How to Save $5 billion in 2011 in Pension and Health Care Costs.
Ninety-five percent of Illinois workers are not eligible for the gold-plated state pensions and health care benefits available to K-12 teachers, university employees and state employees. So why do the 95% have to pay for retirement benefits for the 5% that are superior to their own? And shouldn’t the 5% pay into the system as least as much for their superior retirement benefits as the 95% pay for their own inferior retirement benefits?
The new Governor should represent the 95% with at least the vigor he represents the 5%. In effect the tail-is-wagging-the-dog because the 5% have a disproportionate influence on politicians and legislation at the direct expense of the 95%.
An Easy $5 BILLION/year in Savings
1. Increase Employee Pension Contributions.
- If private workers have to pay 12% to retire at 65 why do most teachers and university employees only pay 8% to retire at 55?
- Increase public employee retirement contributions to at least the level of private sector employees or 12% (7.65% Social Security plus 4.4% 401K).
- Fellow Midwest industrial state Ohio is in the process of raising the employee contribution rate to 12.5%. If Ohio can do it why can’t Illinois?
NOTE: Most state employees are part of Social Security and pay 4% on top for their pension. I would up that to 6%.
SAVINGS: $700 million/yr, $54 billion over 35 years.
2. Eliminate the Pension Cost Of Living Allowance.
- Reduce the automatic 3% COLA to 0% until budget is balanced then make it CPI or 1.5% whichever is less.
- While Social Security recipients will receive zero COLA for 2009, Illinois has 4 retirees whose 3% COLA will increase their pensions by more than $10,000/yr.
- Many other states are implementing COLA reductions including Ohio, Kentucky, and Rhode Island.
SAVINGS: $180 million per year, $13 billion over 35 years.
3. Sell State Assets.
- If “The Price Is Right” sell state assets including, but not limited to, the Lottery, Toll Way, Thompson Center, and Thomson Correctional Center in Thomson IL.
- The “Right Price” to be determined by disinterested 3rd parties not political hacks like Chicago Mayor Daley had for the Parking Meters Payoff.
- Use the proceeds to pay down the unfunded pension liability.
- As a bonus eliminate state employees, pensions, and a long-term source of corruption.
- Since the state is responsible for the pension shortfall, let the state pay for it rather than the innocent taxpayer.
SAVINGS: $20-30 billion off of the $80 billion unfunded liability saves at least $900 million/yr, $70 billion over 35 years.
4. Consolidate Five Pension Systems Into One.
- Combine all five state pensions into one not necessarily to save money but to increase transparency and ease oversight.
- Pension trustees should be disinterested third parties not members of the group receiving the benefits.
- Get rid of politically connected lawyers and teachers and appoint some accountants and actuaries as trustees.
SAVINGS: $30 million over 5 years but anti-corruptive and a huge increase in transparency.
5. Make High-salary School Districts Pay Their Own Pension Costs.
- Move pension costs to the local school district based upon salary.
- Change it to full contribution for all salaries exceeding Illinois’ median household income, which is about $65,000.
- For example if District 211 wants to pay $150,000 for a Drivers Ed teacher they would pick up the entire State cost for $85,000 ($150,000 – $65,000) or $25,500. This would allow local districts to pay whatever they want to pay as long as they pick up 100% of the excess pension cost.
- If districts are wealthy enough to pay teachers $150,000/yr then they are wealthy enough to pay the pensions too. NOTE: 123 teachers made more than $150,000 in 2009 and 12,438 school employees made more than $100,000.
- This is not a tax increase but a transfer of tax to a group that can and should control the tax amount by controlling the teacher salaries at the local school district. Controlling teacher salaries at the local level is a function unavailable to state taxpayers and therefore they should not be liable for it.
- Under this plan poorer districts such as Cairo District 1 would pay less than they do now thus eliminating the “poor districts shouldn’t be punished” argument.
- Under the current “rob the poor and give it to the rich” pension system, taxpayers in poor districts like Cairo District 1 pay state taxes to fund outrageous pensions in District 211. I am sure progressives would agree that the poor should not pay for benefits for the rich.
SAVINGS: $1.6 billion of 2011’s $5.3 billion pension contribution.
6. Use Cash Buyouts To Lower Pension Obligations.
- Offer “Cash Buyout” on terms advantageous to the state for any member eligible for a future pension not just those at retirement age.
- This could get rid of a lot of deadweight and decrease the trust funds UAAL.
- In most cases these would be employees at the higher end of the pay scale and they would be replaced with less expensive people or better yet not replaced at all.
- Any new employee hire would have pension based upon a new and lower cost pension plan.
SAVINGS: 2,500 buyouts/yr would save about $500 million/yr.
7. Make public employees pay for 50% of their health-care premiums pre and post retirement.
SAVINGS: $1 billion/yr in 2010, $65 billion over next 35 years.
The new Governor must move towards equality of retirement benefits between public and private sectors. In the short term the changes above will tip the scales towards the taxpayer but more needs to be done long term to make retirement benefits for all Illinois citizens to be fair and equal.
How bad is it going to be?
The following chart shows how the public-sector retirement monster grows to 45% of state revenue – an impossibility. How can 5% of the state’s workers consume 45% of the state’s revenue after they are retired and no longer working?
The assumptions are conservative, 3% Revenue Growth and 7.5% Return on pension assets neither of which are guaranteed and indeed are probably too high. Raising taxes will increase revenue temporarily but will limit growth in the future. Illinois is already losing people and business how is increasing taxes going to reverse that?
If we don’t make systemic changes how do we pay for it?
We don’t need politicians to tinker at the edges of this problem – we need them to take a meat cleaver to it. The future tab for pensions and retiree healthcare cannot be paid as currently defined. Pretending we can will bankrupt the state, the pension funds or both.
Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address.