Pension Reform Q&A from Conference Call

 

  1. 1.        “Provides that no additional service credit may be accrued….” Does this mean that the years of service used for pension calculation are frozen at what they are when the bill passes? Is this equitable for an employee with 5 years of service versus one with 25 years of service?

 

Yes. The years of service used for the defined benefit pension calculation under HB 3303 would be frozen. This is fair for employees with 5 years of service because they are not extremely vested in the current program and will have the 401(k)-style plan for a majority of their career. And it’s fair for employees with 25 years of service who have a lot vested in the program because their earned benefits are protected.

 

  1. 2.       “…no automatic increase in a retirement annuity shall be received.” Does this mean no COLA’s of any kind automatic or otherwise?

 

That is a correct interpretation of the current language. However, the language is being changed such that COLA’s will be frozen until the systems achieve 100 percent funding.

 

  1. 3.       “Provides that the pensionable salary of an active participant may not exceed that individual’s pensionable salary as of the effective date.” Does this mean that the pension will be calculated using solely the salary in effect on the date the bill passes? Again, is this equitable for an employee with 5 years of service versus one with 25 years of service?

 

Yes. Future pension payments will be calculated using the employee’s current/final pensionable salary. The important point here is that pensionable salary under the defined benefit plan is not allowed to increase after the implementation of HB 3303. It’s fair for all employees for the same reasons under question 1.

 

 

  1. 4.       The “Budget Solutions 2014: Pension Reform Plan – Overview,” point 8 on page 4, “Promotes accountability and fiscal savings by requiring local governments to pay the employer share of their employees’ retirement savings plans.” On pages 6 and 7 of the Overview, talks only “teachers and university employees.” Are there any other members of Illinois retirement systems that would fall to local responsibility?

 

Of the state’s five pension systems, school districts (TRS) and public universities (SURS) are the only units of government that have the state pay for their pension costs.

 

A significant driver of Illinois’ $96 billion pension crisis is the fact that the state pays the employer share of pensions for downstate and suburban teachers and public university employees, even though they are not employees of the state. The state pays more than $632 million in retirement costs of local school district employees and another $440 million for state university workers. This means that one unit of government hands out benefits while another pays for them, leading to abuse and the destruction of spending accountability.

 

In local school districts, for example, this arrangement allows school districts to offer teachers overly generous benefits, including end-of-career salary spikes, sick day accumulations and other pension sweeteners, with little incentive to curb retirement costs because the state picks up the pension payments once a teacher retires. In fact, this arrangement provides an incentive for school districts to continually increase teacher benefits. As more school districts balloon benefit packages to attract talent, other districts compete by doing the same – which ultimately perpetuates the cycle of unaffordable and unsustainable retirement benefits.

 

 

 

  1. 5.       In the case of the university employees (SURS), what local governmental entity would then become responsible for pension contributions?

 

The employers (the public universities, not the state) would be responsible for making these contributions.

 

 

 

  1. 6.       On page 7 of the Overview, it states, that it “is simply untrue” that “this shift will result in property tax increases.” It further states that “on average, an amount equal [to] 3% of their total education expenditures.” Assuming “educational expenditures” applies only to the public school (TRS) segment, this is a very small increase considering the proportion that the TRS now makes up of the total state contributions to all retirement systems. Is there some backup data that shows how the 3% figure was calculated?

 

Yes. We have a forthcoming policy brief that details these calculations for every school district in Illinois. We will be sure to send you a copy when it’s released.

 

 

  1. 7.       What about the increased property tax burden on those folks who live in the areas that would now pay the employer contributions to SURS?

 

This is a very important point. The “cost shift” does not necessarily mean higher property taxes. The local cost for a defined contribution plan is predictable in every school district budget. The seven percent employer contribution will cost school districts, on average, an amount equal to 3 percent of their total education expenditures. The costs are, therefore, not of the magnitude that opponents to this reform have portrayed.

 

In exchange for paying the retirement costs of their employees, school districts and universities should be given more freedom and flexibility.

 

First, they should be given the ability to manage the increased costs by having much more freedom under the prevailing wage requirement, project labor agreements and other unfunded mandates. School districts and universities can also manage costs by opening up teacher contracts, negotiating benefits and ending the practice of picking up the pension contributions for their employees.

 

And second, government employers should have the freedom to exit the state’s retirement systems in the future. Local school districts and state universities should be free to stay in the new defined contribution plan going forward or design their own retirement plans from the ground up.

 

Implementing the cost shift with these other reforms will give school districts much more freedom and flexibility in determining the way in which they absorb the cost.

 

 

  1. 8.       How are those already retired affected by the changes called for in HB3303?

 

Individuals who have already retired will continue earning the benefits that they accrued under the defined benefit plan. The COLA, however, will be frozen.

 

 

 

 

 

  1. 9.       Does HB3033 hinge on adoption of the proposed amendment to the Illinois Constitution (HJRCA011) that repeals the pension protections found in Article XIII, Section 5?

 

No. HB 3303 protects all benefits earned to date. We were very careful to protect all benefits that government workers already earned. Going forward, however, current workers will enter into a new contract under the 401(k)-style plan.

The Institute believes that prospective changes to benefits (those that have not been earned) are constitutional. Of course, the unions will most probably sue, regardless of the changes that are made.

 

  1. 10.    10. If HB3303 does depend upon this constitutional amendment (because the changes called for in HB3303 would otherwise not be allowable under the State Constitution as it now exists) will the passage of the Bill be held off until it is known whether or not the amendment called for in HJRCA011 is fully adopted?

See answer to question 9.

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