From the archive:
B. ALLOWABLE PENSION BUDGET ADJUSTMENTS – State and University:
Once a “Total Compensation” value is arrived at adjustments could be made by the managers annually to fit their budget needs.
Currently state pension costs are about 33.3% of payroll (including interest on pension bonds) and change every year according to multiple assumptions used by state actuaries. Health care costs are about 20% of payroll.
As an example lets use a department with a $10 million budget in 2010 with a $6 million payroll. The budget for 2012 would be $12.1 million because the state would kick in $900,000 (15% of payroll) for the state’s share of pensions. It would also provide the health insurance cost of $1.2 million (20% of payroll). That leaves 18% of payroll or $1.1 million for the department’s share of pension costs that the department must come up with out of its budget of $12.1 million. In effect the manager must squeeze 9% out of his budget to pay for pensions.
Here are some cuts that can go towards the 9% (all %’s approximate):
- One day a month furlough – 2%
- Health Savings Accounts instead of the state insurance plan – 4%
- Change maximum vacation days to 3 weeks from 5 weeks – 1%
- Sick day accrual 10 days to 5 days – 1%
- Layoff 4% of employees – 3%
- Lower final pension by 5% – 2%
- Allow employees with needed skill sets to work as sub-contractors at a rate lower than their total compensation. College faculty and administrators would excellent recruits for this type of privatization. They would then be responsible for their own pensions and fringe benefits. See “If It’s in the Yellow Pages Privatize It” below. Savings variable.
As mentioned before K-12 are independent of the state and must determine their own cuts but all of the above apply to them also.
Note that in the above example if employees agreed to take 8% less in pensions no layoffs would need to be made. Since the current pensions are 3 to 10 times better than Social Security this might be an agreement all employees could agree on. In fact state employees, who have Social Security and the best dollar for dollar pension plan in the state, could cut their pensions and still retire with take home pay greater or equal to their final working take home.
(Argument for: One, state employees have a pension system far superior to anything in the private sector and therefore they should pay more for it; secondly taxpayers MUST have a limited liability.)
C. CHANGE IN PENSION RULES THAT COULD LESSEN CUTS:
- Increase employee pension contributions by 4% (2% for those on Social Security). This would be the equivalent of lowering the pension Interest Rate of Return to 6% from 8%; which is more realistic (recalculate the Normal Cost.)
- Eliminate all “Spiking” by restricting final years salary increase (auto 6%/yr increase for 4 years for teachers for example). Salary increases limited to cost of living last 4 years and only base salary can be used for pension calculations.
- Use last 8 years salaries for average not last four or last one as in the case of legislators and Illinois State Police.
- Reverse all benefit enhancements since 1998 including Early Retirement Option for teachers and sick leave accrual used for pension credit.
- Tax state pensions over $50,000 and earmark money for pension payments.
- Revert COLA to 1970 pension rules: 1.5% not compounded and earmark money for pension payments.
- Pay off pension bonds thus eliminating interest costs.
(Argument for: this eliminates many “gimmicks” that have been added just to enhance what was already an outstanding pension plan. These are items that are especially irksome to taxpayers.)
D. EMPLOYEE REFORM ENHANCEMENTS:
1. Sell State Assets and use the money to pay off pension bonds. Anything left would be added to pension assets.
… Tollway
… Lotto
… Real estate including but not limited to: buildings, Thompson Correctional, parks
… Oil/ gas leasing rights to the New Albany shale gas fields covering most of eastern IL.
2. Allow employees at anytime to take their contributions with interest actually earned plus state’s 15% contribution without interest and leave the system. Actuarial adjustment to pensions would be required for this option to be implemented.
3. Allow employees to adjust their compensation according to their needs as long as the total cost remains the same. For example they could reduce pension and increase insurance coverage or cut vacations and increase salary.
(Argument for: providing enhancements for employees would help sell the plan. If the cost to the state is neutral why not do it? The goal is to reduce state pension costs to manageable levels, end economic uncertainty and avoid long, drawn out legal action.)
Up next: Part 3.
Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address.
This article originally posted on March 3rd of this year.
