Illinois Pension Reform

[ripper1]

Possible landmark pension reform legislation is about to get voted on today in Illinois capitol in Springfield. Anybody have any skin in the game. Any thoughts. The sticking points are a reduced COLA, increased age.

 

[phil1ben]

Only some Illinois General Obligation Bonds which I expect will rise in value if the measure passes. I normally hold to maturity so not a lot of skin in the game.

Interesting article in the weekend edition of the Wall Street Journal about an interview with a democratic California Mayor trying to reach some form of pension reform at a city about to go bankrupt but that possesses one of the highest per capita incomes in the country. All in pay to some policemen is over $200,000.00. Very interesting read.

As you might guess, I strongly support pension reform.

 

[donheff]

My brother and several friends are retired in the Illinois system and I think we have a few members here in it. For current retirees teh key change is that they would cap the amount of the annuity that would get the current 3%/yr COLA. I haven't seen what the cap is or whether the cap limit itself would raise with inflation or would be fixed (and therefore gradually reduced as a portion of the pension). If the basic amount is high enough most retirees would skate largely unscathed given the sad state of the program.

 

[MichaelB]

Looks like it passed. Here's a good summary http://www.chicagobusiness.com/arti...-the-details-of-the-big-illinois-pension-deal

 

[Greencheese]

I know several people who are just starting their careers in the Illinois public sector and are quite excited for the 401K plan that will now be offered (court challenge pending I think?)

 

[Brdofpray]

We have been very interested in the political machinations in the state of Illinois. DW is a retired teacher (not in Chicago where it seems other rules apply.), who had 33 years of service as a special education teacher (She is a saint.). It is hard to plan your future, when one of the legs of your retirement plan may get shortened by a state who skipped payments into the system.

With that being said, we have accounted for this possibility a few years ago in our planning. Short of complete elimination of her pension, we are well diversified to move forward without to big of a hit according to FIRE Calc. We also are glad something is finally being accomplished. It is better to keep the ship afloat, than to let it sink.

 

[Mulligan]

Looks like it passed. Here's a good summary http://www.chicagobusiness.com/article/20131127/BLOGS02/131129786/here-are-the-details-of-the-big-illinois-pension-deal

Considering the system was 40% funded or so and sinking the revisions seem to be reasonable to get it back on solid footing, as long as the assumptions are correct. It is truly amazing how much of a funded system is drained by the compounded cola's over time. That is probably why my cola's are capped at 80% of original salary.

 

[Theduckguru]

A 1% decrease in employee contributions for a plan that is in trouble? Now that is GD dumb.

 

[ERD50]

Looks like it passed. Here's a good summary Crain's Chicago Business : Subscription Center

Thanks for that link, I've been getting bits-pieces on the news. Sounds like this is the key element:

Under the proposed new formula, the COLA only would apply to one's years on the government job, times $1,000. That means, for instance, that a 25-year government veteran would get a 3 percent annual COLA only on the first $25,000 of their pension, even if the total pension was $50,000. That employee would get no COLA on that second 25-grand.

That $1,000 figure would increase with inflation. But insiders say there would still be huge savings because of the portion of one's pension that would not get a COLA. Those with particularly high pensions would be really zapped; lower-salaried workers, less so.

If cuts had to be made, I think a little better mix would be to raise that COLA-cap of $1,000 x years ($25K in their example) some and offset that with a taper off payments above a certain level. Like maybe payments above $50,000 get cut by half (reducing a $100,000 payment to $75,000), and maybe another break-point or cap above that.

For reference, a private pensioner that got taken over by the PBGC would be capped at mid $40's if he retired at 65, lower for ER. The pension would have zero COLA (though the cap might be adjusted each year? Or maybe only for that year's retirees?)

I don't understand how any of this can stand up to an IL Supreme Court challenge though (and a fight is promised). The IL Constitution says that retirement benefits:

"shall be an enforceable contractual relationship, the benefits of which
shall not be diminished or impaired."

I would think that limits them to changes only to future earned benefits (which they did in 2011), but not those already earned. I think they would need a Constitutional amendment.

A 1% decrease in employee contributions for a plan that is in trouble? Now that is GD dumb.

Yes, that one had me scratching my head. Or just reminding me how we got in this mess.

-ERD50

 

[youbet]

For reference, a private pensioner that got taken over by the PBGC .........

An extremely important distinction is that Illinois refuses to declare bankruptcy, fully open their kimonas, and allow the courts to reorganize state finances as would happen with a private company before turning over pensions to the PBGC. Maybe some day in the future.......

Think of it this way. UAL declared bankruptcy and turned their pensions over to PBGC. Some employees had their pensions capped at the PBGC maximum. But this is different than having UAL, without declaring bankruptcy, simply declare that they are having trouble paying pensions and still keep up with their other expenses so they are going to cap pensions themselves without declaring bankruptcy just "because." It doesn't work that way. The bankruptcy court must get involved and decide how whatever money is available is to be split among the various creditors, including retirees owed pensions.

I don't understand how any of this can stand up to an IL Supreme Court challenge though (and a fight is promised). The IL Constitution says that retirement benefits:

"shall be an enforceable contractual relationship, the benefits of which
shall not be diminished or impaired."

I would think that limits them to changes only to future earned benefits (which they did in 2011), but not those already earned. I think they would need a Constitutional amendment.
-ERD50

It will pass muster with the Illinois Supreme Court because the judges are all political appointees, appointed by the same folks who sponsored this legislation. One judge is the wife of notorious Chicago Alderman Edward ("Mr Payola") Burke! Madigan would not have brought the legislation to vote if the justices had not already been spoken with and a deal worked out.

Remember, the justices' pensions (and the legislators' too) are not subject to the reductions the rest of the employees are receiving. This is all well "under control."

Word on the street is that iterations of the legislation were passed back and forth between the justices and the legislators until they came up with a package the justices thought they could say was not unconstitutional without excessive embarrassment. The procedure is already in place for a simple thumbs up or thumbs down decision. My understanding is that public disclosure of written opinions as to why justices voted as they did will not happen.

The same applies to the part of the new legislation which gives the various state pension funds the right to sue if the state continues to not fund in the future. Sure, the retirement system can sue but where does that get you when the justices are beholding to the folks who have some reason (yet again) for not funding?

Oh yeah..... the reason for the 1% reduction in employee contribution is that the justices requested it. It turns out (I'm no lawyer so excuse my non-legal wording) that it's easier to take something from somebody (in this case pension dollars already earned) when those people receive something "in consideration." So they gave them the 1% reduction "in consideration" of losing some pension dollars. Rumor has it that when the justices made this suggestion to Madigan, he countered with "how about I give the retirees a kick in the ass in consideration?" Nice guy our man Madigan.......

BTW, if there are still any issues taking care of this goofy "constitutionality thing," Mike Madigan's daughter is Lisa Madigan......... Gee, isn't she Illinois Attoney General? Funny how this all works out.

 

[haha]

Youbet, thanks for this look at the sausage being made. People may have their opinions, and know lots about the principles, but when it comes to action, it is usually decided differently.

This tale restores my faith in mankind.

Ha

 

[ERD50]

An extremely important distinction is that Illinois refuses to declare bankruptcy, fully open their kimonas, and allow the courts to reorganize state finances as would happen with a private company before turning over pensions to the PBGC.

Agreed, that is an important distinction. But the PBGC caps do provide us with some grounding for a hypothetical discussion of what is 'equitable' (a better word than 'fair' in this case, I think) if the priorities were such that cuts must be made (as in a real bankruptcy).

It will pass muster with the Illinois Supreme Court because the judges are all political appointees, appointed by the same folks who sponsored this legislation.

Yes, that must be the case. I'm guessing that the reason that they chose a COLA cap versus a straight benefit cap/reduction is the 'excessive embarrassment' you mentioned. They will try to weasel around and say that is not a cut to the benefit itself, it's an 'adjustment' to increases to that benefit. Or some such.

Oh yeah..... the reason for the 1% reduction in employee contribution is that the justices requested it. ... So they gave them the 1% reduction "in consideration" of losing some pension dollars. ...

I suppose that's a reasonable explanation for such a seemingly unreasonable thing to do.

I guess the real test of the perception of the impact of these changes will be what happens to IL bond rating. Some on the conservative side are arguing this is too little too late, and that it just kicks the can down the road and avoids a real fix. I haven't dug into the numbers deep enough to have an opinion, but it seems those COLA caps could be a big impact. Of course, if they just divert the savings and spend it somewhere...


-ERD50

 

[BLS53]

I know several people who are just starting their careers in the Illinois public sector and are quite excited for the 401K plan that will now be offered (court challenge pending I think?)

Considering the kind of pay out Illinois retirees have been getting under the current system, I don't see how a 401k would be superior. Maybe if they live on rice and beans for 40 years.

 

[Texas Proud]

An extremely important distinction is that Illinois refuses to declare bankruptcy, fully open their kimonas, and allow the courts to reorganize state finances as would happen with a private company before turning over pensions to the PBGC. Maybe some day in the future.......

Think of it this way. UAL declared bankruptcy and turned their pensions over to PBGC. Some employees had their pensions capped at the PBGC maximum. But this is different than having UAL, without declaring bankruptcy, simply declare that they are having trouble paying pensions and still keep up with their other expenses so they are going to cap pensions themselves without declaring bankruptcy just "because." It doesn't work that way. The bankruptcy court must get involved and decide how whatever money is available is to be split among the various creditors, including retirees owed pensions.

It will pass muster with the Illinois Supreme Court because the judges are all political appointees, appointed by the same folks who sponsored this legislation. One judge is the wife of notorious Chicago Alderman Edward ("Mr Payola") Burke! Madigan would not have brought the legislation to vote if the justices had not already been spoken with and a deal worked out.

Remember, the justices' pensions (and the legislators' too) are not subject to the reductions the rest of the employees are receiving. This is all well "under control."

Word on the street is that iterations of the legislation were passed back and forth between the justices and the legislators until they came up with a package the justices thought they could say was not unconstitutional without excessive embarrassment. The procedure is already in place for a simple thumbs up or thumbs down decision. My understanding is that public disclosure of written opinions as to why justices voted as they did will not happen.

The same applies to the part of the new legislation which gives the various state pension funds the right to sue if the state continues to not fund in the future. Sure, the retirement system can sue but where does that get you when the justices are beholding to the folks who have some reason (yet again) for not funding?

Oh yeah..... the reason for the 1% reduction in employee contribution is that the justices requested it. It turns out (I'm no lawyer so excuse my non-legal wording) that it's easier to take something from somebody (in this case pension dollars already earned) when those people receive something "in consideration." So they gave them the 1% reduction "in consideration" of losing some pension dollars. Rumor has it that when the justices made this suggestion to Madigan, he countered with "how about I give the retirees a kick in the ass in consideration?" Nice guy our man Madigan.......

BTW, if there are still any issues taking care of this goofy "constitutionality thing," Mike Madigan's daughter is Lisa Madigan......... Gee, isn't she Illinois Attoney General? Funny how this all works out.

I am surprised someone else has not made a comment on this...

From what I have read (a number of times), a state cannot declare bankruptcy.... there is no section in the law for states.... there is for municipalities, but that is not a state...

The PBGC does not guarantee the state pensions.... if the state does not pay it, then it will not be paid... that is one of the big concerns with the Detroit BK case... the ruling so far is allowing them to make changes even though state law says they cannot... so the 'protections' might not be there....

 

[ripper1]

Big win here in Illinois for megacorp and loss for vast majority of public employees. The middle class erosion continues.

 

[ERD50]

Big win here in Illinois for megacorp and loss for vast majority of public employees. The middle class erosion continues.

Just for reference, the kinds of pensions that many of these public sector employees get in Illinois puts them more in the top 5% income area, not the middle class.

I know a couple of retired, married teachers - their household income from their pensions is ~ $130,000 - $150,000, and before this law that was all 3% COLA'd for life. That is not middle class, independent of any opinion of 'fair' or not.

A more useful figure would be what is the median pension for someone who worked a full career. I don't have that number, but I'd bet it is above the 'middle class' definition, especially when you take into consideration retirement age and COLA value.

What about the middle class who has to pay the taxes to fund those pensions? IL income tax is a flat tax, BTW. Recently raised from 3% to 5%.

Plus, a 'win for MegaCorps' can mean more middle-class jobs in IL. It isn't always an 'us-versus-them' game.

-ERD50

 

[ERD50]

Here's a little more perspective on the 'middle class' issue -

Current IL pension liability is $83B, but that assumes an 8% return on investments. This source estimates it at $209B if you assume 4% returns going forward. Let's split the difference and say $146B.

There are 4,773,002 households in IL, so that comes to $30,589 per IL household. How can a middle class household afford that bill? Now factor in the lower class that aren't going to be able to pay anything, and that goes up. Also, our credit rating is hurt by this, causing us to pay higher interest on bonds. There are many factors.

I do think something has to give, and I think the way to help the 'middle class' may be to make some adjustments to above middle class level pensions.

-ERD50

 

[ripper1]

Here's a little more perspective on the 'middle class' issue -

Current IL pension liability is $83B, but that assumes an 8% return on investments. This source estimates it at $209B if you assume 4% returns going forward. Let's split the difference and say $146B.

There are 4,773,002 households in IL, so that comes to $30,589 per IL household. How can a middle class household afford that bill? Now factor in the lower class that aren't going to be able to pay anything, and that goes up. Also, our credit rating is hurt by this, causing us to pay higher interest on bonds. There are many factors.

I do think something has to give, and I think the way to help the 'middle class' may be to make some adjustments to above middle class level pensions.

-ERD50

Another example of someone talking about extreme examples of exorbitant pensions. Sure there are people making 6 figures here but that is an extremely small sampling. For most also this is it and no social security. BTW, two thirds of Illinois megacorp pay no taxes through deductions, perks, and loopholes. Also what jobs are you talking about. Illinois has one of the highest unemployment figures in the country.

 

[2B]

Another example of someone talking about extreme examples of exorbitant pensions. Sure there are people making 6 figures here but that is an extremely small sampling. For most also this is it and no social security. BTW, two thirds of Illinois megacorp pay no taxes through deductions, perks, and loopholes. Also what jobs are you talking about. Illinois has one of the highest unemployment figures in the country.

I don't see where ERD50 cherry picked any extreme pensions in the post you attacked. The figures used were for the entire pension plan. It doesn't matter if everyone was getting $250,000/yr or $25,000/yr. The higher value would have fewer recipients and the lower value more. ERD50 gave total plan liabilities at different returns and numbers for the average households liability.

You then throw out a totally unsubstantiated number (BS) about corporate taxes that added nothing but "local color" without any value to the discussion. Does that include sales, property, income, etc taxes or just a corporate income tax? What taxes do their employees contribute? Maybe there is a reason that Illinois has one of the highest (per you) unemployment rates in the country.

 

[ERD50]

Another example of someone talking about extreme examples of exorbitant pensions. Sure there are people making 6 figures here but that is an extremely small sampling. For most also this is it and no social security. BTW, two thirds of Illinois megacorp pay no taxes through deductions, perks, and loopholes. Also what jobs are you talking about. Illinois has one of the highest unemployment figures in the country.

?

No cherry picking, that is the total plan liabilities and total households in IL. Did I miscommunicate this somehow? I don't understand your concern.

As far as 6 figure IL pension households or persons, it might not be as uncommon as you think. Off the top of my head, the sources I've seen before that are across the board would also include highly paid administrators, which might skew things a bit. Median, or quintiles would be more useful, but then those will include people who worked just a few years.

And why do you think IL unemployment is so high?

edit: I see I cross-posted with 2B

-ERD50

 

[marc515]

A couple of things I just don't get.

1. Why in the world should anyone be guaranteed a 3% COLA; just doesn't make fiscal sense.

Instead of the fang dangled formula they came up with, why didn't they just adopt the same formula as Social Security, Federal Government Pensions, and Veteran's Pensions?

2. Why are Governments still in the pension business, as they are no longer sustainable as we can easily see. The Federal Government reduced pensions dramatically back in the early 80's for new hires, and coupled it with a 401K retirement. States need to follow that lead, as taxpayers can no longer afford pensions, especially coupled with fantastic health benefits. Heck, here in NJ, current retirees and future retirees grandfathered in, get reimbursed for their Medicare part B premiums; who else gets those benefits.

Politicians pandered to the public worker vote over the years, and made promises at the expense of future generations, and it is now catching up with us. Reform is long overdue.

Look, I'm not against the public worker, as I'm a retired federal worker, but at some point Governments need to realign benefits to a more realistic and affordable level.

 

[Mulligan]

Just for reference, the kinds of pensions that many of these public sector employees get in Illinois puts them more in the top 5% income area, not the middle class. I know a couple of retired, married teachers - their household income from their pensions is ~ $130,000 - $150,000, and before this law that was all 3% COLA'd for life. That is not middle class, independent of any opinion of 'fair' or not. A more useful figure would be what is the median pension for someone who worked a full career. I don't have that number, but I'd bet it is above the 'middle class' definition, especially when you take into consideration retirement age and COLA value. What about the middle class who has to pay the taxes to fund those pensions? IL income tax is a flat tax, BTW. Recently raised from 3% to 5%. Plus, a 'win for MegaCorps' can mean more middle-class jobs in IL. It isn't always an 'us-versus-them' game. -ERD50

As a person with a generous pension who had the cola tweaked downward recently, I still find myself in agreement with you, ERD. We all know what coulda or shoulda happened over the years, but didn't. So nevertheless, here is where they are at. Raising taxes more to continue the same exact system would have created "us versus them" game, and eventually it would have been a losing battle for the pensioners. This is a decent outcome for the pensioners; especially compared to the way it is apparently heading in Detroit. Fifteen years ago, I barely gave my pension a thought. Now I'm worried in 20 more years us pensioners will have to hide in clustered compounds in the hills of South Dakota.

 

[Hamlet]

Well, considering that the payout is about to get a lot worse, and that their pension payouts will ultimately depend on what the political scene looks like over the next 30-50 years, I can certainly understand wanting to just get the money now in a 401k.

Frankly, I think it would probably make sense for states with serious corruption issues like Illinios to move to a more pay as you go system like a 401k. That way the politicians have fewer ways to deceive the public.

Every time I hear about the stuff going on in Illinios, I'm thankful to live in a different state. Minnesota may not be perfect, but our political leaders manage to stay out of prison.

Considering the kind of pay out Illinois retirees have been getting under the current system, I don't see how a 401k would be superior. Maybe if they live on rice and beans for 40 years.

 

[ERD50]

... The middle class erosion continues.

... BTW, two thirds of Illinois megacorp pay no taxes through deductions, perks, and loopholes. ...

I'm not sure of the veracity or relevance of your claims regarding corporate taxes.

First, when a corporation pays tax, it passes it on to the consumer in the price of the product - it essentially becomes a flat tax on the consumer, and hurts the poor and middle class disproportionately. So I think it is more accurate to say that corporate income taxes are a drain on the middle class. We should eliminate them, IMO.

This source: State Tax Revenues: Charts and Data

shows that IL corps paid $3,494,539,000 in income tax out of a total tax of $36,437,803,000 - so about 9.6% of the total bill.

Texas on the other hand, has no corporate income tax at all. So what does this tell us? Anything? What I'm saying is, it is more complicated than any single number. Big Picture.

-ERD50

 

[Ronstar]

Given the current state of the state and the lack of pension reform coming from the politicians, I don't see how Illinois can recover from this. I know of some state jobs where there are 2 retired people for 1 worker. Given roughly 80% pension, that means that Illinois could be paying at least 260% of a normal salary for each current worker. I have to convince DW to get out of here.