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By: Mark Glennon*

 

You’ll recall that in 2010 Illinois passed, to widespread, bi-partisan applause, the “Tier 2” pension reforms. Under it, state and local workers starting after that year were put into a second category with far lower benefits.

 

Well, in hearings last week on a new pension reform proposal by Governor Rauner, Rep. Michael Zalewski (D-Chicago), said this:

 

“I think its fair to say members of this this committee have genuine concerns that when we created Tier 2 it wasn’t designed designed in a way to be a genuine benefit that people could rely on to work.” [Video linked here at the 21.10 mark.]

 

The comment is ambiguous in a couple ways, but however you interpret it, it’s troubling, to put it mildly.

 

First, was he saying the committee that passed those reforms knew at the time they wouldn’t work? He voted for the bill. Or was he saying that they know now that the bill was a failure?

 

I’ll give him the benefit of the doubt on that and assume he meant to say the later. His admission was refreshingly candid. I had lunch with Zalewski earlier this year and he seemed like a swell guy who wouldn’t vote for a doomed bill. (I also thought he had no concept of the scope of real pension reform that’s needed.)

 

But here’s the real question, and the answer speaks volumes about how the Illinois political establishment that created our pension crisis works: Should they have known the bill would be a failure? Those Tier 2 reforms indeed resulted in many new problems, which we covered earlier.

 

Yes, absolutely. Here’s why:

 

It was was “bulldozed” through by Michael Madigan and John Cullerton in less than 12 hours, according to none other than Democratic strategist David Ormsby. “Madigan and Cullerton today pulled-off a real doozy. Wow,” wrote Ormsby. Like all pension reform, it was exceptionally complex, and that’s why the bill has resulted in an awful mess, including possible failure to comply with Social Security exemptions, which could trigger new liabilities for all units of government, which we covered in our earlier article. Nobody really understood it, or if they did they didn’t speak up. That includes Republicans who voted for it, of which there were many.

 

Next, exactly what did he mean by saying that Tier 2 is not a genuine benefit recipients can rely on?  It’s definitely less generous than Tier 1, and Tier 2 member are forced to pay additional amounts, beyond contributions for their own benefits, to keep down the unfunded liability (which is owed entirely to Tier 1 members for work already done).

 

But that doesn’t necessarily mean Tier 2 is getting a bad deal. Pensions understate the true cost of projected benefits. They guaranty those benefits, yet calculate their cost using unguarantied, risky return assumptions.

 

Or maybe Zalewski was just trying to say that no money will be there to pay the benefits. If so, he’s certainly right, especially for municipalities like Chicago that have funding levels below 50%. For many pensions, there is simply no money in the system for Tier 2; it will all be consumed by Tier 1 obligations.

 

Zalewski went on to criticize the Rauner administration for granting a special pension perk to the new Illinois school superintendent, who wasn’t satisfied with Tier 2 benefits. Zalewski again is right that the optics on that are horrible and it’s unfair to single out one person for a special benefit. On the other hand, if Tier 2 wasn’t designed in a way people can rely on to work, should we be surprised that somebody asked for and got something more?

 

This is just another example of how our defined benefit pension system is a monstrosity and its history is a scandal.

 

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

 

 

 

 

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