, Karmeier and Thomas,” says Kirk Jenkins, who chairs law firm Sedgwick’s appellate practice in Chicago. “Generally, your best shots at getting the fourth vote are Justice Theis and Justice Burke.”

The most frequent dissenters were Democrats—Burke, Freeman and especially Kilbride. Burke and Kilbride, a former solo practitioner before he ran for the Supreme Court in 2000, vote in tandem only 18 percent of the time.

More than 86 percent of the time, Burke votes with Freeman, the court’s only African-American. In Kanerva, last year’s health care benefits case, Freeman wrote the opinion, suggesting he may be a difficult vote for the state to win in the pension case. Burke was the sole dissenter.

• • •The pension case involves both public employee benefits and constitutional issues, two areas in which the court often has been skeptical about plaintiffs’ cases in recent years.

In seven cases involving public employee benefits since Theis was named to the bench, the court reversed two-thirds of the appellate decisions won by defendants but 75 percent of those won by plaintiffs, according to Jenkins, who tracks the court’s civil cases. Three cases, including two combined into one decision, were reversed on 4-3 votes. The others were more lopsided, but the majority varied from case to case.

The court also has reversed almost half of the constitution-related civil cases that plaintiffs won at the appellate level and none of the cases won by defendants, according to Jenkins.

In March, after the court hears arguments in the pension case, the justices likely will face two unattractive options, says former Gov. Thompson.

“Pensions are going to swallow the budget and will necessitate extremely higher taxes or a gutting of support for many items in the budget, especially education and Medicaid because that’s where the money is,” he says. At the same time, “it’s a slippery slope—if police powers can override this constitutional provision, what else can it override?”

Northwest Herald backs Illinois Policy Institute’s Pension theft Plan B. TRS’ Ingram calls it out. | Fred Klonsky

23 Jan

The Northwest Herald’s editors have decided that the stink tankers from the Illinois Policy Institute – which was funded by Governor Bruce Rauner – is right about moving state employees to a 401(k).

The state’s pension systems are underfunded by at least $111 billion. That number grows by the millions daily, and doesn’t count the $56 billion of unfunded debt for retirees’ health benefits.

Current pension benefits are, frankly, unaffordable. Each year, more and more tax money the state collects goes to pay nonworking retirees as opposed to services. The only way the current system can be sustained is through significant – and by significant, we mean huge – tax increases. Any tax increase would only drive more jobs out of Illinois and break the backs of hardworking Illinoisans, many more of whom also would flee the state.

Maintaining the status quo has one – and only one – eventual outcome: State retirees and employees will lose all of their retirement benefits, creating an economic crisis so big that 2008-2009 would seem like boon years in comparison.

The biggest obstacle to meaningful pension reform is language in the state constitution that says public employee benefits “shall not be diminished.”

So what’s Plan B?

During his campaign for governor, Rauner discussed a defined contribution option, a 401(k)-type retirement plan similar to what most employers in the private sector offer. This is the way to go.

An optional defined contribution plan could be offered to all state employees almost immediately, without legal challenge, as more meaningful, longer-term pension reform is adopted. One of the state’s public pension systems, the State University Retirement System, already offers it on an optional basis, and more than 18,000 university employees have opted in. Why wouldn’t they when the pension systems are in danger of crashing?

The Illinois Policy Institute, a conservative policy think tank, also has recommended adopting legislation that would move all state workers into a defined contribution plan moving forward.

“The pensions earned to date would be protected and treated as though they retired today,” wrote Diana Rickert, vice president of communications for the Institute. “All new retirement benefits would be earned under the defined contribution plan, so when the current workers ultimately retire, they will have both a pension and a 401(k). All new workers would be on a 401(k).”

The institute says its plan would pay down the unfunded liability by 2045, and reduce the state’s annual pension payment to $4.1 billion. This fiscal year, the state is paying more than $6 billion on pensions only, none of which addresses the unfunded liability.

Because already accrued benefits would not be “diminished,” the institute’s plan passes constitutional muster.

Rauner should open up an optional 401(k)-style plan to all state employees as soon as possible, and work with lawmakers to pass legislation similar to what the Illinois Policy Institute proposes.

They are the best options we’ve seen to save Illinois from insolvency.

Illinois Teacher Retirement System’s Executive Director calls them out on the facts.

via Northwest Herald backs Illinois Policy Institute’s Pension theft Plan B. TRS’ Ingram calls it out. | Fred Klonsky.

Our view: Plan B for pension reform | Northwest Herald

19 Jan

The Illinois Supreme Court is scheduled in March to hear arguments on the constitutionality of 2013 pension reform legislation approved by state lawmakers but challenged in court by public employee unions.

Because Illinois’ financial future depends on a complete overhaul of the state’s public pension systems, Gov. Bruce Rauner and legislative leaders shouldn’t simply cross their fingers and hope the state’s highest court rules in their favor.

They should start working on Plan B immediately.

Most signs point to the Supreme Court overturning the 2013 reform legislation. It isn’t what Illinois needs, anyway. Even if the court OKs it, most of the savings are backloaded so they won’t be realized until 2035-2045.

Guess what? We have a pension crisis now.

The state’s pension systems are underfunded by at least $111 billion. That number grows by the millions daily, and doesn’t count the $56 billion of unfunded debt for retirees’ health benefits.

Current pension benefits are, frankly, unaffordable. Each year, more and more tax money the state collects goes to pay nonworking retirees as opposed to services. The only way the current system can be sustained is through significant – and by significant, we mean huge – tax increases. Any tax increase would only drive more jobs out of Illinois and break the backs of hardworking Illinoisans, many more of whom also would flee the state.

Maintaining the status quo has one – and only one – eventual outcome: State retirees and employees will lose all of their retirement benefits, creating an economic crisis so big that 2008-2009 would seem like boon years in comparison.

The biggest obstacle to meaningful pension reform is language in the state constitution that says public employee benefits “shall not be diminished.”

So what’s Plan B?

During his campaign for governor, Rauner discussed a defined contribution option, a 401(k)-type retirement plan similar to what most employers in the private sector offer. This is the way to go.

An optional defined contribution plan could be offered to all state employees almost immediately, without legal challenge, as more meaningful, longer-term pension reform is adopted. One of the state’s public pension systems, the State University Retirement System, already offers it on an optional basis, and more than 18,000 university employees have opted in. Why wouldn’t they when the pension systems are in danger of crashing?

The Illinois Policy Institute, a conservative policy think tank, also has recommended adopting legislation that would move all state workers into a defined contribution plan moving forward. More…

via Our view: Plan B for pension reform | Northwest Herald.

Illinois government worker pension system remains big issue for Rauner > Chicago Tribune

7 Jan

As Bruce Rauner is sworn in Monday as Illinois’ 42nd governor at the Prairie Capital Convention Center, a half-mile away, government lawyers will file papers asking the state Supreme Court to reinstate a law that would make massive changes to the public employee pensions system.

It’s a law that Rauner lobbied against, arguing it didn’t go far enough to resolve Illinois’ worst-in-the-nation unfunded pension liability. It’s also a law public employee unions fought in the legislature and in the courts, contending the Illinois Constitution expressly prohibits diminishing retirement benefits once they’ve been handed out.

Regardless of what the court decides, the pension issue will remain the most significant one confronting Rauner and the state government he takes over. The state public pension system is nearly $105 billion short. That debt has led to declining credit ratings and higher costs when the state borrows money.

Perhaps most urgently, the rising pension costs are taking up an ever-growing share of the government checkbook, leaving less money to spend on education, health care, public safety and social services. As Rauner plots his first budget, state spending on pensions is expected to rise by $600 million, to more than $6.6 billion, according to the legislature’s budget forecasting agency. That’s about 24 cents of every tax dollar put into the state’s all-purpose general funds bank account.

To make matters worse, much of that state pension spending isn’t even paying for current retirement benefits — 80 percent of the money covers borrowing and previous failures to put enough dollars into the system.
lRelated Former executive to serve as state comptroller, vows to be ‘guardian’

The pension shortfall also is exacerbated by the pension systems’ decision to lower how much they think they’ll make off of the billions invested. The pension systems had been criticized for expecting unrealistically high rates of return that helped mask the true extent of what the state owed.

The future of the state’s pension funding will play out this year following a campaign for governor that saw public employee unions front and center in the contest between Rauner, the Republican governor-elect, and the man he will succeed, Democratic Gov. Pat Quinn.

Unions pumped millions of dollars into the campaign in an effort to stop Rauner, who peppered his Republican primary campaign rhetoric with harsh anti-labor attacks before softening them in the later stage of his general election campaign against Quinn.

It’s not that the unions were pleased with Quinn. They had little love for him after he signed into law the major pension measure that vastly changed retiree benefits and extended retirement ages in an effort to ameliorate the state’s pension debt over 30 years.
Quinn is going away, but the fate of the law he signed is in serious legal jeopardy. With Rauner taking over, the pension debt remains unsettled. As has been the case on many issues, the Republican has offered general answers about his preferences for dealing with public pensions and how he’ll respond if the new law is struck down.

“We have some very specific thoughts on that, but we’ll be developing those with the General Assembly,” Rauner said during a postelection visit to the Capitol. “We need a comprehensive, fair overhaul of the pension system, and we’ll make that a top priority.”

The pension crisis that Rauner faces is among a string of financial problems that have accumulated for decades under Democrats and Republicans in Illinois government. Rauner has vowed to use his business acumen to usher in streamlined, restructured governance, comprehensive tax reform and an era of business and job growth.

Illinois’ pension money woes largely stem from politicians failing to make the employer’s share of contributions to systems covering state and university workers, teachers outside Chicago, elected state officials and judges.

Adding to the mess, the pension systems’ returns on investment were battered by the recession of 2000-03. Then, during the tenure of now-imprisoned former Gov. Rod Blagojevich, the state sold bonds to pay its share of pension contributions or took holidays to escape fully paying into the system. Then, the Great Recession hit, driving the debt into acceleration mode as investments tanked.

For years, Quinn vowed to address the pension shortfall, even introducing a cartoon “Squeezy the Pension Python” to demonstrate how retirement costs were squeezing dollars from education and social services. In December 2013, lawmakers and the governor finally enacted sweeping changes in public worker pension benefits.
Gov. Quinn says post-Blagojevich stability his greatest accomplishment
Gov. Quinn says post-Blagojevich stability his greatest accomplishment

The new law would increase the age for workers younger than 46 to be able to start collecting a pension. It also would sharply curb annual cost-of-living adjustments from the current 3 percent annual compounded increase retirees receive. And it would put a ceiling of about $110,000 on the salary used to calculate pensions.

The unions quickly sued. In November, just days after Rauner was elected, Sangamon County Circuit Judge John Belz ruled the law unconstitutional, conflicting with what’s known as the pension clause of the state constitution. That provision describes membership in any public pension system to be “an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Lawyers for the state, seeking to uphold the law, argued government’s sovereign or police powers trumped the pension clause, contending the risk to pay for government services and continued pensions was sufficient to overcome the prohibition against diminished retirement benefits.

Belz, however, ruled the state’s courts have consistently held the pension clause’s protection of benefits is “absolute and without exception,” including attempts by the state to use its sovereign or police powers.

That sent the case on appeal to the Illinois Supreme Court. Written arguments from the state are due Monday, the same day Rauner takes office. Justices will hold oral arguments in March. There is no time frame for a ruling.

But the justices have given some indications that they may throw out the landmark state pension law. In July, the state’s highest court ruled in a 6-1 decision that state subsidized health care benefits for public retirees were protected by the constitution’s pension clause.

“In light of the constitutional debates, we have concluded that the provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them,” Justice Charles Freeman wrote for the majority.

Freeman’s choice of words is seen as a critical crack in the state’s argument that its police powers and need to fund essential services trump the protections granted by the constitution.

Asked recently if the state should begin working on a “Plan B” while the pension law is debated by the state Supreme Court, Rauner said his “preference is probably to wait until the Supreme Court rules, so we have some ground rules for what probably works and what won’t work. I think that’s a smarter way to do it.”

But there is no obligation for the court to provide any guideposts for Rauner or Illinois politicians — Belz, the trial court judge, certainly did not.

“It’s a good thing to hope for. But to pass (the court’s) muster? I don’t know what those things are,” said Richard Dye, an economist on the faculty of the Institute of Government and Public Affairs at the University of Illinois.

In his successful campaign, Rauner spoke generally about wanting to shift public employees from receiving a defined pension benefit into becoming members of a defined contribution plan similar to a 401(k)-style system.

Rauner has said public workers should be able to keep the benefits they have already accrued, but, moving forward, go into a defined contribution system. He also has said public safety workers should stay in the current system. And, with 80 percent of public employees not eligible to receive Social Security, Rauner has said he favors some unspecified plan to create a retirement safety net.

But it’s unclear whether Rauner’s concept is constitutional, as he maintains, or how it would address the current unfunded pension liability since payments would go into a new retirement system rather than address the shortfalls in the current system.

“Not only does it not solve the problem, but it makes it worse in the near term,” Dye said. “Whatever the solution is will cost something, and I don’t know how it would be implemented. It’s hard to add (Rauner’s concept) up as a fiscal benefit for the state.”

Dye said the issue of pension funding ties into the rest of the state’s money woes, with revenues failing to match an unsustainable rate of spending. But even as a new governor takes the stage, Dye said there is little trust among Democrats and Republicans as well as among taxpayers and the state’s politicians to resolve the problems.

“We need some sort of a multiyear compact as to how much revenue can be raised, what spending cuts we need to hold the line on and some transitional borrowing,” he said.

“The problem with these package deals, the state has always needed some sort of multiyear solution, but there is no trust or incentives which would hold together a multipart solution. There’s no reason people in Illinois would or should believe that a political package deal would hold,” Dye said. Via
Illinois government worker pension system remains big issue for Rauner

Why 401(k)s Shouldn’t Replace Pensions > Huffington Post

28 Dec

It’s not just basic finance, it’s common sense: A large pool of money invested by professionals will yield far greater returns than small, separate accounts managed by individuals with no professional training in finance.

So why do some think that ending Illinois’ defined benefit pension system and moving workers into privatized, 401(k)-style accounts is a good idea?

In an effort to get investment risk off their backs, corporate America made a wholesale switch from traditional pensions to 401(k) plans over the last 30 years. Since these inadequate retirement vehicles are accepted as the only choice for the majority of workers, their inefficiencies in comparison to a traditional pension are little understood.

But new data from the National Institute for Retirement Security shows just how much Illinois taxpayers stand to lose if we switch to privatized accounts. To provide workers with the same modest retirement benefits, traditional pensions are 48 percent less expensive than 401(k)-style plans. That’s a 48 percent savings to Illinois taxpayers.

According to NIRS, there are a few key reasons why defined benefit pensions are more cost effective:

  • Pension plans enjoy higher investment returns and lower fees than individual accounts, generating a 27 percent cost savings.
  • Unlike individual investors who generally enjoy high-risk, high-reward investment strategies when they’re young but switch to lower-risk portfolios that yield far lower returns as they age, pension plans can maintain a balanced portfolio that yields consistently high returns, generating an 11 percent cost savings.
  • Pension plans pool longevity risk, meaning that they only have to save for the average life expectancy of a group of individuals. Workers in a 401(k) plan need an investment strategy that provides for the event that they live a longer than average life. Longevity risk pooling generates a 10 percent cost savings.

What’s more, cutting public workers’ retirement security by transitioning them to a 401(k) has its own set of unforeseen costs.

The average Illinois public employee makes a salary that is 13.5 percent less than their similarly educated counterparts in the private sector, trading front-end benefits like salary for back-end benefits like pension payments. With pension benefits gone, the state of Illinois may have to drastically increase public sector salaries or risk losing teachers, police officers, firefighters, and thousands of other critical workers.

In addition, some 80 percent of Illinois public employees (including teachers, police, fire fighters and university employees, among others) are ineligible for Social Security due to old laws that exempt workers who have a public pension. Switching to a 401(k) system could require Illinois workers to participate in the national program, forcing cities, school districts and universities to begin paying Social Security taxes, now 6.2 percent of each workers’ salary.

Lastly, moving public workers to 401(k)-style accounts will not fix the unfunded liability problem Illinois faces. In fact, such a move will likely increase the state’s pension debt, as it will reduce revenue in the form of employee contributions going into the pension funds and lower investment returns due to the change in the makeup of participants.

The problem with pensions in Illinois is a creation of politicians who spent years underfunding the system, essentially using the retirement savings of public workers as a credit card to pay for other priorities while ratcheting up state debt.

But it makes no sense to use the past misdeeds of politicians as an excuse to switch state workers to an inferior, less cost-effective retirement plan. Instead, we need to find ways to strengthen and Illinois pensions for future generations. Via Why 401(K)s Shouldn’t Replace Pensions

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