October 25, 2011

State, University, Union Leaders Examine Our Pensions in IGPA Summit

George Bush appointee Jeffrey Brown (left), a Professor of Finance at U of I Champaign-Urbana, and Alicia Munnell, a financial advisor to the Bill Clinton Administration, achieved a rare consensus on what to do about Illinois’ public pensions crisis. UIC Philosophy Professor Anthony Laden (center) urged that employees and pensioners be treated with fairness.

By William S. Bike
STATE AND University of Illinois officials and union leaders came together Oct. 3 and 4 at the Union League Club of Chicago for “A Bold New Dialogue on Public Pensions.”

ORGANIZED BY the University of Illinois Institute of Government and Public Affairs (IGPA), the event kicked off Oct. 3 with keynote speaker Alicia H. Munnell, a professor of management sciences at Boston College.

Pension Reform: How to Get from Here to There

MUNNELL, WHO was a member of the President’s Council of Economic Advisers and assistant secretary of the treasury during President Bill Clinton’s administration, spoke about “Pension Reform: How to Get from Here to There.”

SHE NOTED that public pensions “were not considered a problem before the 2008 economic meltdown” and that, even before then, the “funding ratios for Illinois State pensions have been consistently below average. Among the bottom ten state pension plans in the nation, Illinois has three of them. Why is Illinois in this mess? Because the State has not been paying its annual required contribution (ARC), so the hole just gets worse every year.”

A DEFINED benefit (DB) plan is a traditional pension, an employer-sponsored retirement plan set up to pay a fixed monthly amount to eligible employees during their retirement years. The employer takes complete control over investment risk and portfolio management and determines each employee’s retirement benefit based on a formula—generally expressed as a percentage of annual salary—that takes into account the employee’s age, years of service, and earnings.

IN A defined contribution (DC) plan, the employer sets up an individual account for each participant and contributes a fixed amount to each account annually. The amount of each person’s monthly retirement benefit is not fixed nor guaranteed because it depends on the amount of money in the individual’s account at retirement. Also, the individual must bear responsibility for all investment risk and portfolio management. Individual retirement accounts (IRAs) and 401(k)s are examples of DC plans.

MUNNELL SUGGESTED moving away from DB pensions for State employees but did not go so far as to call for a complete switch to DC plans. Instead, she called for a hybrid plan.

“CONTEMPLATED CHANGES in Illinois pensions are driven by budget problems, not human resources needs, but State employees must be protected no matter what system is used,” she said. While some people today go so far as to suggest that government is not necessary, “You have public workers because you need tasks done and you need good people to do them,” Munnell stated. “Any pension changes should be fair and benefit all groups: current employees, new hires, and retirees.”

WITH ILLINOIS not contributing its full ARC, the State has been selling pension obligation bonds to raise money for the pension fund. Proponents believe Illinois can come out ahead in this approach by investing its money in the stock market and getting a better return than the interest it will pay on the bonds.

“THAT’S CRAZY,” Munnell said.

MUNNELL ALSO noted that cost of living adjustments (COLAs) “get these plans in trouble.” The COLA in Illinois plans is 3%, compounded annually. She noted that Minnesota, South Dakota, and Colorado recently reduced their retirement plans’ COLAs.

SHE OFFERED a two-fold solution to Illinois’s problems. “Illinois should start contributing the full ARC and revise its benefit structure,” Munnell said. “The goal should not be to hack at the plan but to set up a solid plan. I think State employees are entitled to their benefits. First, something has to be done on the tax side like raising taxes to fund the ARC. Then change the benefits.”

RESPONDING TO Munnell was Jeffrey Brown, professor of finance at the University of Illinois at Urbana-Champaign (UIUC) and a member of the federal Social Security Advisory Board under President George W. Bush.

WHILE TYPICALLY Munnell and Brown have occupied opposite sides of financial arguments in their careers, when it comes to Illinois retirement benefits they are—surprisingly—in almost complete agreement, showing that bipartisan solutions are possible.

BROWN ALSO does not favor Illinois going to a full DC pension, explaining that “people’s financial literacy is low. So they need a guaranteed ‘floor’ amount in pension funds for life. Supplementing that by an intelligently designed DC supplemental contribution would be ideal. A DB/DC model would be better than forcing people to choose one or another.

“THE CONVERSATION should be changed from ‘us vs. them’ to designing a good pension program,” Brown concluded

ANTHONY LADEN, an associate professor of philosophy at the University of Illinois at Chicago (UIC), spoke next and focused on fairness. He noted fairness in designing a pension plan should not be a cursory check “to be brought in at the end, but should be part of the discussion from the beginning.” He also said that, for constructive dialogue to happen, both sides should be prepared and willing to “look at each other face-to-face and explain their position in a way in which facts and evidence are used to back up their position and explain why they feel as they do,” rather than the modern-day way of arguing in which each side tries to demonize and shout down the other.

Collaboration is the Key to Success

Nick Berardino of the Orange County Employees Association. Pension reform in Orange County, CA, is considered a model because officials reached an agreement between organized labor and a 100% conservative Republican county board.

KEYNOTE SPEAKER on Oct. 4 was Nick Berardino, general manager of the Orange County Employees Association. Pension reform in Orange County, CA, is considered a model because officials reached an agreement between organized labor and a 100% conservative Republican county board. Berardino spoke on how “Collaboration is the Key to Success.”

PENSION REFORM agreement appeared even more difficult in Orange County because “taming” public workers was “a cause célèbre for conservatives in our area,” Berardino said. “They were getting elected on a platform of ‘We’re going to get these damn public employees under control.’ That made an already dollar-difficult issue into a football for political opportunists.

“YOU HAVE to be careful that you don’t get so polarized that you can’t deal with pension reform,” Berardino added. “Accepting reality isn’t fun, but that’s what both sides have to do to reach a workable agreement. Conservatives have to accept that collective bargaining isn’t going away. Labor has to accept that some pension reforms are necessary to preserve defined benefits. Everyone has to accept that pensions are complicated and most people—particularly journalists and lawmakers—don’t fully understand how they work.

“BOTH SIDES have to start selling this idea of accepting reality early on if you really want to reach a solution,” Berardino continued. “Or you can just beat each other up verbally. It’s easy and it pleases your constituents, but it doesn’t solve anything. Politicians and union leaders get elected by saying ‘no compromise.’ But you have to move away from this. We said to the elected officials, ‘No matter how much you dislike us, we aren’t going anywhere, so learn to work with us.’

“WORKERS HAVE a much better shot at protecting our benefits if we’re part of forming a solution,” Berardino said.

BERARDINO EXPLAINED why he believes public pensions are in crisis today. “In the late 1990s, most public pension accounts were well funded,” he said. “There was pressure to improve benefits,” and with the economy booming and plenty of money in government coffers, “enhanced formulas were adopted with overwhelming bipartisan support.”

WITH THAT no longer the case, conservatives pressured public employees to give up traditional DB plans. “Conservatives basically said, ‘Our money is in 401(k)s, and we’ve lost 70% of our retirement benefits. So should you.’”

WHILE THAT obviously was not a good deal for employees, a deal that could be sold to both sides was the approach Munnell spoke about earlier: Orange County and union officials created a hybrid retirement plan for employees that was part DB pension, part DC.

THE ORANGE County plan closely resembles a plan some have talked about for Illinois. County employees could decide whether to keep their old plan, or they could select the hybrid plan. Under the hybrid, Orange County employees would retire later and collect less from their pensions due to a reduced pension formula, but during their working years they would pay less each month toward the DB part of the plan and could decide how much to contribute to the DC part, with the county matching their DC contribution up to 2% of salary.

“WE COULD sell that to our members because we showed mathematically how some could actually make more money in retirement with the hybrid,” Berardino explained, noting the City of Atlanta has adopted a similar plan.

“IF WE as Americans can accept the core principles of fairness, we can come up with a solution,” Berardino concluded.

ACCORDING TO Public Sector Inc., an online forum on public sector issues and taxes published by the Center for State and Local Leadership at the Manhattan Institute for Policy Research, “The Civic Committee of the Commercial Club of Chicago has floated a pension reform for Illinois that would essentially copy private sector practice—existing pension plans would be terminated, and existing workers would keep their benefits accrued to date while receiving future benefits in a new pension system.”

RESPONDING TO Berardino was Tyrone Fahner, president of the Civic Committee of the Commercial Club of Chicago and a former attorney general of Illinois elected as a Republican. Fahner said, “We’re trying to protect the benefits of retirees, we’re trying to protect the benefits of current employees, we want to bring parity between new and current employees, and we want to protect citizens by stopping the politics of kicking debt down the road.”

PARITY BETWEEN State employees hired on or after January 1, 2011 and State employees hired before that date has become an issue because benefits for the two groups are so different. In the State Universities Retirement System (SURS), for example:

Employees hired before January 1, 2011

Retirement is age 60 with eight years of service, 62 with five years of service, or any age with 30 years of service; early retirement age is 55 with eight years of service. Vesting period is five years. Final salary is considered the average of the highest four consecutive years or the last four years, whichever is greater. Retirees get 80% of final average salary, no matter how high the amount.

Employees hired on or after January 1, 2011

Retirement is age 67 with ten years of service; early retirement is age 62 with ten years of service. The vesting period is ten years. Final salary is considered the highest eight years within the last ten years of service. Pensions are capped at $106,800 per year.

FAHNER SAID his organization is pushing to bring up Senate Bill 512 in the Illinois General Assembly in the fall; under this bill, State employees could either pay more for benefits or pay less but get fewer benefits. He noted that “If 512 is passed, we don’t want to see any benefits taken away that have already been earned.”

THE NEXT speaker was Henry Bayer, executive director of the American Federation of State, County, and Municipal Employees (AFSCME) Council 31.

BAYER SAID, “Orange County took some pension holidays, in which the county didn’t pay its portion of pension contributions at certain times. Here in Illinois, we took a pension sabbatical. In 41 years, we have not increased our pension funding level.

“SO LET’S confront reality,” Bayer continued. “The problem here in Illinois is not a pension problem. The average Illinois pension is $32,000—and these employees have no Social Security coverage. We have a funding problem, not a too-much-pension problem.

“THE STATE Constitution says the State will not impair the benefits of employees,” Bayer explained. “Officeholders swear to uphold the Constitution. You can’t just toss this aside. All of the plans put forth are to cut pension benefits. None advocates funding the pensions. We do need changes; we acknowledge we have a problem. Our members are being asked to sacrifice; we have in the past. The last time the pensions were reformed, our members agreed to forego a pay increase and agreed to work longer for full retiree health benefits. We have shown our willingness to step up to the plate.

“THE BILL changing benefits for new employees was a disgrace,” said Bayer. “It was passed quickly, with one speaker for each side given three minutes. We are more than prepared to face reality, but there is nothing in the proposed pension changes that requires the State to act responsibly.”

SOME HAVE said reducing State employee pensions would be preferable to raising taxes on corporations to gain the money to fund the pensions because the corporations are “job creators.” Bayer addressed this point by noting that “three-quarters of the corporations in this State pay no income tax. It drives me crazy to read in the paper when some business threatens to leave the State if they don’t get a tax break. Motorola and Caterpillar got tax breaks, and then left.

“WE’VE got to stop giving out handouts to these businesses that pay lower taxes than individuals,” Bayer said. “We earned our benefits. They get giveaways.”

BERARDINO ECHOED Bayer, noting “the money that we’re saving business here through giveaways is not being spent by them here. They are taking the jobs offshore.”

Small Group Discussions

SMALL GROUP discussions came next. Darren Lubotsky, who holds appointments at GIPA and in the Department of Economics at UIUC, led the discussion about “Pensions as a Component of Total Compensation.”

DAVID MERRIMAN, associate director of IGPA and a professor of public administration at UIC’s College of Urban Planning and Public Affairs (CUPPA), led a discussion on “Principles of Fairness and Options for Reform.”

THE STATE Constitution has a “non-impairment” clause that protects government employees’ earned benefits, saying such benefits cannot be reduced or altered. It is therefore constitutionally unclear what changes can be made in employee pensions. Does that mean future costs and benefits to current employees must remain unchanged, or does it mean accrued benefits are safe, but costs and benefits can be changed for current employees going forward? J. Fred Giertz of IGPA, a professor of economics at UIUC, led a discussion on this topic.

GROUP LEADERS for the small group discussions summarized conclusions their groups reached.

MERRIMAN SAID, “Tone down the rhetoric. Make the process as transparent as possible. There should be agreed upon, objective facts as to what the situation is with the pension plans. And whatever is arrived at should be arrived at with consensus, not rammed down anybody’s throat. There should be common goals. Whatever solution is achieved has to be realistic in the share of the budget it takes. Retirees should be guaranteed a basic minimum level for a decent retirement.”

LUBOTSKY NOTED pensions should be thought about “in the context of the total compensation package. Whatever we spend on pensions, we want to maximize the value for everyone. And all involved should realize that most people aren’t equipped to make good pension decisions, so design the pension to insulate people from bad decisions.”

GIERTZ CONCLUDED that “underfunding has to become a thing of the past. There has to be a buy-in to the concept of shared sacrifice and shared contribution. We could make changes in areas not covered by the non-impairment clause, such as retirement healthcare. And we have to think about the transition process—how do we get to where we want to be from where we are?”

Legislators Panel

State Senator Kwame Raoul (right) said, “We legislators must point the finger inward. It’s the Legislature’s fault—both parties—not the fault of the employees.”

A PANEL consisting of Representative Darlene J. Senger (R-96th, Naperville); Representative Elaine Nekritz (D-57th, Northbrook); State Senator Bill Brady (R-44th, Bloomington); and State Senator Kwame Raoul (D-13th, South Side, Chicago) offered opinions on the State pension crisis.

SENGER ASSERTED, “When we think of pensions, we shouldn’t think so much about the numbers, but about the people. I welcome everyone’s input so we can make better decisions. It’s important not to use scare tactics about pensions. We want to come up with something sustainable for the long run.”

NEKRITZ BELIEVES that “to solve the budget crisis, we have to use every arrow in our quiver—raising revenues and making cuts. I don’t believe we can take a certain percentage of the budget and say we can’t touch that. We must find a way to make the pension system sound.”

BRADY WANTS the State to make some hard choices. “We have an unfunded liability of $85 billion. Thirty-nine states have revised pension reforms similar to Senate Bill 512—employees have to ‘pay to stay’ in Tier 1; there will be lower contributions with lower benefits in Tier 2, with a DC plan. The State ideally should increase its contributions to pay down our pension debt and decide on no more pension borrowing. The State should pay in cash, on time.”

RAOUL TOOK exception to the views of some that the problem can be laid at the feet of former governor Rod Blagojevich. “This is not a problem that came about with the Blagojevich administration,” Raoul said. “It’s decades old. We legislators must point the finger inward. It’s the Legislature’s fault—both parties—not the fault of the employees. To fix the problem, we have to use an appropriate process that observes our State constitution.”


UNIVERSITY PRESIDENT Michael Hogan had the final word of the day. “Pension uncertainty is hurting us in recruiting the best and brightest employees for the University of Illinois,” Hogan said. “If we lose the ability to attract the best and the brightest, there will be serious consequences not only for the University, but for the State.

“AS PRESIDENT of one of the State’s largest employers, I’d be remiss if I didn’t advocate for a stable pension system for our employees,” Hogan concluded.

IGPA IS a public policy research organization based in all three University of Illinois campus cities. Its mission is to improve public policy and government performance. For more information, visit www.igpa.uillinois.edu. For the IGPA report on the pension summit, see: http://igpa.uillinois.edu/state-summit-2011/report.


  1. I am a nurse at the University of Illinois for 21 years. In this article you made it sound like we get 80% of our salary no matter how long we've been here. That is just not correct. Maybe an employee would get 80% after 30 years of service but I have spoken with my SURS benefits counselor and if I retire at 21 years, I may get 40% - I surely am not getting 80%. The people that are deciding our fate are misinformed - or is that intentional?

    1. This nurse is correct; my pension benefit will be less than 50% of my salary, if I retire this year; and I have been in the system since 1993--although sometimes as a part-time employee.