Gov. Quinn wants drastic changes in State workers’ pension benefits
May 31, 2012

By Dolly Duplantier

Governor Patrick Quinn on April 20 announced his plan to alter the State’s five public pension systems, including the State Employees’ Retirement System (SERS), the Teachers’ Retirement System(TRS), the Judges’ Retirement System (JRS), the General Assembly Retirement System (GARS), and the State Universities Retirement System (SURS) — the system that covers University of Illinois at Chicago (UIC) employees.

Now underfunded by $83 billion, Illinois’s pension systems rank last among the 50 states in being adequately funded, according to an April 2011 Pew Center on the States report.

“Unsustainable pension costs are squeezing core programs, public safety, and human services, in addition to limiting our ability to pay our bills,” said Quinn. “This plan rescues our pension system and allows public employees who have faithfully contributed to the system to continue to receive pension benefits.”

In opposition, the We Are One Illinois organization, a coalition of labor organizations working to protect public employee pensions, issued a statement rejecting the Quinn plan, which, the organization said, “would shift responsibility for the unfunded liability to employees—despite the fact that those same employees have always paid their share into the pension funds, while the State has too often failed to do so. Labor’s position is clear: any changes to the pension systems must be fair to employees, constitutional, and developed through a process that includes the unions that represent public employees.”

The Quinn plan reflects the discussions of the governor’s pension working group. Members of the group include Senators Mike Noland and Bill Brady and Representatives Elaine Nekritz and Darlene Senger. “The proposal is a compilation from interested parties and the community,” said Kelly Kraft, Quinn’s assistant budget director.

Big changes

The governor’s proposal would change the current plan as follows: increase employee contributions 3%; cut the cost-of-living adjustment (COLA) to the lesser of 3% or one-half the Consumer Price Index simple interest rate; delay COLA to the earlier of age 67 or five years after retirement; increase the retirement age to 67 (phased in over several years); and establish a 30-year closed actuarially required contribution (ARC) funding schedule.

According to the proposal, if employees choose the new plan, their pay increases still will be counted in calculating their pensions, and employees will receive a subsidy for health care in retirement.

If they stick with the old plan, pension calculations would be based on current salary, and they would not be eligible for state payments for retiree healthcare. Currently 90% of retired state employees pay nothing for healthcare coverage, but that also will change drastically, as the General Assembly recently passed a bill allowing the state’s central management services department to charge retirees for health insurance premiums.

The governor’s plan also would phase in the responsibility for paying “normal” (non-employee) costs ofpensions away fromthe state and onto each employer, including school districts, community colleges, and public universities such as UIC.

With time short before the end of this legislative session and changes likely to occur to the state pension system, leaders of Illinois’s public universities are concerned about how the outcome of the governor’s plan will affect their budgets and their ability to retain and recruit talented faculty and staff.

For the past year, leaders of Illinois’s public universities and colleges have been involved actively in Springfield and at their respective campuses to put forth an equitable solution to pension funding. IGPA plan Last month, the University Senates Conference (USC), a faculty elected advisory body to the president of the University of Illinois and the U of I board of trustees consisting of university senators from UIC, the University of Illinois at Urbana-Champaign, and the University of Illinois at Springfield, passed a USC resolution on pension reform.

Many of its principles came from an Institute of Government and Public Affairs (IGPA) February 9, 2012, report authored by Jeffrey R. Brown and Robert F. Rich: Fiscal Sustainability and Retirement Security: A Reform Proposal for the Illinois State Universities Retirement Systems (SURS).

IGPA is a public policy research organization based in all three University of Illinois campus cities. Rich heads the IGPA, and Brown is an IGPA expert on pensions and director of the University of Illinois Center for Business and Public Policy.

On May 3, 2012, the presidents and chancellors of the State’s public universities sent a “Statement of Objectives” to Quinn and the four leaders of the State House and Senate.

The statement reflects the shared opinionthat any changes affecting SURS must provide a credible certainty of retirement security to the state’s public university employees and that any proposal for change must find a fair and equitable way to share the burden of the reform among all the stakeholders: participants, universities, and the State of Illinois.The chancellors and presidents also believe any proposal must respect existing constitutional protection of accrued pension benefits.

According to University of Illinois president Michael J. Hogan and president-designate Robert A. Easter, the university is working with other public universities’ leaders to modify the most troublesome aspects of Quinn’s pension alteration plan.

While Quinn has seen the plan submitted by the IGPA and agrees with certain aspects, he is unlikely to implement the full proposal, whose key points include: *Existing unfunded liabilities must remain the state’s responsibility, and the state must provide credible guarantees that future payments will be made on time.

*The state should continue making contributions to the system at a level at least equal to what it would be paying to Social Security (6.2% of pay) along with its contributions to health care.
*Any transfer of normal costs to universities must be nominal and phased in gradually.
*Any reform must include improvements to the current Tier II program (employees hired January 1, 2011 or after) for new employees.
*The report also suggests the idea of a hybrid plan that combines some elements of a defined benefit (pension) plan and a defined contribution (employee self managed) plan.

According to an IGPA statement released May 14, IGPA pension policy experts agree the governor’s proposed changes do not take advantage of an opportunity for comprehensive reform. Rather than modernizing the pension system, the governor’s plan focuses largely on shifting pension costs to employers and employees, effectively ending the state’s role in funding future retirement benefits for public sector workers. They believe Quinn’s primary goal is to reduce the normal (nonemployee) costs of the public pension system for the state. In fact, the governor’s office estimates Quinn’s plan will save between $65 and $85 billion by 2045.

Rich countered that the governor’s proposal “too narrowly defines the pension issue; he has concentrated on the fiscal side alone. This proposal does not take into account the broader issues associated with compensation for all public employees in Illinois.”

Huge burden, questionable ‘choice’

Requiring employers to take on 100% of the normal costs of their employees’ retirement benefits creates an enormous financial burden. “That’s a substantial amount that we have to factor into our budget,” said Thomas Hardy, executive director for university relations for the University of Illinois.

According to analysis by Avijit Ghosh, special assistant to the president of the University of Illinois, if all normal costs were transferred to the employer, the University of Illinois would have to find $165 million in payroll funds.

As this burden filters down, it would lead to higher tuition, program cuts, loss of faculty and staff, and increased class sizes. “It would have a major impact on the university, making us less competitive nationally and internationally,” said Rich.

Rich believes this represents the worst of all possible worlds.

“The state would require that the university take over the employer contribution while retaining the right to define what the benefit will be and the structure and level of the benefits.”

Illinois university officials also object to the governor’s plan because it presents changes as a “choice” for current public employees. If the reform measures are considered voluntary, the governor may be able to avoid violating the non-impairment clause, a contract between the state and employees that protects employees against “impairment” of pension benefits they have accrued already.

“By persuading employees to choose cuts in benefits in order to keep the health care benefits they will receive in retirement, the governor believes he has found a way to make these reforms ‘voluntary,’” said Brown. “This tactic is really an attempt to circumvent constitutional protections, and it remains to be seen whether the courts would accept this approach.”

“A court will ask if the choice presented to employees is fair and equal,” said Rich. “The proposal at hand penalizes the employee for staying with their current benefits by decreasing their retiree health insurance. The individual is forced to choose between two bad options. This does not seem like a choice at all.”

However, Brown suggested this “choice” option might not have the desired effect. “Why would an individual elect to take a cut in their constitutionally protected pension benefits in order to save their non-protected healthcare benefits, if they believe that the state could still turn around and further reduce those health care benefits or shift the premiums to retirees at any time in the future?”

Kraft, Quinn’s budget director, countered that “The governor has put forth a proposal that would strengthen and stabilize the pension systems due to decades of fiscal mismanagement in our state.

Any proposals that come forth need to do just that, otherwise they are not serious proposals with the goal to repair a broken system. We did talk with the universities, and a lot of their ideas were [used] when the governor put forth his proposal in April.”

Kraft said the governor’s office is working with the General Assembly to draft a bill. “The framework consists of the ideas we put forth. If we don’t do something now, there’s not going to be a pension.”

“If the governor’s plan were to pass, the conversation will not be over,” said Brown. “Moving forward, comprehensive reforms will need to be implemented to create a more fiscally sound system that does not compromise employee retirement security and public employer competitiveness.”

“Everyone in SURS has faithfully made contributions to the system,” said Hardy. “People have planned their careers and lives around expectations of their pension system.

Now Springfield wants to restructure it. People must have the ability to prepare. There must be a way to transition into this new structure,” said Hardy.

For the full IGPA report, go to http://igpa.uillinois.edu/system/files/SURS-Paper.pdf.

Editor’s note: At press time, the Illinois General Assembly still was considering pension bills and had not yet passed any of them. Despite attempts to contact them, no members of the Illinois General Assembly returned calls for this article.