May 09, 2013
A union-backed pension reform proposal sponsored by Senate President John Cullerton was passed by the Senate on May 9, 2013 by a vote of 40 to 16.
Senate President Cullerton believes that Senate Bill 2404 is a less risky option for the State than legislation discussed here, which was approved by the House on May 2. The Senate President is convinced that the House bill, sponsored by House Speaker Michael Madigan, will be found to violate the Illinois Constitution, while SB2404 will withstand legal challenges.
However, SB2404 is expected to save the State far less than Speaker Madigan’s legislation. Senate President Cullerton has said he expects his bill to reduce the State’s unfunded pension liability by between $8.5 billion and $15.7 billion and lower State pension contributions by between $45 billion and $51 billion through FY2045. The Senate President said SB2404 would results in State savings of $850 million on pension contributions and $150 million to $200 million on retiree health insurance in FY2015.
Actuarial reviews of the financial impact of the two bills have not been made available. However, the House Speaker bill, Senate Bill 1 as amended in the House, is similar to a bill discussed here that was analyzed by actuaries in late 2012. The actuarial reviews indicated that the proposals would reduce the total unfunded liability by approximately $28 billion and lower State pension contributions by about $159 billion through FY2045. Speaker Madigan indicated during the House debate on May 2 that his bill would reduce State contributions in FY2015 by about $1.5 billion from FY2014.
Senate President Cullerton’s proposal is based on a theory that reducing pension benefits will only comply with the Illinois Constitution if employees and retirees are given something of value in exchange. The Illinois Constitution provides that membership in any pension system in the State is an enforceable contractual relationship and that member benefits “shall not be diminished or impaired.”
Speaker Madigan’s plan is based on the idea that the constitutional language is not absolute and that the contract with employees and retirees will be found to be subject to revision in light of the State’s financial crisis. The preamble to the House Speaker’s bill states that cutting pension benefits is necessary because of the State’s dire fiscal condition and lack of other feasible options.
The State’s retirement systems had an unfunded liability of $96.8 billion and a combined funded ratio of 39.0% as of June 30, 2012, based on the market value of assets. State contributions are determined by a 50-year pension funding plan that began in FY1996 and deferred costs to later years. Largely as a result of this funding plan, annual pension expenses paid from the State’s general operating funds are expected to consume 24.5% of State-source general operating revenues in FY2014. Total expenses include $6.0 billion in statutorily required pension contributions and $1.7 billion in payments on pension bonds.
The Senate President has said that he developed his proposal based on discussions with the We Are One coalition of public employee unions. The group has strongly opposed other comprehensive plans, including Speaker Madigan’s, and pledged to sue the State if they were enacted.
Senate President Cullerton’s proposal covers four of the State’s five retirement systems (the Judges’ Retirement System is not included) and includes a funding guarantee by the State. The State’s existing funding schedule, which requires 90% funding by FY2045, would remain in place under the bill.
Retirees and employees hired before January 1, 2011 would be offered the following choices, centered on reducing or temporarily forgoing the existing compounded automatic annual 3% increase in benefits:
Retirees
Choice A:
Keep existing 3% compounded automatic annual benefit with staggered two-year freeze. Receive access to retiree health insurance.
Choice B:
No change to existing 3% compounded automatic annual benefit increase. No access to retiree health insurance.
Employees
Choice A:
Annual automatic increase is reduced to 3% simple with a two-year delay. Receive access to retiree health insurance. All future salary increases are credited toward pensions.
Choice B:
Option 1: No change to existing 3% compounded automatic annual benefit increase. No access to retiree health insurance and no pension credit for future salary increases.
Option 2: No change to existing 3% compounded automatic annual benefit increase. Receive access to retiree health insurance and pension credit for future salary increases. Three-year delay in automatic annual adjustment and two percentage point increase in employee contributions phased in over two years.
Senate President Cullerton has said that one of the major advantages of his proposal is that unions would not challenge it in court. However, an organization of retired teachers recently said it would sue the State if either the plan sponsored by the House Speaker or the Senate President were enacted.