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Uncertain forecast for pension changes

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May 31.

That’s the final day lawmakers convene for the current legislative session and the date employees at the three University of Illinois campuses will have circled on their calendars to learn what, if any, changes the Illinois General Assembly will make to the state’s massively underfunded pension system.

A panel of experts — Robert Rich, director of the Institute of Government and Public Affairs; economists Darren Lubotsky, David Merriman and J. Fred Giertz; law professor Laurie Reynolds; and Kappy Laing, executive director of the Office of Governmental Relations and the university’s chief lobbyist — provided an overview of a new report on the public pension policy to nearly 800 UIC faculty and staff Tuesday at the UIC Forum.

“We’re not here to here to take positions,” said Rich, who along with Lubotsky, Merriman and Reynolds authored the report, “Public Pension Policy in Illinois: An Introduction to a Crucial Issue.”

"There’s little practical value to talk about who is at fault. We are here to provide you with information on the issue.”

In May 2010, Illinois’s unfunded pension liabilities were officially estimated at more than $79 billion, the worst in the nation. The state’s total new pension obligations were greater than $11.9 billion in fiscal year 2011. Illinois contributed only about $3.7 billion to state pension trust funds in fiscal year 2011 and added more state debt to make this contribution.

Nationally, underfunding of state pension funds totals more than $3 trillion. Illinois faces two important questions, Rich said: How should the state dispose of its accumulated pension liability? And what sort of pension system should the state have moving forward?

Some of the following reforms are being considered:

• switching from a “defined benefit” (usually financed primarily by the employer) to a “defined contribution” (usually financed by the employee) program

• increasing the contributions required of employees

• limiting the total amount of pension for which an employee is eligible

• changing eligibility criteria

• limiting retiree benefits or increasing the costs of the benefits (such as medical benefits) to employees

• limiting increases in direct pension benefits by tying these increases directly to rates of inflation.

According to Reynolds, there is a debate over the legality of legislative reforms to the retirement systems, and it all begins with the state’s pension law, which in part reads: “Membership in any pension or retirement system of the State…shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

“When that language was added to the 1970 constitution, it radically changed the status of government employee pension systems in the State of Illinois,” she said.

There are several different ways the sentence could be interpreted by the Illinois Supreme Court, she said. One scenario is that the Illinois Constitution creates a legally binding obligation between the employee and the pension system itself, but not the State of Illinois. This, Reynolds said, would be the worst case of pensioners.

Another interpretation is that the state could recognize its obligation to its employees under the pension system. A reduction of existing, accrued benefits would be legal, she said.

Reynolds said the most widely held interpretation is the state has no power to change any benefits, formulas for calculating benefits, or to alter any of the terms and conditions of the pension plan that was in effect on the employee’s first day at work.

It’s unknown at the present time how the Illinois Supreme Court would interpret the decision, Reynolds said.

Changes have already been made to the pension program by Illinois lawmakers. The adjustments, which apply to employees hired on or after Jan. 1, include:

• an increase in the retirement age from 60 to 67

• benefits are now based on the eight highest years of pay in the past 10 years, rather than the highest pay in four consecutive years

• cost of living adjustments are calculated using simple interest instead of compound interest

• the earnings based used to calculate benefits is now capped at $106,800

• the cost of living adjustments are limited to 3 percent per year or one-half of the actual inflation rate, whichever is less.

It’s an exaggeration to say all the state’s budget problems have arisen from the state’s pension program, said Giertz.

It’s also an exaggeration to think that the pension system will fail and no one will receive their benefits — that is unlikely to happen, he said.

samhos@uic.edu


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