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 Amid the worst pension crisis in the nation, Illinois Gov. J.B.
Pritzker signed a bipartisan measure to improve pension benefits for downstate
police officers and firefighters without ever performing the necessary financial
analysis to estimate the cost.
The enhancements to Tier 2 benefits – for employees hired after 2011 – were part
of a bill to consolidate the state’s roughly 650 public safety pension funds
into one fund for police and another for firefighters.
Supporters justified the changes by pointing to potential violations of a
provision of federal law known as “safe harbor.” The Internal Revenue Code
requires state and local government employees to either receive Social Security
or be part of a retirement system that is at least as generous. Failure to
comply with IRS rules could result in a significant taxpayer cost if local
governments were forced to make retroactive contributions to Social Security, a
concern noted by Pritzker’s task force on pension consolidation, which crafted
the plan.
However, as pointed out by the Civic Federation, lawmakers never definitively
established that a safe harbor violation existed for Tier 2 public safety
workers, nor that the changes in this bill were the minimum necessary to bring
the plans into compliance.
In other words, lawmakers responded to a problem they had not confirmed existed
with changes they had not confirmed would fix the problem, without knowing how
much the changes would cost. Elected officials never sought formal guidance from
the Internal Revenue Service.
The three changes intended to bring Tier 2 benefits in line with safe harbor
restrictions are as follows:
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Expand survivor benefits. A husband or wife of a deceased
police officer or firefighter will now be eligible for two-thirds of the
deceased’s accrued pension benefits, regardless of how long the person
worked before their death. Previously, employees hired after 2011 needed to
work at least 10 years and vest before survivor benefits were available. For
Tier 1 public safety workers hired before 2011, surviving spouses were
already eligible to receive a survivors’ benefit regardless of how many
years of service an employee had.
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Increase pensionable salary cap. Tier 2 employees are
subject to a pensionable salary cap that began at $106,800 and has grown
since 2011 at half of inflation or 3% per year, whichever is less. Salaries
can grow beyond the cap, but the portion that is used to calculate pension
benefits cannot. With the changes in the bill just enacted, the cap would
grow at full inflation instead. A legal memo from the Illinois Municipal
League had pointed to the pensionable salary cap as a particular area of
concern for potential safe harbor violations, because the current salary cap
of roughly $115,000 is less than the Social Security wage base of $132,900.
However, this fact does not definitively establish that prior Tier 2
benefits were in violation of safe harbor rules.
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Increase final average salary. A Tier 2 public safety
employee’s final average salary, which serves as the basis for calculating
monthly and annual pension payments at the end of a career, will now be
based on the highest four out of the last five years rather than the highest
eight of the last 10. The practical effect is that many employees will see a
boost in their initial pension check on retirement, which serves as the
basis for subsequent annual increases.
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No analysis of the benefit increases was performed
by a professional actuary, the specialized financial analysts who
estimate pension costs. While the governor’s task force publicly
stated the enhancements would cost $14 million to $19 million more
per year, this number was not backed up by any public data or
methodology to justify it. Some Republican lawmakers who voted
against the bill raised the lack of a cost estimate during
legislative debates, including state Sen. Jason Barickman,
R-Bloomington.
One concern is that these benefit enhancements were not truly
necessary, but were used as a political bargaining chip to convince
police and fire unions to support the legislation. As Rich Miller
writes in the Chicago Sun-Times, enhancing survivor benefits has
been part of the political agenda for police and fire unions since
long before consolidation became a topic of discussion.
Consolidation of downstate police and fire pension funds made sense
by itself, the Illinois Policy Institute previously stated. By
cutting down on duplicative administrative costs and pooling
investment assets to get better returns – an important source of
income for pension funds – consolidated pension systems are more
efficient.
But consolidation is a small step for a tiny portion of Illinois’
pension problem. Total downstate police and fire pension debt is
only about 5% of Illinois’ total public pension debt. This plan
falls far short of eliminating even the $11 billion of debt held by
these plans.
The task force savings estimates of between $160
million and $288 million annually are almost certainly too
optimistic. These estimates came from comparisons to existing
Illinois pension plans that are more consolidated, but these other
plans also have different benefit formulas. Moreover, because the
existing plans are already better funded, they’re able to diversify
their investments more, enabling higher returns.
Ultimately, the combination of unknown costs for the benefit
increases and uncertain savings from consolidation means taxpayers
should be wary of any potential benefits of this bill. Handing out
increased pension benefits without accounting for or offsetting the
long-term cost is largely how Illinois got into its pension crisis
to begin with.
Pritzker is certainly overselling the benefits, calling the move a
“huge bipartisan step,” which is concerning given Illinois
politicians’ long history of ignoring the root cause of the pension
crisis. Taxpayers must not allow Springfield to pretend they’ve
solved the pension problem.
The only real way to fix the pension crisis once and for all – and
strike a balance between protecting taxpayers, retirees and
vulnerable Illinoisans who rely on government services – is with a
constitutional amendment to allow for structural pension reform.
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