State Budget Whodunit Raises Doubt About Quick Savings From Pension Overhaul
This story was published with Crain's Chicago Business.
To put it in terms worthy of Sherlock Holmes, the latest mystery surrounding Illinois’ often confounding and razor’s edge budget could be called “The Case of the Missing $500 Million in Pension Savings.”
The clues line up like this:
In February, Gov. Bruce Rauner proposed a state budget that included creation of a 401k style savings plan for newer teachers and public workers that he said would save $500 million in the 2018 fiscal year that began July 1.
In July, the Democratic controlled legislature enacted its own budget over the objections of Rauner that nonetheless incorporated his pension overhaul. The governor quickly attacked that budget as unbalanced, in part because it counted on the very savings that he earlier had estimated would be reaped from the 401k-style initiative, commonly referred to as Tier 3.
Now, administrators at the state pension systems that must operate Tier 3 are scratching their heads over how exactly the $500 million estimate came to be, while also raising doubts that any savings might materialize for close to two years.
“Right now, my operating thesis is that July 1 of 2019 would be the earliest possible effective date (for Tier 3),” said Richard Ingram, executive director of the Teachers’ Retirement System which administers pension funds for hundreds of thousands of current and retired suburban and downstate teachers. “There is absolutely no way we can do it by July 1 of next year."
To recap, if Tier 3 does eventually prove a money saver for Illinois – whatever the amount – it’s unlikely to be this year or even next.
So how did this critical calculation creep into the current budget-making process? That, too, is a bit of a mystery.
Jason Schaumburg, a Rauner spokesman, said savings estimates were developed by the governor’s staff in consultation with the big state-run retirement systems for teachers, public university workers and general state employees.
But officials of some of those pension plans say they have yet to develop savings estimates because details of Tier 3 are still in flux. Meanwhile, legislative Democrats say they lifted their savings number straight from Rauner because it was his plan and they presumed he knew what he was talking about.
“This was adopted at the recommendation of the governor,” said Rep. Greg Harris, the Chicago Democrat who is the party’s chief budget negotiator in the House.
Schaumburg disputed that the Democratic iteration of Tier 3 was ripped whole from the pages of Rauner’s budget plan, contending that there were “some significant changes.” Asked what those changes were, however, the governor’s office did not respond to follow-up queries from the Better Government Association.
Out of all that confusion, one thing is clear. Illinois can’t just flip a switch to start Tier 3, despite what Rauner and the Democrats appeared to suggest through their budget proposals.
At its core, Tier 3 aims to induce a portion of public workers into shifting their retirement benefits away from traditional pension plans and into more portable retirement investment accounts similar to those in vogue in private industry. Instead of browbeating workers into joining, participation would be voluntary and available only to those hired in 2011 or later, a distinct minority of the current public workforce.
Tier 3 beneficiaries would still get a traditional pension, though one smaller than they would otherwise receive. The upside for them would be a separate retirement account that is portable regardless of career track and one that can grow — or shrink — depending on investment choices.
Workers would contribute up to 6.2 percent of their pay toward the pension benefit. However, an additional 4 percent of their pay would also be deducted to help fund an individual retirement account. Employers like local school districts would then kick in a match for the retirement account ranging between 2 percent and 6 percent of pay.
One big plus for financially-pinched Illinois is that the arrangement would also ease the current burden on the state for having to cover the employer share of retirement costs for public school teachers and make it the responsibility of local districts and the property taxpayers that largely support them. The same applies for public university systems.
Ingram, TRS’s executive director, explained that one challenge to get Tier 3 up-and-running is that, as written, the new law requires pension fund administrators to create retirement accounts for each worker that qualifies. Such an action requires approval from the Internal Revenue Service, Ingram said.
He said a workaround would be for lawmakers in their fall veto session to pass additional legislation to authorize pension systems to hire investment firms that already have obtained IRS approval to do the retirement account work. Such legislation, he said, would also need to spell out the mechanics of transitioning existing workers into Tier 3 and how to account for pension benefits they have already accrued.
“We can’t really start serious work until we know exactly what it is that we are implementing,” Ingram said.