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The heat was on during the afternoon of July 14 – a sultry summer afternoon outside, and, in the Levy Center’s auditorium constituents of State Senator Daniel Biss again expressed their anger, worry and frustration about the State’s pension mess.
Sen. Biss is a member of a bipartisan conference committee formed after it was apparent that the issue was stalemated in the State legislature; and people on both sides, he said, had become “entrenched.” The committee is supposed to craft legislation that will address the pension crisis and be likely to be approved by both houses of the General Assembly. “Our responsibility is to … come up with something based on a new framework and do it in a way that ‘un-entrenches’ [politicians] and stakeholders on all sides,” he said.
The committee, created last month, has met three times but missed its July 9 deadline to draft a compromise bill. Sen. Biss said he expects the committee to complete its work within the next few weeks.
A Brief History
Sen. Biss traced the pension problem back to the mid-1990s, when then-Governor Jim Edgar created a “pension ramp” that spread over 50 years the state’s mandatory contributions to its public pension funds. The legislators at that time were “intentionally shorting our systems for over a decade,” said Sen. Biss. Thus the mess was “partly caused by deliberate acts of legislators because it was, frankly, more convenient than doing the hard work of paying [the debt] down.”
By 2008, the pension funds were underfunded by “$50 to $60 billion,” said Sen. Biss. The recent financial crisis played a hand in increasing the overall unfunded liability to its present $100 billion. Annual payments on that whopping number constitute “about 20 percent of our spending,” he said. Contributions to the pension fund were $4.8 billion in 2012 and $5.7 billion in 2013 and will be $6.7 billion in fiscal year 2014.
Some estimates peg the unfunded liability at much higher amounts if, for example, a lower rate of return were used in estimating the unfunded liability.
The unfunded liability, together with the annual payments, “left many legislators thinking that something else has to be done,” said Sen. Biss.
Is Change Possible?
Whether the Illinois Constitution permits changes in public pensions – and, if so, to what degree – is being debated in some legal circles and among legislators. “Article 13, Section 5 of the Illinois Constitution states ‘Pensions shall not be diminished,’” said Sen. Biss. In 2010 the legislature created a “second tier” of pensions for those hired after the effective date. The second-tier pensions changed benefits and retirement age, among other things.
Two central questions seem to divide legislators in addressing the pension of persons employed before 2010: “Are pensions untouchable?” and “Does the state have to make all the payments?” The answers so far appear inconclusive or at least not agreed-upon.
In May of this year, the House passed a bill that would reduce the State’s pension liability by raising the retirement age, reducing the cost-of-living increases for retirees and making employees pay more for their pensions. The House bill is estimated to save $187 billion over time.
The Senate passed a bill that gives state employees and retirees a choice. One option is they may give up cost-of-living increases on their pension payments in exchange for keeping health-care coverage. The Senate bill is estimated to save $57.6 billion over time.
The House and Senate have each rejected the other’s approachDuring the afternoon, Sen. Biss described several approaches to that constitutional question. One approach, from a four-person working group convened in 2012, suggested that pensions, but not other perks such as the right to participate in health care programs, are protected.
A second approach is found in a 2012 bill sponsored by Elaine Nekritz of Northbrook and co-sponsored by Mr. Biss when he was a State Representative. That bill was premised on the idea that “pensions are protected by the Constitution, and so are other things such as the right to public education and the right to a clean environment,” he said. The underlying idea seems to hint at something Sen. Biss has been saying for several months: Pensions are on the level of other basic rights guaranteed by the state, and, when cuts must be made, the sacrifice must be shared by as many people as possible. “I’ve come to the view that an appropriate balancing of these rights would help us to offer a balance of services,” he said.
Sen. Biss also described a third approach: “Most encouragingly,” he said, “the Institute of Government and Public Affairs at the University of Illinois [has come up with another study] based crucially on another Constitutional theory: The Constitution protects pensions prospectively and retrospectively but says you can make changes as long as you provide ‘consideration’ – something in exchange.”
The bipartisan conference committee is charged with finding a compromise and an approach that will satisfy constitutional concerns. Presumably, the members will be sifting through these approaches and perhaps others.
Shifting the Burden to School Districts
One idea that has been floated for more than a year is that local school districts rather than the state should be responsible for paying the “normal cost” (e.g., the cost attributable to the current year) of funding pensions of teachers in the Teachers’ Retirement System. Several proposals would shift the normal cost, but not the unfunded liability, to school districts. Sen. Biss has previously indicated that he would support shifting the normal cost to the local school districts. He said on July 14, though, that he would support that measure only if it were phased in, not if the burden were to be shifted to the school districts at once.
During the hour-and-a-half question-and-answer period, most speakers said they did not want their pensions or benefits reduced in any way. Some said they had forgone other, higher-paying jobs and taken jobs with the state so they could have a pension in retirement. Others said they felt their pensions were owed to them because of their years of hard work.
Sen. Biss praised public-sector workers and decried the tendency to “demonize” them and blame them for the pension mess. In trying to work out a compromise, he said, there are “three critical areas: We need to find a way forward for both parties [and resolve the Constitutional issue]. We must be able to say, ‘We’re not going to do this again [the plan must work long-term].’ And we must share the sacrifices as equitably as possible.”