Illinois recently passed pension reform legislation with a number of complex provisions (read the full bill here). It will add new funding streams to the state’s woefully under-funded pension plans, limit pension “spiking” whereby employees cash out vacation and sick leave to artificially inflate their benefits, raise the retirement age for current workers, limit annual cost-of-living adjustments, and allow a limited number of employees to choose a defined contribution plan over the traditional defined benefit. Union leaders have called the bill “pension theft” and are already planning to sue to prevent the bill from taking effect.
To better understand the legislation and the issues around it, I spoke with Illinois State Senator Daniel Biss. A former mathematics professor, Biss represented the 17th District in the Illinois House of Representatives from 2011 to 2013 before his election to the state Senate. As a Senator, Biss served as co-chair of a bipartisan working group exploring solutions to the state's pension crisis and co-sponsored the final legislation. The following interview has been edited for clarity and length.
Chad Aldeman: First, can you say why you are interested in pension reform, and what made this bill important?
Daniel Biss: I’m interested in pension reform because the first two years of my service in the Illinois General Assembly were years that followed a very significant tax increase and yet saw extremely deep cuts in discretionary spending to areas of public service that I cared deeply about, the reasons that I entered public service in the first place.
The size of our pension payments was so large that if we tried to address our budget problems without looking at pensions, we would be signing ourselves up for deep and never-ending impacts on the rest of state government. I just couldn’t get to a place where that seemed acceptable. I sought out changes to the pension system that ultimately strengthened and preserved it for those who rely on it the most.
This bill makes significant changes to the pension system in a way that seeks to do three very important things. The first is to achieve significant budgetary savings. After this legislation, our state payments over the next 30 years will be $160 billion dollars lower. Number two, this bill achieves those savings in a way that is consistent with my policy priorities, namely sheltering those with the smallest pensions and those who are most reliant on their pensions, as well as those who have served the longest. Number three, for the first time in history, Illinois will be making its actuarially required payments in keeping with national actuarial standards. Not only do we get on an actuarial payment schedule, we put in place protections to ensure that we stay on that schedule going forward.
Aldeman: The bill lays out a path to full funding by making the actuarially required payments immediately and beginning a separate stream of payments to pay down the existing liability starting in 2019. Can you say more about this plan and what was the rationale for this timeline?
Biss: There are 3 different streams of money that the bill directs to the pension system. The first is just the regular actuarially required payments. That’s calculated independent of the next stream. Over and above that, 10% of the annual savings from the policy changes built into this bill will go back into the pension system. The third piece of the funding is, again, over and above the first two streams, is a set of additional payments that begin in 2019 and expand in 2020. In the past, Illinois has borrowed money to pay its pension obligations through a series of bonds. Some of those bonds expire in 2019 and 2020. That means the state’s debt service will reduce in those years. Instead, that so-called “found money” will also go back into the pension system.
We want to make sure that, as money becomes available in the coming decade, that we don’t find ourselves back in this awful situation again.
Aldeman: Am I reading correctly that the changes apply to legislators? Was that a complicating factor in the negotiations?
Biss: It is true. Whatever the bill does for other pension systems—for state employees, teachers, and state university employees—the bill either replicates the same policy for legislators or asks more of them.
I don’t know if that was a concern for some people or if there were resentments. Nobody ever mentioned anything. Very few of us were prepared to do something like this to teachers, state workers, and university employees unless we were prepared to do it to ourselves as well.
As an example, in 2010, Illinois created a new “Tier 2” of benefits for employees hired after January 1, 2011. It’s a relatively stingy plan. This bill didn’t change anything for those workers at all. The only exception is that the bill did have a cut for Tier 2 legislators. I just couldn’t look myself in the mirror and sponsor a bill that left me off the hook.
Aldeman: One component of the bill is a gradual increase in the retirement age for current employees. For example, if an employee is 46 years or older as of June 1, 2014, they face no change, but if they’re between 45 and 46, their retirement age will increase by 4 months. The law creates tiers like this, adding four months to the retirement age a year until the employee is less than 32. Anyone 32 or younger would have their retirement age increased by 60 months (5 years). What was the rationale for creating this tiered system?
Biss: This is probably one of the parts of the bill that feels the fairest to some people. If you’re close to retirement, moving the retirement age is a lot to ask. If someone is 59 and planning to retire at 60, changing their retirement age is changing their life in a really extreme way. On the other hand, telling someone who’s younger, say 40, just doesn’t seem as much to ask, particularly in a climate where other workers in the private sector are retiring later.
I have always felt you need to protect those close to retirement. In a bill I introduced a year ago, we had somewhat crude bands. Those bands were larger than what emerged in the final bill. The bigger bands worked ok, but they unfairly penalized people depending on when their birthday fell in relationship to the bands.
The Senate Republicans came up with the idea we compromised on. It may be difficult to write it out, but it’s phased in smoothly and doesn’t make someone say, “I can’t believe I was born only two days late.” It’s less capricious and arbitrary.
We wanted to phase it in over a reasonable time period while sheltering those who are close to retirement. However, part of the challenge for a place like Illinois, because we have so much debt, is that an unbelievably large portion of our liability is associated with workers and retirees who are over the age of 60. In other words, the vast majority of our unfunded liability is to retirees. What this means is that changing the retirement age just can’t move the needle significantly enough on the cost side.
We were asked, “How can you possibly touch retirees?” but once you realize that two-thirds of our liability is associated with people over the age of 60, it doesn’t seem plausible to make a significant fiscal change while leaving retirees untouched.
Aldeman: There’s been quite a bit of questioning about the legality of the changes. Article XIII, Section 5 of the Illinois State Constitution says, “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency of instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” The last part, “shall not be diminished or impaired” has been seized on as prohibiting changes like what’s in this bill. Can you explain the counter argument for why these changes are legal?
Biss: There are a number of different arguments. I would lay out two here.
First, there is consideration given to the class of affected individuals in this bill. It is consideration to the class rather than an opportunity for each individual to renegotiate their contract. For those still working, their annual contributions will be reduced by 1%. For the entire class, there is a significant new right in the form of additional funding. The Supreme Court has said the Constitution has protected the right to a benefit, but we're also creating a new right to fund the benefit properly and therefore guarantee its fiscal health and stability. We’re not only going to an actuarially funding schedule, we’re going above and beyond that. All of this is money going to the retirement system and therefore to the employees.
The second argument is simply one of balancing priorities. The Constitution does include Article XIII, Section 5. But it’s a long constitution and it includes other things too, such as a free public education and health and welfare and safety. It’s very clear that we’ve had to cut spending on things like public education in a way and to an extent that imperils the quality of our services.
My expectation would be that the courts decline to rule narrowly but will recognize that this was an attempt to balance between different priorities, all of which are important, some of which are statutorily and others which are constitutionally protected. Though it was a difficult and painful struggle internally, I felt like the public harm from doing nothing at all was unacceptable to the people of Illinois. I hope the courts will weigh that seriously and carefully as they make a determination.
Aldeman: The bill includes an optional defined contribution (DC) plan where individual employees can invest their own and their employer’s contributions into a portable savings account. However, the bill caps eligibility at 5% of employees and doesn’t apply to new employees? What was the rationale for the cap and why not allow new employees to join?
Biss: Regarding new employees, the champions of this provision were insistent that it be cost-neutral. Because the package of benefits offered to new employees after 2011 was so poor, it was impossible for it to be cost-neutral if offered to new employees.
Regarding the cap, I would make two points. Number one, there is some anxiety that if you chase a lot of people out of the system and significantly slow the flow of incoming employee contributions, you would de-stabilize the system. If we went to a full DC system, we’d shut off all contributions and potentially destabilize the system, the precise opposite of what we were seeking to do.
There’s also a broader point to make. If you don’t think the classic Final Average Salary Defined Benefit plans are the way to go, there are a lot of better options than throwing everyone into a 401k. I sympathize with the desire to make larger structural reforms, but for those of us who have a strong interest in thinking carefully and rationally about the structure of benefits, this seemed like more of a political down-payment to some members who have an ideological attachment to DC plans more than it was a carefully designed solution to a real problem.
Aldeman: You’re a Democrat in a Democratic state. You just helped author a bill that will reduce pension payments to government workers like teachers, state employees, and state university employees. Labor groups sponsored a call-in campaign lobbying legislators against “pension theft.” What does this say about the politics of pension reform?
Biss: First of all, we in the Democratic party, especially those of us who identify as progressives, have a strong attachment to our friends in organized labor and a strong preference for being on the same side as them on issues when it makes policy sense. The fact that you saw this bill pass with such robust bipartisan support is an indication of how broadly shared the view was that this was a necessary step if we were going to achieve the kind of fiscal balance that allowed us to spend dollars in the places we want to spend. Some of that is a pure policy judgment—that we need to do this to provide budget relief—and some of this was a procedural point about showing the public that we’ll take necessary actions on the spending side of the ledger in order to make compelling arguments on the revenue side. A lot of Democrats came to the conclusion that this was an important thing to do for our state.
The public was very conflicted and was not particularly enthusiastic about any of the options. In that environment, compromise is politically attractive. Showing the public that you can find a way to bridge differences, even if they don’t love everything that comes out of it, is a way to build the public’s trust. You saw what can only be described as an embarrassing spectacle of three out of the four Republication candidates for governors to finding ways to oppose the bill. They did not want to see the General Assembly and the Governor find legislative success. One of the four candidates, to his credit, stood up and said it was the right thing to do and he voted for it. Many other votes were based on partisan reasons.
Aldeman: Illinois has now passed pension reform bills in 2010 and 2013. Are you done for the foreseeable future, or are there issues that you’d still like to see resolved?
Biss: The immediate answer is that the state of Illinois has, I believe, 628 pension plans. The bill we passed last month made significant changes for 4 of them. Of the 628 funds, five are paid for by the state—one each for state employees, legislators, teachers, state university employees, and judges. Judges were excluded from this bill, but that that still leaves 623 pension systems, including five where the city of Chicago is the employer. There are more than 600 small pension plans, mostly for municipal police and fire officials.
The city of Chicago is about to go over a cliff, a pension cliff. That cliff is not going to be pretty. There’s an extremely strong interest in making steps on the Chicago and Cook County pension plans. The other ones are in varying shape. Some are 20% funded and some are 80% funded. That variance brings in delicate, difficult issues that need to be addressed.
Looking further on, I mentioned earlier that the benefits for new employees under “Tier 2” are not very generous. What I didn’t mention is that it may be in violation of federal law for being so exceptionally stingy. Finally, we have this wacky system of misplaced responsibilities where school districts outside the city of Chicago negotiate contacts that impact teacher pensions but then the fiscal responsibilities fall on the state. The issue of structure has also gone largely unaddressed.
In short, there is plenty left to do.