March 22, 2011

Public Employee Pensions Face the Chopping Block…

Chart courtesy Mish’s Global Economic Trend Analysis.

By Jean Lachowicz
Special from the Gazette

PHRASES LIKE “ticking time bomb” and “political tsunami” are being used to describe the pension situation for State, City, and County employees, as record-breaking government deficits put longstanding benefits in the cross hairs of budget-cutting proposals.

ACCORDING TO the Civic Federation, Illinois’s pension code allows State and local governments to avoid paying the actuarially required contributions for employees’ retirements. That fundamental flaw has been made worse by staff reductions and early retirement incentives as well as the current recession.

LAURENCE MSALL, president of the Civic Federation, said, “People nationwide are starting to ask why Illinois and Chicago have allowed this fiscal recklessness to happen. That’s not an easy question for politicians to answer. But if we don’t take action soon, we may be beyond the point of fixing these problems.”

ON FEB. 8, Illinois House Speaker Michael Madigan (D-Chicago) outlined many of the decisions the Illinois General Assembly must face during the current legislative session. He warned there likely will be proposals to reduce pension benefits for current State employees.

"WE'RE ALL familiar with the inadequate funding of the State pension systems,” Madigan said. “Again, tough decision-making, telling people you’re not going to get everything you thought you were going to get, telling people you may have to pay in more. Not easy stuff. So we all better get ready for it.”

THE GENERAL Assembly passed a measure in spring 2010 that established a new set of pension benefits for State employees hired after January 1, 2011. New employees now receive reduced benefits and, in most cases, must work until age 67 to collect full retirement benefits. Yet some business groups and many members of the legislature still are looking at the immediate and significant savings that would come only from reducing benefits for those working for the State before last year’s reforms went into effect.

THE SAME day Madigan made his statements, Governor Patrick Quinn’s office confirmed the United States Securities and Exchange Commission (SEC) is conducting an inquiry into the State’s financial disclosures about potential savings expected from the pension reforms enacted last spring.

"THIS IS not an investigation, this is an inquiry,” said Kelly Kraft, the governor’s budget spokeswoman. “The SEC has stated this is not an indication of any violation. We feel our disclosures have always been accurate and complete.”

Pension audit
THE SEC is examining whether the State was taking projections of future savings and treating them as reductions in the State’s current pension costs. In response to the SEC inquiry, Representative Dwight Kay (R-112th/Edwardsville) introduced legislation urging the Commission on Government Forecasting and Accountability to conduct an audit of Illinois’s pension systems.

TO PUT the situation in perspective, the Pew Center on States ranks Illinois as having the most underfunded public pension plans in the nation. At the end of the current fiscal year on June 30, 2011, legislative analysts project the five retirement systems for which State government is responsible will need roughly $131 billion to cover benefits already earned by public workers, with only $46 billion in expected assets to cover the costs, or about 35 cents on the dollar. The other $85 billion represents the unfunded liability, an obligation the State must meet but for which no funding source exists.

WHILE HOUSE Republicans already have their own bill, which would give current State employees three options on changing their benefits, Senate President John Cullerton (D-Chicago) and many others say they believe reducing benefits to current employees would be unconstitutional.

ARTICLE 13, Section 5 (Pension and Retirement Rights) of the Illinois Constitution states, “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

WHILE IT is believed by most authorities that Illinois State employees currently enrolled in pension plans and Illinois State pension plan recipients (and survivors) cannot have their benefits reduced, based on the Illinois Constitution, legal challenges ultimately could be decided by the Illinois Supreme Court.

MERRILL L. GASSMAN, professor emeritus of biological sciences at the University of Illinois at Chicago (UIC), and president of the UIC Chapter of the State Universities Annuitants Association, said, “From my perspective, this is a public policy issue that has been building for many years and has been ignored for the most part. Now the State is way behind in pension payments, and the magnitude of the problem, coupled by the current economy, has brought the issue up to the front page of public attention.

"FOR MANY years, the State has neglected to make contributions to the pension fund and sometimes sold bonds instead of making payments,” Gassman continued. “If the State did not have its own public pension funds and instead had to participate in Social Security, it would not have had the flexibility—payments would have been made. The law requires that benefits be paid but says nothing about putting money into the fund, so the State is not legally compelled to do so.”

GASSMAN BELIEVES public employees have become a scapegoat to the larger problem of focusing on the debt. “When a person makes a decision to enter into public service, one of the considerations is that the wages might be lower than what they would earn in the private sector, but the benefit package compensates for the difference. It is a moral issue when current State employees face such a radical shift in their existing benefits package,” he said.

"STATE EMPLOYEES are not paying into the Social Security system as private sector employees do. When private companies go bankrupt, the Pension Benefit Guarantee Corporation steps in to cover most defined benefit pension promises. But the PBGC does not fully cover municipal or State retirement plans,” Gassman noted.

THE STATE'S most troubled pension plans (all having less than 50% funding) are: State Universities Retirement System (SURS), Teachers Retirement System (TRS), State Employees’ Retirement System (SERS), Judges Retirement System (JRS), and General Assembly Retirement System(GARS).The healthiest plan is the Illinois Municipal Retirement Fund, which ended 2010 at 100%(fully funded).

Create new revenue streams
INSTEAD OF focusing on what should be cut from workers’ pensions, Lou Phillips, business manager of Chicago Laborer’s Local 1001, wants to create new streams of revenue to support pensions.

"WE SHOULD clean up the unemployment rolls and alleviate the pension fund problems at the same time,” Phillips said. “The pension is a promise, and keeping a promise is simply the right thing to do.”

PHILIPS SEES a need for increased education about public employee pensions, since private sector employees have experienced great losses themselves over the past few years and they do not appreciate the fact that public employees have constitutional protections that private sector employees do not have.

"PEOPLE DON'T understand that public employees don’t have Social Security to fall back on,” he said. “People don’t understand that public employees contribute 8-1/2 percent to the pension funds every paycheck, year after year, no matter what. “When we have job cuts, less goes into the pension funds. When we have furlough days, less goes into the pension funds. You can’t just cut cut cut. You’re going to have to feel it somewhere. Put people back to work and the pension funds will recover,” said Phillips.

U OF I President Michael Hogan said, “Our current faculty and staff were hired - and have served our students, patients and the public for many years - on the understanding that these pension benefits were part of our compensation. We are not eligible for Social Security and our salaries often lag far behind those of our counterparts at private institutions of comparable quality. Our people, therefore, have built their financial planning and retirements around these pension benefits, and it is not their fault that the pensions have not been adequately funded. Accordingly, we continue to participate in discussions on this issue in Springfield and to use our good offices to the best advantage of our faculty and staff.”

THE HUMAN Resources office has developed a website that is tracking the various proposed bills that would affect employee pensions; this information is available at State Universities Retirement System (SURS).

No comments:

Post a Comment