After years of near misses, lawmakers approved major changes in the state’s public pension systems for teachers and most other public employees Dec. 3, State Sen. Sue Rezin (R-Morris) said.
The one-day special session saw hours of near simultaneous debate in the Senate and House as the two chambers took the unusual step of considering a Conference Committee Report. The report had been hashed out through a combination of a bipartisan, bicameral committee over the summer, followed by final negotiations among the top legislative leaders of both parties.
Pension Reform Targets $160 Billion Savings
The Conference Committee Report on Senate Bill 1 makes major changes to the state’s public pension systems in order to save an estimated $160 billion over the next 30 years. It should also result in an immediate savings of $1.2 to $1.5 billion in its first year.
With $100 billion in pension debt, Illinois has the worst funded pension system in the nation and the worst credit rating in the nation. The reform was an attempt to stabilize the systems and help assure that essential state services are not crowded out by unaffordable pension payments.
Additional Pension Change Details
Highlights of the pension changes included in Senate Bill 1 include:
• Fully funds the pension systems by 2044. Provides an additional $1 billion annually from 2020 onward. Allows the state to “prepay its mortgage” by devoting an additional 10% of the annual savings to extra payments. The cost savings are projections from a private consultant. The major credit rating agencies have indicated they will do their own analysis to verify the savings.
• Grants employees a 1% reduction in out-of-pocket employee contributions. This was designed to allow for a legal argument that employees were receiving additional benefits or “consideration” for reducing other benefits, such as their 3% annual cost of living hikes.
• Offers a guarantee that the State will meet its obligations to make its full pension payments by allowing the pension systems to file suit if the state does not make those payments. However, critics argued that the guarantee is weak because the General Assembly would have the power to change the funding formula that drives the payments.
• Reduces, but does not eliminate cost of living increases. Pension benefits will still grow. Targets these revisions so that those who have worked the longest and have the most modest pensions will receive the most protection. For employees not covered by Social Security (most teachers and university employees) the cost of living increase would be based on a portion of the employee’s salary equal to $1,000 for each year of service. For employees covered by Social Security (most state employees) it would be $800 for each year of service. The base amounts used to calculate the COLA would increase each year by the amount of inflation and would compound. The actual COLA would be 3% of that base amount.
For example, a teacher with 30 years of service who retired with at $25,000 pension will see a decrease of $137 in the cumulative COLA over a total of 10 years. A teacher who retires with 30 years experience with a pensionable salary of $53,000 will see a 3% decrease in the COLA over 15 years. A teacher who retires with 30 years of service with a pensionable salary of $75,000 will see an 8.7% decrease in the COLA over 15 years. Instead of receiving cumulative benefits of $958,000 over 15 years, they will receive $874,706 over 15 years. The change in the COLA formula is based on years of service and the pension that is currently received or promised in a current contract.
• Creates an optional defined-contribution (401k) plan, which employees can choose to participate in. Employees would pay their regular pension contribution into the plan and the state would match that with an amount to be calculated by the individual retirement systems. No more than 5% of the employees in each retirement system could participate in the defined-contribution plan.
• Includes caps on pensionable salary that applies only those earning at least six figures. Cap applies to pensionable salaries above $110,000 and allows for the cap to grow at half the rate of inflation. Everyone whose salary currently exceeds this amount or will exceed this amount after their contract has been fulfilled will be grandfathered in.
• Retirement age will not change for employees 46 or older. Younger employees will see staggered increases depending on their age. For example, those 40 years old would be able to retire as early as age 62, while those aged 31 would be expected to work until they are 65.
• Addresses past abuses in which persons were allowed to participate in the public employee system even though they were not public employees. This addresses a problem where highly-paid union bosses left their jobs to work full-time for the union, but were allowed to accumulate taxpayer-paid public pension credits.
• Removes pension benefits from collective bargaining. This would mean that a Governor could not offer higher benefits to unions as part of contract negotiations.
Vote Splits Parties
It was one of the most controversial and divisive issues to come before lawmakers in years, with support split down the middle in both parties. Sen. Rezin supported the measure.
“This was not an easy vote for anyone,” Sen. Rezin said. “We have been struggling with this issue for over three years now. There have been numerous legislative scenarios with no final agreement. Every day that went by without a resolution resulted in another day that teachers and other public employee retirement was at risk. I took the difficult vote to move this process forward in an effort to bring some fiscal stability and solvency to the state retirement systems.”
Opponents criticized the measure from both sides, with some arguing it went too far and required public employees who have paid their contributions to the systems to now make up for the state’s failure to meet its obligations. Others argued the reforms did not go far enough, suggesting the system of granting employees specifically defined benefits should be scrapped in favor of a system that would provide a defined contribution to individual workers’ retirement accounts.
The measure’s savings projections and constitutionality were also questioned. Public employee unions announced just a day after the bill had passed that they would take the measure to court once the Governor signs it.
Supporters acknowledged that it would be challenged in court, but argued that the measure had been crafted to increase the odds that it would win court approval. They also said it was important to pass the changes so that the state’s Supreme Court could decide the issue and offer the legislature additional guidance if the changes are ultimately ruled unconstitutional.
Sen. Rezin said she actually welcomes that challenge because of the need to resolve this once and for all.
“The only way to move forward is to have the courts rule on what is, or what is not, constitutional since it is blatantly clear that the General Assembly has as many opinions on this issue as there are members. Those opinions are highly unlikely to change” she said. “I realize that this is difficult for many people and I truly sympathize with that, however I believe that it is in the best interest of the future of all Illinois retirees and the future of the State of Illinois to get a proposal before the courts for a final ruling on what the General Assembly may or may not do to reform our pension systems.”
She said she supported the Conference Committee’s Senate Bill 1 report that was before the Senate and House because she wants this issue resolved for the state, the retirees, and the taxpayers.
“I find it unacceptable that people have been living in uncertainty for over three years,” Sen. Rezin said. “A resolution was long overdue.”
Quinn Absent from Negotiations
Governor Quinn was quick to pledge to sign the measure, even taking credit for the plan despite the fact that he had played virtually no role in negotiating the agreement and even refused to appear before the Conference Committee charged with developing the basic outline for changes. The final details were worked out among the four legislative leaders – the House Speaker, the Senate President and the Senate and House Republican Leaders – without the Governor.
Busy One Day Session
The one-day special session also saw the Senate take up several other important measures, including two incentive packages designed to either retain or lure companies to Illinois.
These included tax credits for multinational agricultural product processor Archer Daniels Midland (ADM), which has announced it is moving its headquarters out of downstate Decatur. Under House Bill 2536, the company will receive tax credits if it keeps its headquarters in Illinois but also creates new jobs in Decatur.
The company must maintain 200 full-time employees at its new corporate headquarters, relocate 100 employees into Decatur from somewhere outside of Illinois within five years, hire at least 100 new employees every year for five years at the Decatur location, and must establish an internal committee for five years that promotes jobs in Decatur. The bill passed the Senate and must now win House approval.
Other Business Incentives
Another bill, House Bill 3271, would create a specific EDGE (Economic Development for a Growing Economy) tax credit for Univar Co., which is considering relocating its corporate headquarters from the state of Washington to Downers Grove.
The measure also contains incentives designed to convince the recently merged Office Max and Office Depot to locate their combined headquarters in Illinois. Office Max is headquartered in Naperville, but Office Depot is Florida-based, and the two states are competing to land the combined headquarters. Like the ADM package, HB 3271 won Senate approval and is now in the House.
Concealed Carry Trailer, other measures
Approved and sent to the Governor during the special one-day session were several technical corrections to the state’s new concealed carry law contained in Senate Bill 114. For example, it clarifies how fingerprint information will be provided to the Concealed Carry Licensing Review Board, so that the procedure is consistent with federal law.
A measure related to the pension changes in SB1 was Senate Bill 1961 which allows only the Attorney General to represent the Teachers Retirement System and the State Universities Retirement System in litigation. This removes the option of the systems’ boards to hire their own outside counsel for litigation. This was designed as a cost-saving measure and also to assure that if pension changes are challenged in court, the state will have a consistent and coordinated defense provided by the Attorney General. It also has been approved by both the Senate and House.
Lawmakers also authorized (SB 1955) the transfer of $5.9 million from the state’s General Revenue Fund to the Illinois Emergency Management Agency (IEMA) for disaster relief to meet the state’s cost-sharing obligations under federal requirements.