Illinois Gov. Rauner Would Fine Schools For “Spiking” Pensions

Bruce Rauner

Illinois public schools that hand out late-career pay raises could be subject to heightened penalties under the Rauner administration.

Gov. Bruce Rauner this week laid out a series of pension-related measures as part of his budget proposal; among them was the idea of levying a penalty on schools that give late-career raises to teachers.

Illinois already penalizes schools for handing out such raises if they exceed 6 percent. Under Rauner’s proposal, schools would be penalized for any such raise that exceeds the cost of inflation, which is a much lower threshold.

More from the Daily Herald:

Tucked away in his plan to cut teachers’ pensions, though, is a detail school districts would have to be wary of should Rauner’s plans become law.

Here’s all it says on the list of details released publicly by the governor’s office: “Eliminates spiking.”

Rauner wants to change a state law that makes local school districts pay penalties if they give big end-of-career pay raises to teachers and administrators.

School districts can still give the pay raises, but the state says local officials have to pay for the pension consequences.

Now, school districts have to pay penalties if they give late-career pay raises of more than 6 percent. Rauner wants to enact penalties for those pay raises if they’re greater than the rate of inflation, which lately has been around 1 percent.

Suburban schools have already had to pay big bucks when they’ve been caught by the 6 percent law. For the 2012-2013 school year, for example, Elgin Area District U-46 had to pay $135,393.

The year before that, Schaumburg Township District 54 had to pay $489,841.

Most districts avoid big penalties, even writing in a 6 percent pay raise cap into their contracts with teachers. But 1 percent is a lot lower, of course.

“While a so-called reform was enacted in an effort to prevent pension spiking, teacher contracts in recent years have made the six percent cap a floor rather than a ceiling,” Rauner spokesman Lance Trover said.

A teacher’s salary during his/her final year of teaching plays a large role in determining pension benefits.

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

“Phantom Savings”: Top Illinois Senator Questions Gov. Rauner’s Pension Cuts

Bruce Rauner

Illinois Gov. Bruce Rauner laid out his budget plan on Wednesday, and it included a number of pension cuts – decreasing annual COLAs, freezing benefits, and moving employees into a plan that yields fewer benefits.

(Under Rauner’s proposal, police and firefighters would be exempt from these changes.)

One lawmaker on Wednesday accused Rauner of using “fuzzy pension math” to calculate the savings the cuts would yield.

That followed the accusatory words of another top lawmaker, who claimed Rauner’s pension changes produced “phantom savings”.

Here’s Illinois Senate President John Cullerton:

The basic math still doesn’t work in his proposal. Governor Rauner leaves a $2.2 billion hole in the budget by relying on unrealistic revenues from a questionable pension proposal. Even as the courts review a significant test case, the governor’s plan banks phantom savings for a pension plan that may fail key legislative and judicial tests. When we passed pension reform last year, we took care to exclude possible savings from budget plans pending a legal resolution. The governor’s plan rejects that wisdom.

Indeed, when the state passed its pension overhaul in late 2013, it never included the savings in the budget. That’s because a legal challenge was sure to be brought against the law and Illinois didn’t want to assume savings only to get burned later.

Rauner’s proposals, if enacted, are likely to end up in court as well, depending on the outcome of the state’s current pension lawsuit.

 

Photo by Tricia Scully via Flickr CC License

Documents: Illinois Gov. Rauner’s Budget Will Recommend Pension Cuts

Bruce Rauner

Illinois Gov. Bruce Rauner will give his budget address on Wednesday afternoon. He’ll announce a number of cost-cutting proposals, and pensions are sure to be featured.

What specifically does Rauner have in mind for the state pension system?

Greg Hinz of Crain’s Chicago Business got a hold of budget documents that hint at Rauner’s plans.

From Crain’s:

On pensions, Rauner is proposing to go substantially farther than the reforms passed a year ago by the General Assembly, reforms that now are being challenged before the Illinois Supreme Court.

Specifically, according to budget documents shared with me, Rauner intends to save $2.2 billion next year, cutting the state’s unfunded pension liability by $25 billion. He’d do that by freezing all benefits as of July 1, moving workers to a new plan in which cost-of-living hikes would be cut from the current 3 percent a year to the lesser of 3 percent or half of inflation, non-compounding; the normal retirement age would be 67, and overtime would not be counted in pension benefits.

These changes would apply to benefits earned after July 1. Benefits earned prior to that date would be paid at the previous rate. The Rauner document says that makes it constitutional as “earned benefits” are not cut. Expect a court challenge to that.

All of these changes would apply only to plans covering teachers, university employees and other state workers—not public safety employees.

Read an overview of the rest of Rauner’s probable budget proposals here.

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Illinois Union President: Taxpayers Would Lose With Switch to 401(k)

401k jar

When Illinois Governor Bruce Rauner was on the campaign trail, he touted his preferred solution to the state’s pension problems: shifting new hires into a system that more resembled a 401(k) plan than a traditional pension.

The idea is commonplace and has been incorporated into dozens of state and local pension plans across the country.

Michael T. Carrigan, president of the Illinois AFL-CIO, has penned a piece lambasting the idea that 401(k)s should replace traditional pensions.

From the piece:

It’s not just basic finance, it’s common sense: A large pool of money invested by professionals will yield far greater returns than small, separate accounts managed by individuals with no professional training in finance.

So why do some think that ending Illinois’ defined benefit pension system and moving workers into privatized, 401(k)-style accounts is a good idea?

[…]

New data from the National Institute for Retirement Security shows just how much Illinois taxpayers stand to lose if we switch to privatized accounts. To provide workers with the same modest retirement benefits, traditional pensions are 48 percent less expensive than 401(k)-style plans. That’s a 48 percent savings to Illinois taxpayers.

According to NIRS, there are a few key reasons why defined benefit pensions are more cost effective:

– Pension plans enjoy higher investment returns and lower fees than individual accounts, generating a 27 percent cost savings.

– Unlike individual investors who generally enjoy high-risk, high-reward investment strategies when they’re young but switch to lower-risk portfolios that yield far lower returns as they age, pension plans can maintain a balanced portfolio that yields consistently high returns, generating an 11 percent cost savings.

– Pension plans pool longevity risk, meaning that they only have to save for the average life expectancy of a group of individuals. Workers in a 401(k) plan need an investment strategy that provides for the event that they live a longer than average life. Longevity risk pooling generates a 10 percent cost savings.

What’s more, cutting public workers’ retirement security by transitioning them to a 401(k) has its own set of unforeseen costs.

The average Illinois public employee makes a salary that is 13.5 percent less than their similarly educated counterparts in the private sector, trading front-end benefits like salary for back-end benefits like pension payments. With pension benefits gone, the state of Illinois may have to drastically increase public sector salaries or risk losing teachers, police officers, firefighters, and thousands of other critical workers.

Read the entire piece here.

 

Photo by TaxCredits.net

Illinois Gov. Rauner’s Municipal Bankruptcy Plan Faces Obstacles

Bruce Rauner

Last week, Illinois Gov. Bruce Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.

The idea is that even if towns and cities don’t follow through, the threat of bankruptcy could give them leverage in pension negotiations with workers.

But the proposal, if it ever comes to fruition, will face legal and political obstacles, according to an analysis by Bond Buyer:

Illinois statutes don’t grant any general legal authority allowing for a Chapter 9 filing, said municipal bankruptcy expert James Spiotto, a managing director at Chapman Strategic Advisors LLC. The one exemption is for the Illinois Power Agency.

The state offers assistance for stressed communities with a population under 25,000 through its Fiscally Distressed City Act. The local government must ask the General Assembly for the appointment of a special commission to consider whether the municipality meets the act’s criteria. If approved, the municipality can qualify for state financing assistance.

Spiotto said the establishment of a Chapter 9 provision could offer some benefits, but he cautioned it should be used as a last resort when all alternatives are exhausted. Any statute best serves a state and its local governments when it includes additional layers of review and is written with market access in mind.

[…]

Municipal Market Analytics partner Matt Fabian said given unions’ historically strong influence on the Democratic majority in the state, he thinks a Chapter 9 law faces a dim chances.

“In Illinois, it’s unlikely that a bankruptcy law would be passed, and even more unlikely that what might be passed would protect bondholders over employees,” Fabian said. “The cost of capital would very likely rise.” Illinois’ local governments already pay interest rate penalties for the financial distressed of the state government.

Read the full Bond Buyer piece here.

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Illinois Gov. Rauner Proposes Bankruptcy As Strategy for Taming Municipal Pension Debt

Illinois

Illinois Gov. Bruce Rauner didn’t touch on pensions during his State of the State address this week.

But in a list of policy proposals handed out to lawmakers, Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.

Even if towns and cities didn’t act, the threat of bankruptcy could give them leverage in pension negotiations with workers.

From the Chicago Tribune:

Gov. Bruce Rauner wants to give cities, towns and counties the authority to file for bankruptcy protection, a move that could give local governments a stronger foothold when negotiating with local police and fire officials over costly pension obligations.

[…]

Rauner aides would not elaborate on how it might work.

But the single sentence calling for the state to “extend to municipalities bankruptcy protections to help turn around struggling communities” mirrors a proposed law introduced last month by state Rep. Ron Sandack, R-Downers Grove. Sandack said his aim was to give cities more tools for getting their financial affairs in order, including a “level field” when negotiating over pensions.

Federal law only allows municipalities to file for bankruptcy with explicit permission from the state where they are located, said James Spiotto, a municipal bankruptcy expert and attorney who is managing director of Chicago-based Chapman Strategic Advisors.

Currently, only the Illinois Power Agency has been given such authority. It would take passage of a new state law to extend the authority to municipalities.

Chicago Mayor Rahm Emanuel was quick to dismiss the idea that the city would use such a tactic to lower its pension costs, according to the Tribune.

Rauner’s State of State Address Short on Pension Talk

Bruce Rauner

On Wednesday, new Illinois Gov. Bruce Rauner gave his State of the State address.

The speech wasn’t short on policy ideas – but in one area, Rauner was conspicuously mum: Pensions.

Rauner didn’t so much as say the words “pension” or “retirement” in his speech. Observers say he could be saving that talk for his budget address later this month.

More from the Chicago Tribune, including reaction from credit rating agencies:

For rating agency analysts, who routinely check the state’s pulse for signs of improving health, the assessment was simple: “Show me.”

[…]

On Wednesday, Rauner provided little detail about how he’d tackle Illinois’ largest financial troubles.

The past is littered with proposals to “right the ship, but they didn’t get there,” said Karen Krop, an analyst for Fitch. “We’re looking for an effective balanced budget and a pension solution.”

She said she will be watching closely for the governor’s coming budget proposal — a document that will provide more detail than the agenda Rauner outlined this week. The key, Krop said, would be permanent solutions to the state’s financial problems.

The state’s rating, its financial grade, has been “downgraded multiple times over the last five years because of its inability to find permanent solutions,” Krop said. There’s a “mismatch between spending and revenue,” and while temporary tax increases helped since 2011, they aren’t lasting.

“A lot has to do with the pension liability,” Moody’s analyst Ted Hampton said. “The state is still a long way off from coming to terms with its pension liabilities.”

A potential pension solution remains tied up in courts and is a major reason why rating agencies such as Moody’s have graded Illinois as the most unhealthy of states financially.

[…]

“Illinois’ long-term liabilities, particularly pension liabilities, are very high for a U.S. state and are expected to remain so even with improvement in pension funding from pension reform,” Krop said.

Read the full speech here.

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Video: How Might Bruce Rauner Tackle Illinois Pensions?

How might Bruce Rauner attack the state’s pension debt? Pension360 has covered his changing views on reforms.

In this video, Illinois Policy Institute CEO John Tillman talks about the state’s pension debt and how Rauner might handle it.

 

Video credit: The Wall Street Journal

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Where Does Bruce Rauner Stand on Pension Reform?

Bruce Rauner

When talking pensions on the campaign trail early in 2014, Bruce Rauner said that new hires, current workers and retirees all would need to be on the receiving end of pension benefit cuts.

But Rauner has softened that stance in recent months; the Illinois governor now says the benefits accrued by current workers and retirees need to be protected.

From NBC Chicago:

[Rauner remarked] that it’s most important to “protect what is done—don’t change history. Don’t modify or reduce anybody’s pension who has retired, or has paid into a system and they’ve accrued benefits. Those don’t need to change.”

[…]

“What we should change is the future—the future accruals, the future benefits for future work,” he said, according to the Chicago Sun-Times. “That is constitutional. It’s also fair and appropriate for the taxpayers and the workers themselves.”

“Hopefully (the state Supreme Court) will give us some feedback that will help guide the discussion for future modifications as appropriate for the pensions,” noted Rauner.

Rauner’s website has also been updated accordingly and clarifies his official stance further. He is still pushing for a switch to a 401(k)-style system, but he wants to keep current retirees insulated from any changes:

We must keep our promise to current retirees, but we put all government workers at risk by continuing to promise a pension no one can afford.

[…]

We must boldly reform our pension system. To do that, we can:

* Ensure pay and benefits do not rise faster than the rate of inflation.

* Eliminate the ability of government employees to receive massive pay raises before they retire just to increase their pension.

* Cap the current system and move towards a defined contribution system.

The change in sentiment is perhaps due to a circuit court ruling late last year that overturned the state’s pension reform law, which made it more unlikely that pension reforms can legally come in the form of benefit cuts for retirees.

The law is currently being heard in the halls of the state Supreme Court.

It could also be that Rauner, since taking office and taking the temperature of fellow lawmakers, is now more in-tune with the political realities of steep pension cuts, and doesn’t see the worth in pushing an unpopular policy if it has little chance of coming to fruition.

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Questions Surround Bruce Rauner’s Pension Proposal, But Rauner To Be Mum on Specifics Until Court Ruling

Bruce Rauner

Illinois’ pension reform law currently sits in legal limbo. But if the Supreme Court deems it unconstitutional, all eyes will shift to Illinois Gov. Bruce Rauner, who will need to propose a new solution to the state’s pension woes.

On the campaign trail, Rauner supported a plan to shift workers into a 401(K)-style plan. He has since softened his stance a bit, but hasn’t offered much in the way of clarification as to the specifics of his plan.

From the Chicago Tribune:

With Rauner taking over, the pension debt remains unsettled. As has been the case on many issues, the Republican has offered general answers about his preferences for dealing with public pensions and how he’ll respond if the new law is struck down.

“We have some very specific thoughts on that, but we’ll be developing those with the General Assembly,” Rauner said during a postelection visit to the Capitol. “We need a comprehensive, fair overhaul of the pension system, and we’ll make that a top priority.”

[…]

Asked recently if the state should begin working on a “Plan B” while the pension law is debated by the state Supreme Court, Rauner said his “preference is probably to wait until the Supreme Court rules, so we have some ground rules for what probably works and what won’t work. I think that’s a smarter way to do it.”

Would Rauner’s 401(k) plan work? Would it be constitutional? What are the specifics? And is that still his plan? From the Chicago Tribune:

In his successful campaign, Rauner spoke generally about wanting to shift public employees from receiving a defined pension benefit into becoming members of a defined contribution plan similar to a 401(k)-style system.

Rauner has said public workers should be able to keep the benefits they have already accrued, but, moving forward, go into a defined contribution system. He also has said public safety workers should stay in the current system. And, with 80 percent of public employees not eligible to receive Social Security, Rauner has said he favors some unspecified plan to create a retirement safety net.

But it’s unclear whether Rauner’s concept is constitutional, as he maintains, or how it would address the current unfunded pension liability since payments would go into a new retirement system rather than address the shortfalls in the current system.

“Not only does it not solve the problem, but it makes it worse in the near term,” Dye said. “Whatever the solution is will cost something, and I don’t know how it would be implemented. It’s hard to add (Rauner’s concept) up as a fiscal benefit for the state.”

Illinois is expected to make $6.6 billion in pension payments in fiscal year 2015. The state is saddled with over $100 billion of pension debt.

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons