Illinois | Pension360

Eric Madiar: Illinois Reform Law Is Unconstitutional

Eric M. Madiar, the Chief Legal Counsel to Illinois Senate President John Cullerton, has written an op-ed today opposing Illinois’ pension reform law on the grounds that the law is unconstitutional. An excerpt:

Anyone following the pension reform debate knows that Illinois has long diverted the moneys needed to properly fund its pension systems to avoid tax increases, cuts in public services or both. Some may not admit it, but they know it. They also know this practice is the primary reason why the systems are underwater.

Since much of my time over the last three years has been spent on our State’s pension problem, I wanted to find out how long it’s been that way and how long we have known about it. Well, as chronicled in an article I wrote now published by Chicago-Kent College of Law, I have an answer.

1917. No, that’s not a typo.

In 1917, the Illinois Pension Laws Commission warned State leaders in a report that the retirement systems were nearing “insolvency” and “moving toward crisis” because of the State’s failure to properly fund the systems. This nearly century old report also recommended action so that the pension obligations of that generation would not be passed on to future generations.

The 1917 report’s warning and funding recommendation went unheeded, as were similar warnings and funding recommendations found in decades of public pension reports issued before and after the Pension Clause was added to the Illinois Constitution in 1970.

[…]

…As early as 1979, Moody’s and Standard and Poor’s advised the State that it would lose its AAA bond rating if the State did not begin tackling its increasing unfunded pension liabilities. Also, in 1982, Governor Jim Thompson succeeded in passing legislation making pension funding far more dependent upon stock market returns to stave off higher State pension contributions.

Further, a 1985 task force report noted that Standard and Poor’s reduced its bond rating for Illinois from AAA to AA+ due to the State’s “deferral of pension obligations,” and that another rating agency viewed the State’s pension funding as a future financial “time bomb.” Finally, the much heralded 1995 pension funding plan was designed to increase the State’s unfunded liabilities and postpone the State’s actuarially-sound pension contributions until 2034.

Given this well-documented history, it’s extremely hard to legitimately believe that our State’s current situation is so surprising that the Illinois Constitution can be ignored and pension benefits unilaterally cut. As noted in my previous legal research, the Pension Clause does not support such a result.

The entire piece can be read here.

Photo by Mr.TinDC via Flickr CC License

Do Illinois’ Candidates For Governor Need A Pension “Reality Check”?

Pensions are one of many issues taking a prominent hold in the race for the Illinois governorship.

Both candidates, Pat Quinn and Bruce Rauner, recently sat down in front of the Chicago Tribune’s editorial board for an informal debate on, among other issues, how they would each handle the state’s pension crisis.

One member of the Chicago Tribune’s editorial board, Eric Zorn, listened to both sides. Now he says both Quinn and Rauner need to stop living in their “pension fantasies”.

On Quinn, Zorn writes:

Gov. Pat Quinn says he doesn’t need a “Plan B” to address the problem because he believes the Illinois Supreme Court will uphold the pension reform law he signed in December.

[…]

Quinn’s faith in the Illinois Supreme Court is farfetched. In July, the court issued a thumping 6-1 ruling striking down a previous legislative effort to cut health care subsidies to state retirees and employing language that seemed to serve as a funeral oration for the pension reform law.

Addressing the state’s “but we can’t afford to provide the benefits we promised!” argument, the majority wrote that the unequivocal pension protection clause in the Illinois Constitution “was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

Even if Quinn genuinely has hope that the court will gymnastically OK the pending law nevertheless, he still owes it to us to reveal what he proposes to do when — I mean if — those hopes are dashed.

Zorn then shifts to Rauner and his plan to shift Illinois workers into a 401(k)-style system:

Rauner owes it to us to explain why his ideas — he admits they’ve yet to rise to the level of a plan — are any more likely to survive court challenges than the bipartisan reform law, which he strenuously opposed.

…When I asked if joining such a plan would be mandatory, spokesman Mike Schrimpf echoed word-for-word the dodge Rauner employed in his Tribune candidate questionnaire: “We need to wait to see the parameters of what the Supreme Court says in order to carefully craft a plan that will pass constitutional muster.”

Mandatory enrollment of current public employees into 401(k)-style accounts by which they will ultimately fund their own retirements would likely not pass that muster. They’re generally not as lucrative for employees as plans that guarantee monthly pension payments.

Rauner knows this. It’s why he’s promised to allow police officers and firefighters to keep their “special retirement” that includes a standard pension, and why he projects “billions” in savings.

Zorn also decried the administrative costs associated with 401(k) plans. You can read his full editorial here (subscription required).

Photo by Chris Eaves via Flickr CC License

Illinois Gov. Quinn Accuses Challenger Bruce Rauner Of Paying Off Lawmakers To Vote Against Pension Reform Bill

Things got heated on Tuesday when Illinois Gov. Pat Quinn and challenger Bruce Rauner met for a face-to-face debate in front of the Chicago Tribune editorial board.

[Watch the full video here.]

The session lasted 80 minutes but arguably the most interesting point came when Quinn dropped an intriguing allegation: that Bruce Rauner had offered to pay off lawmakers to vote against the pension reform bill passed by Illinois last December. From the Chicago Tribune:

Quinn said that in December, during the heat of negotiations over a measure to drastically change public employee pension benefits, House Republican leader Jim Durkin told him that Rauner was offering campaign cash to GOP lawmakers to vote against the bill.

Rauner acknowledged working against the pension bill, which Quinn signed into law, but denied the governor’s allegation. Durkin aides referred calls to the state Republican Party, which did not directly address Quinn’s allegation in an emailed statement.

Bruce Rauner has proposed a plan to freeze the pensions of all current state employees and switch them into a 401(k)-style plan.

But Rauner has softened his stance in recent days, perhaps because he doesn’t want to alienate voters in what’s shaping out to be a close race.

During a public appearance Wednesday, Rauner said the following, according to WUIS:

“I’m a believer that we need to protect the pensions for the police officers, and give them a special retirement beyond what’s standardly done in other pensions.”

He didn’t clarify exactly what he meant by the statement.

Photo by Chris Eaves via Flickr CC License

Moody’s: Illinois Pension Debt Is Worst In Country

Moody’s released a report last weekend measuring the pension liabilities of all states relative to state revenue. By that measure, Illinois has the worst pension debt in the country, according to the report. From the Sun-Times:

Illinois’ pension liability as a percentage of state revenue is far and away the nation’s highest, according to a new report from a major credit-rating agency.

The state’s three-year average liability over revenue is 258 percent, Moody’s Investors Service says.

The next closest? Connecticut, at about 200 percent.

The Moody’s report averaged the Illinois percentage from 2010 through 2012. In 2012 alone, the state’s rate was 318 percent.

The state has a $100 billion deficit in the amount of money that should be invested in the portfolios of five state-employee pension accounts.

[…]

In the latest report, Moody’s sets [the median] level at 51 percent.

Several larger states, similar to Illinois, are well below the median and rank in the 10 lowest percentages of adjusted net pension liability, including Ohio, Florida and New York. The group also includes Illinois neighbors Iowa and Wisconsin — the latter having the lowest level next to Nebraska.

Only three others states — New Jersey, Hawaii and Louisiana — have rates higher than 120 percent.

The report acknowledged the state’s pending pension reform, which currently sits in court. From the Sun-Times:

Lawmakers adopted an overhaul plan last fall that cuts benefits and increases worker contributions to significantly cut that debt.

But the law has been challenged in court. A Sangamon County judge indicated last week he wants the case moved swiftly to appellate courts, suggesting the Illinois Supreme Court’s rejection in July of a law affecting retiree health insurance could prove a model for the pension challenge.

Moody’s points out that even if the pension overhaul gets constitutional approval from the state’s high court, it still will take decades for Illinois government to dig out of its financial hole.

Photo by Chris Eaves via Flickr CC License

Judge Hints Illinois Pension Case Could Be Fast-Tracked

It’s been a foregone conclusion that the lawsuit against Illinois’ pension reform law would eventually be heard in the halls of the Supreme Court. The question has always been how long it would take to get there.

But a judge indicated this week that he’d like to fast track the case through the lower courts and get it to the Supreme Court as quickly as possible. Reported by the Herald-Review:

Sangamon County Judge John Belz said Thursday that an earlier court decision that blocked changes to retiree health insurance premiums could provide a roadmap for how the pension case will be handled in the coming months.

In July, the Illinois Supreme Court ruled that a law requiring retirees to pay more for health insurance was unconstitutional, triggering speculation that the pension changes also would be tossed out.

Belz told attorneys gathered for a hearing Thursday that the court’s decision in the health insurance case was like “an elephant in the room.”

“I can’t stick my head in sand and act like it isn’t there,” Belz said.

When Belz and attorneys were initially laying out a schedule for the case, it was not expected to be resolved at the lower court level until sometime in 2015.

Now, with the health insurance case providing a path, Belz said he’d like to move the case to the Supreme Court quickly.

“As fast as we can move it along within reason the better,” Belz said.

“This can be wrapped up by the end of this year,” said attorney John Fitzgerald, who represents a group of retired teachers.

A speedy judgment would make both sides happy. But there was bad news for the state mixed into yesterday’s hearing; the judge indicated he’d heavily weigh July’s ruling on retiree health insurance when crafting his judgment on the pension reform law. The July ruling declared an increase in retirees’ health premiums unconstitutional.

Illinois Workers Opt Into 401(k)-Style Plans In Record Numbers

SURS members chart — CREDIT: Illinois Policy

All around the country, employers are funneling new hires into 401(k)-type retirement plans instead of traditional pension schemes.

But the members of one Illinois fund are given the choice of participating in a defined-benefit or defined-contribution plan–and more than ever, they’re choosing 401(k)s. From Illinois Policy:

Today, more than 13 percent of all active employees in the State Universities Retirement System, or SURS, participate in a 401(k)-style plan instead of a traditional pension plan run by the state. These state-university workers control their own retirement accounts and aren’t part of Illinois’ increasingly insolvent pension system.

And recent data from SURS obtained through a Freedom of Information Act request shows the popularity of 401(k)-style plans is growing.

Nearly 20 percent of all SURS employees eligible for a retirement plan in 2014 have chosen a self-managed plan over the traditional pension scheme. Just a few years after the Great Recession, the number of SURS members choosing self-managed plans has reached an all-time high.

In 1998, SURS began allowing its new workers to opt into self-managed retirement plans. In these plans, an employee contributes 8 percent of his or her salary toward retirement savings and the employer puts in a matching 7 percent. That means the employee has the equivalent of 15 percent of each paycheck put into an account that’s entirely theirs.

As for why employees are opting into 401(k)s over traditional pensions? The growing concern over the health of Illinois’ pension funds probably plays a big role. Strong stock market gains over the last few years likely play a part, as well.

Hawaii Labeled “Sinkhole” State by Watchdog Group

A few names consistently pop up in any discussion of states with the most pension debt—Illinois, New Jersey and a handful of other states are frequently cited as shouldering the heaviest pension burdens.

Hawaii isn’t always on that list. But according to one watchdog group, Truth in Accounting, the state’s pension burden is among the worst in the country. The Hawaii Reporter recaps:

Only Massachusetts, New Jersey, Illinois and Connecticut are in worse fiscal condition that Hawaii.

Donna Rook, president of StateDataLab.org, a division of Truth in Accounting, said Hawaii has been one of the five worst states since this annual study was started in 2009.

“The average Hawaii taxpayer’s share of the state’s debt is $27,000 after available assets are tapped. Since we set aside both capital assets and debt related to capital, the remaining debt is primarily unfunded pensions and retirement health,” Rook said.

The $27,000 per taxpayer is about 57 percent of the average resident’s annual income, Rook said.

Sheila Weinberg, founder and CEO of Truth in Accounting, said Hawaii financial statements show $4 billion in retirement liabilities, but the state actually has nearly $15 billion of unfunded retirement promises.

Hawaii has only $5 billion to pay the state’s bills, which total $18 billion, Weinberg said.

The same Truth in Accounting report also shared some better news: Hawaii has vastly improved the timeliness of its year-end financial reports.

For more data on Hawaii, visit Truth in Accounting’s data lab here.

Pension Limbo Leaves Illinois Schools, Creditors Uncertain

The Illinois Supreme Court will soon rule on the constitutionality of the state’s sweeping pension reforms. But no one knows what the decision will ultimately look like—or when it will happen.

That uncertainty is weighing heavily on institutions that won’t know exactly what their fiscal future looks like until a court ruling comes down. From WUIS:

Tucked into the flurry of reports issued by credit rating agencies, one phrase has been appearing again and again, undercutting the financial outlook for many public schools and community colleges across Illinois. Under headings such as “Challenges” or “What could make the rating go down,” there’s often a warning along the lines of “increased budgetary pressures due to a shift in pension costs from the state.”

Tom Aaron, with Moody’s Public Finance Group in Chicago, says that’s because of “the likelihood that the state may have to search for additional pension answers.”

Despite prognostications by Quinn and others, Aaron says it’s not certain whether last year’s pension overhauls will be upheld by the Supreme Court.

“So in the event they are not, there is a risk that the state is going to have to go back to the drawing board in terms of trying to solve its pension issues,” he said.

And that could include a shift in pension costs from the state onto individual school districts, colleges and universities.

If the court overturns the state’s reform law, lawmakers will be sent back to the drawing board to draft a different set of solutions for cutting pension costs.

One proposal that gas gained steam in the past—and likely would be among the first policies proposed—is to shift pension costs from the state onto schools, colleges and universities. WUIS reports:

The cost-shift was once a key component of pension proposals. House Speaker Michael Madigan decried the “free lunch,” in which school boards set employee pay without worrying about future pension costs, since those would be borne by the state.

Even as recently as March 2014, Senate President John Cullerton mentioned it in a speech at the Union League Club of Chicago:

“We’ve suggested to the suburban and downstate areas, ‘You’ve got to start paying a little bit of your employers’ portion of the pensions.’ It’s called a cost-shift. … It’s important. This makes good public policy,” Cullerton said.

Moody’s doesn’t think schools can afford to wait. Moody’s Public Finance Vice President Rachel Cortez says the agency asks whether districts are bracing themselves for the possibility of a cost-shift:

“The stronger credits, the stronger management teams tend to be aware that that could be coming, and are preparing for it, making contingency plans,” she added.

The cost-shift would be particularly heavy fiscal burden on schools because state funding to schools has been chipped away in recent years.

Illinois Governor, Challenger Spar over Pension Links to Cayman Islands

It’s become a tradition for politicians of either party: on the campaign trail, at some point, you need to accuse your challenger of dodging taxes. The race for Illinois governor is no exception, but there’s an interesting spin on this one.

Current Illinois Gov. Pat Quinn earlier this week accused wealthy challenger Bruce Rauner of dodging U.S. taxes by placing his money in offshore accounts in the Cayman Islands.

A Chicago Tribune investigation had previously revealed that Rauner paid a tax rate of around 15 percent on much of his fortune, even though his wealth made him eligible for tax brackets above 30 percent.

But Rauner fought back, first claiming that his offshore investments did not impact the tax rate he paid. Then, he claimed Quinn himself had money in the Caymans. His pension, to be exact.

Rauner claims that Illinois pension funds have hundreds of millions of dollars in Cayman-based investments.

From the Chicago Sun-Times:

Rauner’s campaign said the Teachers Retirement System has invested $433.5 million in Cayman Islands-based funds while the State Board of Investment has $2.3 billion in offshore holdings, which includes some Caymans-related funds though the agency could not specify how much.

Both are tax-exempt entities and, unlike individual investors, derive no direct tax benefit from investing in funds based there, spokesmen for both agencies said. TRS invests on behalf of current and retired suburban and downstate teachers. The State Board of Investment oversees pension investments for current and retired state workers, university employees, judges, lawmakers and state officials, including the governor.

“If Pat Quinn refuses to apologize and tell the truth, he should immediately move to divest all state investments from companies and funds domiciled overseas, including in the Cayman Islands,” Rauner’s campaign said.

As was bolded, pensions systems are tax-exempt and so there’s no tax benefit from putting money offshore.

Quinn’s camp, when pushed for a statement, declined to say whether Quinn would like the pension systems to stop investment in Cayman-related funds. But the Governors spokeswoman told the Sun-Times:

“The governor has no authority to direct pension fund investments, and he’s not about to start getting involved. That’s really not the issue.”

In Illinois, Public Pension Benefits Are Gaining Ground On Worker Salaries

Over the past decade, the average public pension in Illinois has been gradually catching up to the average salary of employees still working.

Critics of increased benefits say this is the result of years of generous salary increases and compounded COLA increases.

Others say that increased pensions are simply the result of higher public sector salaries, which Illinois needs to pay in order to retain good employees.

The Daily Herald reports:

The average 2013 pension was $31,674 for retirees in nine statewide and metropolitan Chicago public pension systems for government workers, teachers, legislators, judges and university professors, a Daily Herald analysis shows. That’s 60 percent of the $55,120 average salary for pension fund members who are still working.

Ten years ago, the average pension was less than half of the average salary.

…

The narrowest gap between average salary and average pension is for members of retirement systems where advanced degrees and training are required.

In 2013, the average Teachers’ Retirement System pension was 69.4 percent of the average pay for those still working, according to the system’s annual comprehensive financial report.

Judges have the highest average salary — $183,998 — and highest average pension — $105,341.

The gap between average pay and average pension is widest within retirement systems with more transient employees.

The 108,814 local government employees receiving IMRF benefits in 2013 averaged pensions of $13,243. That was 34.8 percent of the system’s $38,059 average salary. However, that’s still a big change from a decade ago when the average IMRF pension was 27.9 percent of the average salary of workers paying into the system.

One lawmaker told the Daily Herald that, although the upward trend is undoubtedly real, the decreasing gap between pensions and worker salaries has slowed over recent years.

“There was a long period of time where there were rapid (pay) raises in the public sector … (and) that growth is tied to the pension formula,” said state Sen. Daniel Biss, an Evanston Democrat who helped sculpt the state’s most recent pension reform plan. “But a lot has changed and we’ve seen a dramatic slowdown, particularly in the last five years.”

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