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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Mike

Here are the speakers in the linked video of the pension hearings last week.

The video was edited, so there may have been more speakers from the General Assembly than appear in the video.

Illinois Channel
Hearing on Governor Rauner’s Proposed Pension Plan
Recorded July 15, 2015

Speakers

Michael Mahoney
Office of the Governor
Policy Advisor for Revenue & Pensions

Dennis Murashko
Office of the Governor
Deputy General Counsel

Representative Greg Harris
Democrat
13th District, Chicago

Representative Thomas Morrison
Republican
54th District, Palatine

Representative Michael Zalewski
Democrat
21st District, Chicago

John Cameron
AFSCME Council 31
Political Director

Will Lovett
Illinois Education Association
Lobbyist

Nick Yelverton
Illinois Federation of Teachers

http://www.youtube.com/watch?v=QDb0ra_ruNY&feature=youtu.be
http://www.youtube.com/user/IllinoisChannelTV

Mike

The accrual rate for active workers in the Illinois public sector pensions is the same for Tier I & Tier II?

The COLA was changed, but what about the accrual rate for active workers.

For instance the accrual rate for TRS is 2.2% (.022) for every year worked for Tier I.

It’s the same for Tier II?

Mike
The accrual rates for Tier 1 (Tier I) & Tier 2 (Tier II) are the same for TRS active workers, so presumably the accrual rates are the same for the other pension funds in the Illinois Pension Code. Source Document: EZ Guide to Tier I and Tier II Retirement Under Public Act 96-0889 http://www.trs.illinois.gov/pubs/EZguide.pdf All of the Illinois Pension Funds have generous accrual rates. The contribution rates didn’t change, at least for TRS, presumably for all the pension funds, but maybe not. One thing that did change is the final average salary has a cap, at least for TRS, presumably for all the pension funds, but maybe… Read more »
Mike

From listening to the entire video it seems one of the union’s major concerns with Tier 2, if not the major concern, is the change in the COLA calculation, from 3% compounded, to 3% or 1/2 CPI (whichever is less) simple (non compounded) interest.

One of the union speakers mentioned that Tier 1 COLA since date x has been less than the Social Security COLA.

The union speaker of course picked the date to best represent his point rather than giving a few different examples, and even more importantly fails to mention that Tier I benefits are VASTLY superior overall to Social Security.

Mike
There was not a single law (Public Act aka PA) created for Tier II (Tier 2) benefits. One PA covered most of the pension funds. Another PA covered Downstate Police and Fire. Another PA covered Chicago Police and Fire. And there were a few other PA. The below list may or may not include all the PA for Tier II. A hallmark of Illinois pension legislation and law is ambiguous complexity. +++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Public Act 96-0889 (PA 96-0889), which was Senate Bill 1946 (SB 1946), signed by Pat Quinn April 14, 2010. A good source is to reference, A Report on the Financial State of the IL State… Read more »
Mike
Highlighted here are 4 kick the can, hide and seek sentences from the above text that were included in Tier II pension “reform.” PA 96-0889 allowed the Chicago Board of Education (BOE) to pay “normal cost” – the cost of the pension benefits earned in the current year – for three fiscal years to provide “relief” to the BOE. PA 96-0889 Skipped amortized payments previously required by law. PA 96-0889 Revised Pension Ramp Extended the pension ramp funding schedule by 15 years for the Chicago Teachers’ Pension Fund. PA 96-1497 also required the Boards of Trustees of the State Systems to recertify to the Governor the amount… Read more »
Jim Palermo

Mike, thank you for pointing out the number of new laws that accompanied Tier ll. I didn’t mean to infer with my comments focused on downstate police and fire that there was just one law; apologies to readers who may have been mislead.

Jim Palermo
Without knowing the context of Rep Zalewski’s remarks, it is impossible to know what he meant, but it wouldn’t be surprising if he’s realized Tier 2 is a leaky patch on the various Illinois state and local pension systems. When you consider these factors: 1) Many downstate police and fire plans have more persons receiving a benefit check than are currently working 2) Many plans have annual employer and employee contributions that are exceeded by benefits paid 3) Often the retiree portion of the total pension liability are themselves underfunded, meaning the system has NO money set aside for active workers 4) Tier 2 savings come late… Read more »
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