By State Rep. Mark Batinick
The state faces many fiscal challenges. None of them are unsolvable. In fact, many of our challenges are interconnected. A failed policy decision in one area often leads to other negative results in another area. For example, skipping pension payments in the past has led to a higher percentage of our current budget being used to “catch up.” It also has contributed to lowering our credit rating which means more money is needed for interest payments on loans. This crowds out funding for basic government operations.
On the flip side, reducing our unfunded pension liabilities would have the opposite effect in the long term. Returning our pension funds to appropriate balances and increasing our credit rating would save the state billions. We have to start taking a series of small steps that have long term benefits and lead to additional savings. My pension reform proposal is a significant step in a positive direction and would have a multiplier effect moving forward.
Legislators attempted to lower pension liabilities with the recent pension reform bill SB1. They achieved savings by reducing benefits. The issue however, was that reducing benefits earned was clearly unconstitutional and the Supreme Court saw it that way. Since then, many have given up on the idea that long term liabilities can be reduced. While this eliminates one possible reform, it does not mean lowering liabilities is impossible. There is a way. Before I delve into that solution, let me explain some basic facts about our pensions:
- Every employee/retiree in a pension plan has a present value of their pension that is based on age, years of service, and salary. It is simply the amount of money necessary to have in the bank today earning interest to cover an individual’s pension costs for the rest of his life. Many of these “present values” are over $1 million.
- Adding up all of these individual values is how we determine the state’s “liability” side of the ledger. The asset side is simply the value of the pension holdings.
- If liabilities are more than assets, the difference between the two is the “unfunded pension liability”.
- The Illinois Supreme Court ruled that diminishing benefits to remove pension liability is unconstitutional. We need a solution that addresses the pension liability problem in a constitutional manner.
Understanding that liabilities cannot be reduced by simply lowering benefits, I searched for a way to offer retirees an optional plan that would be considered an added benefit yet reduce liabilities at the same time. Making the plan optional makes it constitutional. The proposal is simple. The state would offer retirees the following options: 1) Keep your pension the way it is. 2) Choose an accelerated payment for the present value with a small discount to the state (this is where the savings is achieved). Or, 3) a combination of a partial pension annuity with a partial lump sum payment.
A version of this has been done in the private sector. GM, Ford, and Boeing are examples. An example might be that a retiree would be offered to keep a pension of $8,000 per month, take an accelerated lump sum payment of $1.1 million, or do a combination of the two (maybe $4,000/month and a $550,000 lump payment). The lump-sum payment can be rolled into an Individual Retirement Account.
There are many benefits for the retiree. It provides flexibility in retirement planning. For example, two retirees living in the same household might have a significant federal tax bill annually. Rolling some or all of the money into an IRA allows that money to grow tax-free and avoid that. It also allows the retiree to pass some money on to the next generation. You can will a retirement account. You can’t will a pension. It also provides security for pensioners in knowing that if the money is in their account, politicians can no longer attempt to take it.
There are also benefits to the state. The obvious one is that every time someone chooses to take an accelerated payment, our pension liability would be reduced. Also, simply using funds to remove liabilities instead of adding to pension assets reduces future risk. Those bills are “off the books” and the state doesn’t have to worry about having high returns in the market to keep up with the growing liabilities. Finally, the rating agencies should look favorably on the state for offering this. It would help lower borrowing costs in other areas.
My House Resolution 752 urges the House to hold a series of hearings on this concept. All parties should have an opportunity to help craft the final plan. Right now, the state needs ideas and solutions, not political blame games. Hopefully, this can be one of many positive steps the state takes to put us back on the path to fiscal prosperity.