By the way, an Illinois pension update

Last updated on: August 16, 2016 at 9:48 am by Jane the Actuary

By the way, an Illinois pension update 2016-08-16T09:48:34-06:00 Jane the Actuary

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Here’s the backstory: back in 2013, Illinois lawmakers approved a bill curtailing at least some of the more generous aspects of Illinois pensions; now, as expected, the Illinois Supreme Court has ruled that, based on a provision in the 1970 Illinois state constitution, the law is unconstitutional and the state must never, for an employee’s entire working lifetime, reduce pension accruals or ancillary benefits. Reuters has a quick summary of the issue, and here’s a more in-depth article at the Chicago Tribune.

The original reform, by the way, was comparatively modest:

At issue was a December 2013 state law signed by then-Democratic Gov. Pat Quinn that stopped automatic, compounded yearly cost-of-living increases for retirees, extended retirement ages for current state workers and limited the amount of salary used to calculate pension benefits.

though, in another way, it went too far: in the private sector, pension benefits, including ancillary benefits (e.g., COLAs and generous early retirement provisions), based on past service, are guaranteed by law, that is, an employer may not legally eliminate these benefits. Any instance that you ever read about is always a matter of future accruals (and, typically, even though it’s not legally required, and employers ending a defined benefit pension in favor of enhanced 401k benefits have allowed employees above a certain age to retain the old formula because of the imbalance between 401ks and DB plans at older ages). When an employer removes early retirement subsidies, for instance, a person’s benefit at retirement is calculated in two pieces, the first half with and the second half without the subsidy.

So my first irritant is that the reporting fails to recognize this distinction; for instance:

A coalition of unions that represent government workers and retirees applauded the ruling as protecting “the hard-earned life savings of teachers, police, firefighters, nurses, caregivers and other public service workers and retirees.”

Past accruals should always, and are always, protected. It was clearly a bad move on the part of Illinois lawmakers to refuse to fund them, but they need to be paid one way or the other. At the same time, of course, these benefits are far more generous than private sector benefits (no, I’m not going to dig out the details now, and yes, I understand that state workers don’t get Social Security, but even taking this into account the benefits are overly-generous, making it all the more difficult to fund them in the first place).

Future accruals? That’s where Illinois is hemmed in by the union-protecting 1970 state constitution authors. But let’s get this straight: there is nothing wrong with removing, or changing, future pension accruals. That’s what’s implicit in the very label of “future accruals” — they haven’t happened yet, they have not in any way been earned. There is no general right to such a benefit, only a provision written into law.

What’s the way forward?

This is the discouraging part. Rauner’s plan is a constitutional amendment to, basically, repeal the provision that’s tying the states hands, and instead move the state onto the same legal footing as any private sector employer, protecting past accruals but not future accruals. Which is the right thing to do. Heck, I even said so back in 2013, before anyone was talking about this, in one of my very first blog posts. Now, Rauner and I differ in next steps: he wants to simply reduce the benefit formula going forward; I’d move to an entirely different system, something more like the “multi-employer” system or the “Collective DC” systems in The Netherlands, in which the state is responsible for paying an agreed-upon annual contribution up front, like a 401k plan, but the union (because almost all state employees are unionized, if I’m not mistaken, even at management levels that ordinarily wouldn’t be even in private sector unionized industries) would be responsible for managing the plan and paying out benefits. Such a system is, really, the only fair and honest-government way to run a state pension system, since it means that lawmakers (and taxpayers) pay for the benefits when they’re earned, and have no means to cheat the system and postpone the bill-paying ’til they’re out of office.

So what’s discouraging? The fact that, when it comes down to it, I fully expect that the Democratic legislature, which must by a super-majority agree to put this on the ballot (the alternative is a signature-gathering process which crooked pols are pretty adept at squashing), will come up with one reason after the next why they can’t, rather than stand up to the unions who are sitting pretty right now, using this same “unjust stealing of life savings” rhetoric as the Trib quoted above.

This is now, of course, old news (the ruling came on Friday) and I should have written about it earlier, since I am, of course, Jane the Actuary, but to read the reports and know that nothing is going to happen, that the Democrats’ first choice is to raise taxes and, failing that, they’d rather the ax fall on the poor and disabled than on union employees or construction contractors (and don’t get me started on the endless supply of tax breaks for corporations and funding for major building projects) — well, I can’t seem to muster up the fury that inspires a really good blog post, because, so far as I can tell, the only way Illinoisians are going to get good government is by moving.

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