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By: Mark Glennon*

 

If I offer you an equal trade for something which you are free to accept or reject, have you sacrificed or given anything up? Of course not, yet the notion that you’d have somehow made a big concession is behind the “pension reform” piece of the Illinois budget deal now being discussed.

 

We’re talking about the “consideration” approach to pension reform, which has long been pushed by Illinois Senate President John Cullerton (D-Chicago) and his go-to lawyer on pension matters, Eric Madiar. The idea, differently stated, is for pensioners to give up benefits in exchange for being given something else. It would have to be a fair, equal swap and voluntary to be constitutional, since the Illinois Supreme Court has made very clear that benefits cannot be cut.

 

If it’s not obvious to you that the consideration approach makes no sense, please read why, “by definition” it wouldn’t solve much, explained by the City of Chicago in a sworn court filing in earlier pension litigation:

 

Nor would ‘consideration’ work from an economic standpoint. To give participants (or their legal representatives) an incentive to agree, the value of such consideration would need to be similar to the value of the benefits given up. But this would involve trading one obligation for another and by definition would not solve the problem that neither the fund nor the governmental entity has enough money to pay the benefits promised…. And, even if this ‘consideration’ were constitutional, it is unclear how many participants would accept it and, to the extent they did not, full funding would not be available and the funds would not be saved, to the detriment of all participants. (Pages 19-20.)

 

The Illinois press continues to be suckered into thinking there’s merit in this approach. Whet Moser at Chicago Magazine fell for it again in an article on Monday. The State Journal-Register fawns over the bipartisan progress represented by this approach, opining yesterday that Cullerton is bravely risking alienating his constituents. No. Cullerton’s constituency is public unions and he knows he’s giving up nothing.

 

That’s why you haven’t seen any evidence for the supposed savings that could be had through the consideration approach to pension reform. Proponents assert that up to a $1 billion per year in pension contributions might be saved. Where’s their support for that? Nowhere. They’ve claimed to have some earlier actuarial report on it but it’s never been released.

 

It gets worse. In a lengthy legal piece touting the consideration approach, Madiar says this about the supposed savings: “According to news reports, the Senate President’s proposal is estimated to save the State about $1 billion a year.” But the news report he cites is just an article that says “Cullerton estimates” the approach could save $1 billion (page 13 and note 182)!  Basically, they cite themselves to prove the claim, and wrap it a 38-page, tedious legal analysis to make it look legit.

 

Finally, even if $1 billion would be saved, that wouldn’t help much. The state is now contributing about $8 billion per year to its pensions, which is about to increase by $1 billion next year.  And that’s not nearly enough to begin funding them properly.

 

More details on the phony consideration approach are in our earlier articles linked here and here.

 

Wake up, Illinois. You’re being duped again.

 

*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.

 

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Andrew Szakmary

Actually, Cullerton’s approach calls for workers to choose between having any future raises be excluded from pension calculation formulas, or giving up their 3% AAI in retirement in return for the much lower Tier 2 cola. The option of keeping what you have now is not on the table, which is why the plan would save money if the courts upheld it. Problem is, the courts very likely will not uphold it for precisely that reason.

Jim Palermo
The ‘cash-out’ activity that Bross suggests is what’s put Dallas, TX. in such a critical position. As Wirepoints has noted, the police plan there has experienced a ‘run’ as participants have realized how poorly their plan has done and that their benefits are subject to a cut. It isn’t widely known but many Illinois public safety pension plans don’t have enough money to cover the benefits earned by retirees, let alone active workers. Allowing people to take lump sum distributions would only exacerbate the awful funding positions of these plans, many of which have funded ratios of less than 40%. Why local pension plans, whose boards are… Read more »
nixit

Pension plan boards allow municipalities to deliberately and systematically short fund their plans because then that money can fund compensation increases. No worker wants to hear their salary is frozen or they have to pay more for health benefits because their employer has to properly fund their retirement.

Jim Palermo

I get it. Its the moral hazard created by the Illinois constitutional guarantee that pension benefits can’t be diminished. Plan participants put so much faith the Constitution they don’t have the incentive to insist on adequate funding. And if the beneficiaries have no reason to insist on proper funding, why would tax payers or elected officials?

Bross
I know this may not solve all Illinois problems but why can’t the pension board provide a cash out for people. For example, let’s say someone is 40, worked at teaching for a number of years but gets married or moves to a different State or gets out of the profession. Why can’t the pension board (or who ever that is) say, we’ll give you a cash buyout of $10k or some other figure that is basically what they put in plus some basic savings 2-3% interest. Sure, it may be way under valued, but so what. It will not be of equal value but the person… Read more »
nixit
Actually, a pension earned only in the first half of one’s career can be a money maker for the state. Let’s say you spend the first 15 years of your career as a teacher and then leave. Your pension just sits there for another 15-20 years waiting for you to be retirement eligible, compounding interest along the way. But your don’t get that interest, nor do you get the benefits of inflation. Furthermore, not only are you’re locked into a pension based on a middling salary because you didn’t stick around for the big end of career payday and pension spikes your pension would’ve otherwise been based… Read more »

would be helpful if the press could think critically. but, we know that is not possible. most members of the press are decent wordsmiths. But, they don’t understand what they are writing about. they should have taken dictation and become stenographers.