State Pension Update: Comprehensive Reform Proposal Rejected by Senate

March 21, 2013

On March 20, 2013, the Illinois Senate rejected a proposal designed to significantly reduce the State's burdensome pension costs but approved a narrower measure that applies only to active teachers outside of the City of Chicago.

Senate Bill 35 was defeated by a vote of 23 to 30. The bill, sponsored by Senator Daniel Biss, is the Senate version of House Bill 3411, a measure sponsored by Representative Elaine Nekritz and House Minority Leader Tom Cross that was introduced with bipartisan support in February.

SB35/HB3411 applies to employees and retirees in four of the State’s five retirement systems: the Teachers’ Retirement System (TRS), the State Universities Retirement System (SURS), the State Employees’ Retirement System (SERS) and the General Assembly Retirement System (GARS). The Judges’ Retirement System (JRS) is not affected.

After voting down SB35, the Senate passed a revised version of Senate Bill 1, sponsored by Senate President John Cullerton. Unlike the original SB1, which covered the same retirement systems as SB35/HB3411, the revised SB1 applies only to employees in TRS. The revised SB1 was initially rejected by a vote of 29 to 22 (a majority vote by the 59 Senate members is required for passage). Senator Cullerton used a parliamentary maneuver to bring the bill up a second time, and it was eventually approved by a vote of 30 to 22.

The Senate’s action clouded the outlook for comprehensive pension reform, which is widely regarded as the State’s most pressing financial issue. Mainly due to its high annual pension expenses and massive unfunded pension liability, Illinois has the lowest credit rating of any state by Standard & Poor’s and Moody’s Investors Service.

As of June 30, 2012, the State’s five pension funds had a total unfunded liability of $96.8 billion and a combined funded ratio of 39.0%, according to the legislature’s Commission on Government Forecasting and Accountability (COGFA) and based on the market value of assets. The unfunded liability is the accrued liability not covered by assets, and the funded ratio shows the percentage of accrued liabilities covered by assets.

State contributions to the retirement systems are determined by a 50-year funding plan (Public Act 88-0593) that began in FY1996. After a 15-year phase-in period, the law requires the State to contribute a level percentage of payroll sufficient to bring the retirement systems’ funded ratios to 90% by FY2045. The funding plan and subsequently enacted changes deferred a large portion of the required contributions to later years. Total contributions in FY2014, including both general operating funds and other State funds, are expected to be $6.8 billion, up from $2.1 billion in FY2008.

SB35/HB3411 takes a different approach to the legal issues involved in the reduction of pension benefits in Illinois from SB1.The Illinois Constitution states that membership in any public pension or retirement system “shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Supporters of SB35/HB3411 have argued that reduction of pension benefits can be justified in light of the State’s financial problems. Proponents have also argued that the State’s retirement systems are already impaired due to the unsustainable annual cost of the existing funding plan and that SB35/HB3411 would actually save the systems from insolvency. In March 2012, TRS’ Board of Trustees concluded that the fund was imperiled because it could no longer rely on the State to make its required contributions.

As discussed here, SB35/HB3411 was projected to reduce the total unfunded liability by approximately $28 billion and the FY2014 total contribution by roughly $1.9 billion. Total State savings over 30 years were estimated at $159 billion.

The largest savings stemmed from changes in the automatic annual benefit increase. Current retirees and employees hired before January 1, 2011 receive annual compounded increases of 3%. SB35/HB3411 called for applying these annual increases only to the first $25,000 of a pension for those who do not receive Social Security ($20,000 for those who do). That would limit the annual increase to $750 (or $600). In addition, retirees would receive no annual increase until they reach age 67 or five years after they retire.

On March 19, Senator Biss filed an amendment to SB35 that raised the automatic annual increase to $1,000 for those not covered by Social Security and $800 for those who are covered. The impact on total savings is unclear. During the debate on the House floor, Senator Biss said the impact was not significant.

SB35/HB3411 would also phase in higher retirement ages, increase employee contributions and require newly hired teachers outside of Chicago and university employees to enroll in a new hybrid plan, which combines a traditional defined benefit pension with a defined contribution or 401(k)-type plan. The bills include a legally enforceable guarantee that the State would comply with an actuarially determined plan to achieve 100% funding in 30 years.

Before it was revised on March 20, SB1 sought to address the legal issues concerning pension benefits by including two parts: Part A and Part B. Part A was similar to SB35/HB3411. Part B would have taken effect if, as expected by Senator Cullerton, Part A were found to violate the Illinois Constitution. Senator Cullerton believes that a reduction in pension benefits will only survive legal scrutiny if employees and retirees are offered something as contractual consideration for the forgone benefits.

The revised SB1 discards the two-part approach and effectively retains the previous Part B, but only for teachers covered by TRS. Teachers hired before January 1, 2011 would choose between 1) a new benefit plan with lower and delayed automatic annual increases, access to retiree health insurance and pensions based on salary increases or 2) the existing benefit plan with current automatic annual increases but no retiree health insurance and no salary increases factored into pensions. During the floor debate, Senator Cullerton said retirees are not included in the new SB1 because retired teachers were not expected to choose the new benefit plan; unlike most State retirees, retired teachers have been required to pay substantial premiums for their health insurance.

Senator Cullerton said that the new SB1 would reduce the unfunded liability by $4.7 billion. He said that the State could save $18 billion to $44 billion on contributions over 30 years, depending on how many teachers chose the reduced benefit plan.

It is not clear whether Senator Cullerton plans to revive other aspects of SB1 that were eliminated in the revised version. In May 2012, the Senate passed another Cullerton-sponsored bill that applied only to SERS and GARS. That measure has not been considered by the House.

Meanwhile, House Speaker Michael Madigan has held votes on the House floor since late February on a number of separate pension changes, rather than comprehensive reform proposals. Many of the proposed changes, such as a measure to eliminate all automatic annual increases, have been rejected decisively.

On March 14, however, two of the proposed changes were approved by the House. House members voted 101 to 15 in favor of a measure to cap pensionable salaries at the Social Security wage base or current salary level, whichever is higher. COGFA estimated that this change would save $632 million in FY2014. Another change, approved by a vote of 76 to 41, would phase in higher retirement ages for employees under 45.

Representive Nekritz, a chief sponsor of HB3411, acknowledged that it has been difficult to win broad support for comprehensive pension reform. She said the House floor votes were being used to test members’ support for various pension changes.