ABSTRACT: This research adds to an existing body of research that suggests that the adoption of investment return assumptions associated with public sector defined benefit (DB) pension plans may partly be explained by political opportunism.
Major unions sue Illinois over pension overhaul
It was expected, and now it has arrived: a lawsuit has landed in the lap of a Sangamon County Circuit Court judge which seeks to overturn Illinois’ massive pension reform plan signed into law last month.
The lawsuit was filed by We Are One Illinois, a coalition of unions including the Illinois AFL-CIO, the American Federation of State, the Service Employees International Union, the Illinois Federation of Teachers, County and Municipal Employees, the Illinois Education Association and others.
The lawsuit, like the ones before it, centers on a provision in the Illinois Constitution that says pension benefits represent a “contractual relationship” and may not be “diminished or repaired”.
The Associated Press recaps the provisions of the reform law:
The plan reduces the annual cost-of-living increases for retirees and raises the retirement age for workers 45 and younger, giving some workers the option of freezing their pension and participating in a 401(k)-style contribution plan. It also puts some savings back into the pension funds and directs money from pension bond payments to the retirement systems after those bonds are paid off in 2019.
Lawmakers also included two components they say were intended to improve the plan’s odds of surviving a legal challenge: a 1 percent decrease in employee contributions and a funding guarantee, which allows the systems to sue the state if lawmakers don’t provide Illinois’ payments to the accounts.
The law was expected to take effect on June 1, 2014. But the lawsuit will likely delay implementation of the reforms, as the lawsuit asks the court to delay the law until the case is decided.
The Political Economy of Unfunded Public Pension Liabilities
This paper applies a public choice approach to the problem of unfunded pension liabilities and adopts the methodology of Congleton and Shughart (1990) to model underfunding of state-level public pension plans using the median voter theorem, along with the theory of “capture” by special interest groups, and a combined model of the two.
Chattanooga Mayor, public safety groups approve of pension reform proposal
When Andy Berke ran for the office of Chattanooga mayor, the city’s police and fire unions supported his bid. But allegiances change fast in politics, and Berke’s post-election crusade to cut pension costs drew the ire of the unions that had once backed him.
Now, after months of tense negotiations and an onslaught of police and firefighter retirements, the Mayor has approved a deal designed to overhaul the pension plan provided to the city’s police and firemen.
The plan would increase retirement ages for new hires and current employees with less than 10 years on the job. Cost-of-living increases would also be scaled back, and employee contributions would be increased by up to 37%.
Despite the cutbacks, the police and fire employees of Chattanooga seemed to have a jump in their step after the plan was announced.
Nooga.com reports:
The mood at the Fraternal Order of Police Lodge was palpably different, even positive, Thursday. Berke stood shoulder-to-shoulder with union reps who were skeptical of the administration only a month prior.
Toby Hewitt, the outgoing FOP president and a task force member, reminded reporters of the historically strained relationship between employee groups and City Hall. Then, he applauded the Berke administration for its willingness to seek their input and take their ideas and concerns seriously.
“That was a valuable part in the success of this,” he said.
“I feel like we have won because we have a defined-benefit plan that most of the other agencies across this nation do not have and it’s going to be solid,” Sgt. Toby Hewitt, president of the Chattanooga Fraternal Order of Police, told the Times Free Press.
The deal is projected to save the city $200 million over 26 years, but the city has hired two actuary firms that are now set to examine the proposal and project the savings it might bring.
Before the plan becomes law, it must go to a vote through the Fire and Police Pension Board and the City Council.
Detroit Emergency Manager freezes city pension funds
A leaked executive order from Detroit’s Emergency Manager revealed Monday that, as of last week, pension funds for many city workers will be frozen and replaced with a 401k-style plan.
The freeze, which was ordered by city Emergency Manager Kevyn Orr and took effect December 31st, pertains only to Detroit’s General Retirement System, which covers around 19,000 non-public safety workers.
The freeze closes the fund to any new or re-hired workers, halts benefit accruals for current workers and stops worker contributions to the fund. It also ends cost-of-living adjustments for the fund’s 12,000 retirees.
To replace the frozen fund, Orr ordered the creation of a defined contribution plan that all affected workers now have access to.
Tina Bassett, the spokeswoman for the General Retirement System, said in a statement that the freeze was “an outrageous and over-zealous action.”
Detroit Emergency Manager backtracks on pension freeze
Just hours after news broke of an order to freeze some workers’ pensions, Detroit Manager Kevyn Orr is eating his words.
Earlier today, Reuters received a copy of an order issued last week by Orr ordering the freezing of the city’s General Retirement System fund, which halted accrual of benefits and closed the plan to new employees.
But now, Orr says he is holding off on the freeze to allow more time for mediation between representatives of Detroit and the city’s pension funds in federal bankruptcy court.
Orr stated he is putting the freeze on hold indefinitely, but he reserved the right to reinstate it at any time.
If the freeze is reinstated, affected workers will have access to a savings plan styled after a 401k plan.
Details, from the Detroit Free Press:
Instead of pensions, Orr’s order said the city would create a 401k-style savings plan…Under [the proposal] by Orr, the city would no longer pay into pension plans but would contribute an amount equal to a percentage of workers’ base pay — 5% for non-uniformed workers and 10% for police and fire — into retirement accounts. Employees also could contribute their own money into the accounts.
Orr ordered the freeze initially because he was frustrated by lack of progress in mediation between the city and its pension funds.
“Time is running short, and the city’s financial status remains dire,” Orr said after he rescinded the freeze order. “An additional delay without the prospect of a mediated solution threatens to further erode essential services and public safety.”
National security insiders overwhelmingly support military pension cuts, according to poll
Reducing pension benefits is a political minefield, and that sentiment applies two-fold when the benefits in question are for military personnel.
But no one sent that memo to House Rep. Paul Ryan (R-WI) or Sen. Patty Murray (D-WA), who last month passed a bi-partisan budget that cuts the annual cost-of-living adjustment (COLA) of military pensions by 1%.
The move caused anger among veterans, but was supported by national security insiders, according to a poll conducted by the National Journal, a magazine widely read by Washington insiders.
According to the poll, 52% of insiders support the COLA decrease and 38% think the cutbacks should have been deeper.
Only 10% of insiders think military benefits should be off-limits entirely.
The Washington Post explains the rationale for cutting military pensions:
Overall, military compensation — including health benefits and salaries paid to active-duty personnel — eats up roughly half the defense budget, a proportion that is steadily rising. In a speech in November, Defense Secretary Chuck Hagel warned that “without serious attempts to achieve significant savings” in military compensation, “we risk becoming an unbalanced force.”
Military pensions would appear to be particularly ripe for reduction. Anyone who puts in 20 years can receive payments immediately and look forward to annual cost-of-living adjustments, or COLAs, for life. That means service members who signed up at 18 could find themselves with a full pension — roughly half their active-duty paycheck — at 38. And the government finds itself doling out cash to former troops who have launched lucrative second careers, often with defense contractors that draw their profits from government coffers.
A 1% decrease in COLAs may not sound like much, but the decrease is projected to save the federal government $6 billion over the next 10 years.
Click here to read a summary of the budget deal.
CalPERS 2013 Review of Funding Levels and Risk
With pension lawsuits on horizon, Illinois Supreme Court justices take contributions from players in reform
It’s been less than a month since Illinois Governor Pat Quinn signed into law the state’s massive pension overhaul. There have already been lawsuits filed against the legislation, and many more are expected in the near future.
If any of those lawsuits should end up in the Supreme Court of Illinois, the subsequent judgment would have lasting, important effects on pension politics in Illinois and beyond.
But can the Supreme Court justices be trusted to judge the case impartially? A new investigation into the justice’s campaign donations raises doubts.
The Chicago-Sun Times explains:
All told, state records show six of seven justices have taken close to a combined $3 million in campaign contributions tied to those with a stake in the pension debate: labor unions, business groups and a political committee controlled by House Speaker Michael Madigan, D-Chicago, who last month said the legislation could not have passed without his muscle.
The largest beneficiary of pension-related money is Democratic Justice Thomas Kilbride, a former chief justice of the court who in 2010 was immersed in the nation’s most expensive judicial retention battle in nearly a quarter century.
During that fight, Kilbride took in $1.47 million from the Democratic Party of Illinois, which is controlled by Madigan, the state party chairman. That fund chipped in another $688,000 in 2000, when Kilbride was first elected as a justice, assuring another decade-plus of Democratic control of the state’s highest court.
In his 2010 retention battle, Kilbride accepted another $467,360 from the Illinois Federation of Teachers, $100,300 from AFSCME Council 31 and $16,000 from the Illinois AFL-CIO, all of which fought aggressively against the pension legislation Quinn signed.
For observers following Illinois’ pension reform, some of those organizations should sound familiar. The Illinois Federation of Teachers, for one, plans to file suit against the pension overhaul early in 2014. The Illinois AFL-CIO is part of the union coalition We Are One Illinois, a group that plans to file suit against the state’s pension law soon, as well.
There is one justice who appears to be clean: Justice Bob Thomas, according to the Sun-Times, is the only member of Illinois’ highest court not to have taken money from any players in the pension reform game.
CalPERS 2013 Actuarial Valuation: Judges’ Retirement System I
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