Illinois’ Tier 2 Pension In Their Own Words

Earlier this month and late last month, I shared the bipartisan history of Illinois’ legacy of pension plan underfunding, as a broad overview as well as looking at specific pension boosts and the comments of the legislators at the time, via the floor debate transcripts. Of course, the story doesn’t end there, and the pension-boosting came to a (temporary) end when the combination of the crash in funded status after the dot-com bust and again after the “Great Recession” paired with the new attention to funded status with new financial reporting standards (GASB 67 and 68) and with the Tea Party’s call for financial restraint (more about this in another article).

In Illinois, this resulted in a Blue Ribbon Pension Commission under Gov. Rod Blagojevich, which issued a report in 2005 with some recommendations which were adopted and others which, well, never saw the light of day. As might be guessed, the changes actually implemented were small scale, but included an anti-spiking measure, a reduction in the guaranteed interest rate used to calculate a minimum pension benefit, and a reduction in the categories of state employees eligible for the more generous alternative formula. This legislation, Public Act 94-0004, also required that any new benefit increase henceforth must be paired with a corresponding funding increase, and must sunset after five years (though recall that this didn’t stop the legislature from increasing benefits for Chicago Firefighters or non-Chicago Police and Fire pensions, both of which involve the state dictating benefits and localities funding them).

In recognition of the small nature of these changes and the very large debts still remaining, the bill also created yet another commission, with no effect, and in subsequent years, still more commissions met. In 2009, the Illinois Pension Modernization Task Force held a series of public meetings, but produced no majority-approved report, only a work product with findings and minority reports.

It is in that context that the Illinois Tier 2 pension system came into being — which avid readers will recall is a new set of benefits for public-sector employees in Illinois hired after January 1, 2011, a set of benefits with changes made that “looked good” to legislators at the time but had no actuarial review, and as a result will sooner or later fail the “safe harbor” test, in which state and local public pensions must provide better benefits than Social Security in order to opt out of the Social Security system. And why didn’t the law have an actuarial review? Because it was created behind closed doors — which makes it all the more worthwhile to repeat the exercise of reading the legislative transcripts of the day it was brought to the floor of the Illinois State House and Senate for a vote.

Here are the details:

This law, Public Act 96-0889, started out as Senate Bill 1946 (SB1946), introduced in February of 2009, as a small change in how pensionable pay is calculated for leaves of absence. It sat, having been referred to the rules committee in December. Then on March 24, 2010, a new amendment was filed which replaced the entirety of the preceding text. Within a single day, sponsors were added and removed and the bill was passed, 92 to 17, with 7 voting present, in the House, and 48 – 6 (3 present) in the Senate, and the bill was signed by the governor shortly thereafter, on April 14th.

In the House, that day began with the invocation, pledge, roll call, welcoming of visitors, some housekeeping items. Its first vote was to allow a nonprofit group which wished to step up, to print brochures on Fetal Alcohol Syndrome for distribution when couples apply for marriage licenses, which caused a bit of confusion and need for clarification that the state’s existing law mandates the distribution of a brochure but various counties can’t afford to purchase the copies to hand out, and while it might be a worthy question as to whether the mandate makes sense, that’s not under discussion. A long series of additional noncontroversial bills (or bills presented as noncontroversial) were likewise passed, a group of student nurses from Harper College and hair braiders from Chicago in the gallery were recognized, and then SB 1946 was brought up for discussion, with then-House Speaker Michael Madigan announcing that amendments 2 and 3 were being withdrawn, and beginning discussion on Amendment 4.

Madigan describes the new legislation’s key provisions, all for new employees only: an increase in the normal retirement age to 67 with 10 years of service, or reduced benefits at age 62; a salary cap growing at 1/2 of CPI; a change in salary averaging from 4 to 8 years; new limits on the alternative/higher formula for high-risk jobs; a shift from compound to simple interest for the COLA, and based on 1/2 the CPI; a prohibition on double-dipping; and a partial contribution holiday and re-amortization of the pension debt for the Chicago Public Schools pensions. In addition, he says, there are separate changes for the General Assembly and Judges’ pensions.

Rep. Tyron objects to the fact that his Amendment 3 had been withdrawn by Madigan. It turns out that the Chicago Teachers’ contribution holiday had been paired with the pension reform, and Tyron’s amendment intended to remove it, but Madigan had quashed that to allow the contribution break to go ahead. Madigan defends the break because of longstanding complaints that the pension system is unfair regarding teachers (long story short: the city of Chicago is responsible for funding its own teachers’ pension and feels they’re being shorted the amount of contributions the state is paying into the pensions for teachers in the rest of the state).

Rep. Roger Eddy (R) supports Tyron in splitting the pension reform from the contribution break. Rep. Stephens objects to the out-of-order rush with which the bill was moved to the Third Reading. Tyron again calls for support from other members to override Madigan’s decision to pair the two items, and receives substantial — but not enough — support when this is put to a vote: by a vote of 70 to 47, the contribution holiday was kept in the bill. Not surprisingly, this was exactly the partisan breakdown (with one missing Republican) at that time.

After that vote, Rep. David Reis (R) has this to say:

“This looks like Washington D.C. Throw out a Bill, take it or leave it, no time to go back home and talk to your constituents, no time to go home and talk about the school districts and the teachers and the state workers that this is going . . . is going to effect [sic]. This Bill was dumped out today as an Amendment. We barely had time to look at it in committee. Teachers are in school all day. What a perfect way to do this. I think it’s shameful . . . . [H]ow can you go home and face your voters and not even had time to discuss this with them, had a town hall meeting, had time to e-mail them, is beyond my comprehension. . . . At a minimum, Mr. Speaker, I think we should postpone this vote until after we’ve had time to know what’s in the Bill, go home and have some town hall meetings [and] so that everybody in this floor actually knows what they’re voting on.”

Eddy raises concerns about the effect the bill would have on retired workers returning to substitute teach, then returns again to the Chicago pension holiday, as does Rep. Dave Winters (R), who points out that the holiday now will been trouble later, then asks:

“What are the total savings, first year-savings, if this Bill comes to fruition?”

And Madigan answers:

“We don’t have actuarial numbers relative to this Amendment. We would say that we would expect that the savings would be over a hundred billion dollars.” (Of course, that’s not first-year savings, and it is not at all clear what time period Madigan was talking about or whether such a round number had any sort of math behind it.)

Whereupon Winters, again, as did Reis, asks for a delay “until we can actually get some actuarial numbers back.”

Rep. Kevin McCarthy (D) responds to this with a long rambling speech which appears to justify the backroom dealings as necessary because stakeholders weren’t willing to make a deal in public — though no one attempts to justify the rushed nature of this final vote.

Rep. Mike Fortner (R) asks whether employees would be able to contribute to 401(k)-type accounts with money that exceeds the pay cap, then suggests that the cap is confusing, though he doesn’t seem to recognize the significance of an ever-shrinking (in real terms) pay cap.

Another member, Rep. Raymond Poe (R) is concerned about whether too many people have been cut out of the higher-benefit pensions.

And after some additional discussion on the details of the anti-double-dipping provisions, the vote is taken, with 92 voting in favor, 17 against.

On the Senate side, it was evening when the bill came up for a vote. Senate President John Cullerton (D) again introduces the bill with a brief description, this time omitting the ever-decreasing pay cap, but pointing as well to the risk of a bond downgrade “if we don’t show that we’re trying to address our structural deficit.” The tone continues to be positive as the other Senators speak, with Senator Murphy’s statement seeming to speak for others, just before the vote was taken:

“To paraphrase Vice President Biden, this is a really big deal. I want to commend the [Illinois Senate] President for his work on this and his courage in carrying this and working with us in a bipartisan fashion.”

So here ends the take of the approval of the Tier 2 pension system, with no actuarial review, no opportunity for anyone but the backroom negotiators to assess the changes before the vote was taken, and the need to take on faith the claim of $100 billion in savings. Is there anything in here that is a surprise? No. Is this sort of legislating unique to Illinois? Also no. But I think there’s still some value in observing our legislators in action.

As always, you’re invited to comment at JaneTheActuary.com!