By: Ted Dabrowski and John Klingner
Politicians are once again doing pension reform on the cheap – stuffing piecemeal changes in an unrelated bill with no numbers and no debate.
We’ve written earlier in soft support of the proposal to consolidate downstate and suburban police and fire pension funds for investment purposes only. Despite the caveats we raised, it makes sense to pool the funds of the 650 pension plans in an attempt to increase investment returns and lower transaction fees. Everything else equal, not doing so would be irresponsible.
But the consolidation bill being debated on the floor today isn’t just about consolidation of fund assets. It’s also become a vehicle for changes to pension benefits, with increases for Tier 2 public safety workers. Pensions are the biggest issue that the state faces and lawmakers are about to make significant changes with no debate as to their merits and no public actuarial analysis calculating their cost.
For sure, benefits for Tier 2 workers – those who started work after January 2011 – will at some point have to be fixed. We’ve written about that in the past. It’s a real mess.
But this bill is not the place to do it. If Tier 2 is changed, it should be part of a dedicated pension reform bill that fixes all the funds at once, not snuck in as part of unrelated legislation.
Supporters of the Tier 2 reform in the bill argue that the costs of the increased benefits – estimated at some $70 to $95 million over the first five years – are covered by the expected higher investment returns generated as a result of consolidation.
But higher returns aren’t guaranteed by the bill. Yes, the consolidated funds will be able to take more risks in the stock market – but those greater risks can lead to better returns or bigger losses.
And if this bill becomes a “model” for reforming Tier 2 in other systems, how will the changes be paid for then? Downstate and police and fire funds represent just 4 percent of all the public sector retirement debt Illinoisans are saddled with. There are no similar potential savings to be had from pooling the rest of the state funds. So any additional costs from increasing Tier 2 benefits will have to be paid for by ordinary Illinoisans.
It’s absurd that the state has never released a true analysis of the Tier 2 problem. How badly is Tier 2 in violation of Social Security “safe harbor” laws. When will it be in violation? How many funds and how many workers are affected by it? What kind of subsidy are Tier 2 workers paying for workers in Tier 1? What will the “fixes” to Tier 2 do to the solvency of the funds?
And most importantly, how much will it cost Illinoisans to fix the problem?
None of those questions are addressed in the bill.
The downstate consolidation bill is a perfect example of why Illinois is mired in the nation’s worst pension crisis.
As one official from a major pension fund told us, “It’s immoral that they’re only fixing the Tier 2 in some plans and not the others.”
Immoral, yes. But not surprising.
Read more about Illinois’ pension crisis and the consolidation bill:
- Consolidation of Illinois police and fire pensions: a good idea with limited impact and many risks
- Local pension investment consolidation is sensible but risky
- US stock markets up 200%, yet Illinois pension hole deepens 75%
- Illinois’ financial decay spreads to cities across the state