Illinois Taxpayers Have No Obligation to Make Public Employees Millionaires

Gold-plated Retirement Benefits Should Be Paid for by Beneficiaries Not Taxpayers.

Governor Quinn recently suggested defusing the unfunded state employee retirement debt time bomb by raising the employee’s contribution by 2%. That’s like trying to raise the level of Lake Michigan by throwing a penny into it

I have a better idea – raise their contribution by 8% and cut the debt by $50 billion or, better yet, just give every retiree a million dollars when they retire and – poof – the entire debt is gone.

The Problem Is Pensions AND Retiree Health Care.

Most people have become aware of the outrageous pensions available to many public employees (see Top 100 here) but few are aware of the retirement health care provided by the state aka the taxpayer. The unfunded balance on health care alone is $40 billion and mounting. That’s on top of the $70 billion unfunded pension liability

Since taxpayers are being asked to pay $110 billion unfunded liability for state employees’ retirement (see unfunded liability here) it is time to ask the beneficiaries of these gold-plated plans to pay more. Currently more than 73,000 of them pay zero for pension and retirement health care. Obviously that has to change.

State Retiree Health Care Much Better Than Medicare.

Here’s the description straight from the State University Retirement System:

“The State provides health, dental, vision, and life insurance benefits for retirees and their dependents … annuitants with twenty or more years of credited service do not have to contribute toward health, dental, and vision benefits. Annuitants also receive life insurance coverage equal to the annual salary of the last day of employment until age 60, at which time the benefit becomes $5,000.”

Keep in mind that SURS employees pay zero into their pension and health care funds. Taxpayers pick up 100% of the cost.

So state retirees not only receive free health care but also free dental and vision care. And not just for themselves but for their dependents too. Those retired couples on Medicare who are paying a total of between $500 and $600/mo (Medicare + Medigap) for care that is inferior to the free care provided to state retirees should be up in arms. Once again we have an example of superior benefits for public employees compared to private sector employees.

So how much does this health care largesse cost? Well, it is hard to tell exactly since the state has not provided any health care details as required by GASB (Government Accounting Standards Board) Statement 43 and no data at all since 2007. However, the Chicago schools have similar program and they estimate their cost at 12% of payroll. So we use that for our calculations.

Taxpayers Pay The Lions Share of State Retiree Pensions and Health Care.
The breakdown for the $110 billion unfunded liability is as follows as percentage of payroll paid by employee and employer (we the taxpayers):

Taxpayer Pays              Employee Pays

Teachers Retirement                              39%                               8%

State University Retirement                 52%                               ZERO %

State Employees Retirement               43% (average)              4-11.5% (6% average)

So for a public employee making $100,000 salary, taxpayers are paying an additional $39,000 to $52,000/yr in retirement benefits. In the private sector the corresponding amount would be $12-14,000. This is why public employees retire millionaires and taxpayers retire paupers. Paupers because of the taxes they have to pay to support the millionaires.

The Plan to Help the Taxpayers of Illinois.

To partially offset this unfair taxpayer burden, the employee contribution for state pensions should be increased by 5%. This will reduce the $70 billion unfunded portion by $20 billion without raising the state income tax, bringing unfunded portion down to $50 billion. In addition, state employees should be required to pay at least 3% of their payroll for retirement health benefits and at least $250/mo after retirement.

Under current law they pay nothing for either and receive health, dental, vision and life insurance for them selves and their dependents at no cost after retirement. This very reasonable requirement would save another $30 billion. Note that $250/mo for retiree health care is less than most Medicare recipients pay for much inferior coverage. Also note that currently teachers pay .8% into their retirement health care plan while other state employees pay zero.

Even after this plan was implemented taxpayers would still be paying about twice as much as the employee for K-12 teachers (31% vs. 16%)), three times as much for State employees (37% vs 12%) and 5 times as much for university employees (44% vs 8%).

This plan would save taxpayers $180 billion over the next 37 years. See $180 billion savings here.

Does the State Constitution Protect Pensions Despite Cost to Taxpayers?

Section 5 of Article XIII of the Illinois Constitution that states: “Membership in any pension or retirement system of the state… shall not be diminished or impaired.”

According to the TRS, State pensions are guaranteed not only by the Illinois constitution but the US Constitution too under the contracts clause. In other words taxpayers are constitutionally obligated to pay the $10 million pensions already in force and the $15 and $20 million that will soon follow (see $10 million pensions here). According to them, “pension diminishment” is not possible in spite of any pain or suffering that will surely be visited upon the citizens of Illinois who are not public employees in the form of diminished assets and diminished state services used to fund the excessive public pensions.

You have to ask yourself the legality of a constitutional clause that takes money from a specific group, non-public workers, and gives it, in excess, to another group, public workers. How can any constitution earmark public funds for one small group of citizens? This is just another form of Illinois corruption.

There must be a legal remedy available for this kind of corruption. Assuming that allocating more than 25% of the state’s budget to benefit a small politically connected group is “punishment” to those not in the group (see next paragraph), perhaps we could invoke the “pains and penalties” doctrine of the “Bills of attainder” which are forbidden by Article I, section 9, clause 3 of the United States Constitution. In the case of Cummings v. Missouri (1867) it was stated, “A bill of attainder, is a legislative act which inflicts punishment (excess taxes) without judicial trial and includes any legislative act which takes away the … property (wealth from taxpayers) of a particular named or easily ascertainable … group of persons (taxpayers) because the legislature thinks them guilty of conduct (not being public employees) which deserves punishment.” Underlined text inserted by author.

Ten Changes Needed to Avoid Bankrupting the State

The attached spreadsheet shows the looming fiscal crisis caused by out-of-control retirement benefits to public employees. Total due from taxpayers for each 5-year period going forward are shown. From 2010 thru 2014 taxpayers have to pitch in over $31 billion for pension and health care. That would be about 10% of the state budget over that time period. It then accelerates growing at 30% plus over each subsequent 5-year period until it reaches an unsustainable $170 billion in 2040 to 2044. At that point public employee retirement benefits would be in excess of 25% of the state budget in effect taking money from every other legitimate public need. That would certainly be “punishment” to all citizens who are not public employees.

1. Change the constitution to limit pensions.

– Make them a function citizens’ income, say no more than the median Illinois family income ($72,000 as of 2008). That would result in maximum pension payout for a 55 year old retiree of $3.3 million and a cash 401K value of $1.8 million. Do we really owe ANY public employee more than $1.8 million cash at retirement? Let’s have a referendum on that point and see what the answer is.

2. Legislate maximum annual increases for public employees that match public sector increases, currently about 3%.

– Schools and other public entities could take the 3% and divide it any way they wish. Half the employees could get 6%, the other half 0% or any combination thereof as long as the total payroll for their institution does not increase more than 3%. Let’s make these $400,000/yr superintendents real managers instead of cheerleaders and tax-increase salesmen.

3. Increase employee contributions for pensions and health care.

– The percentages we used above could be adjusted up or down based upon the unfunded balance with employees and employers splitting the amounts 50/50.

4. Institute a universal Education Tax Credit of $500.

– This credit could be used for any education cost whether pre-school, K-12 or college. This credit would certainly result in fewer public school students, K-university, and therefore fewer public employees and fewer public pensions.

5. All new public employees go on Social Security and 401K plan. No more open-ended taxpayer guarantees.

– Offer cash buyout to current employees for cash value of pension if they switch to new Social Security and 401K plan.

6. Consolidate school districts to minimize excessive administrator pay.

– Arizona’s top superintendent pay is less than half Illinois top pay (see here).

– In fact we have many retired superintendents whose pensions are more than AZ top superintendent’s salary.

7. Outsource as many public functions as possible.

– A good place to start would be driver’s education which could easily be outsourced. That would eliminate ninety-four $100,000 salaries and by adding Art, Music, Food Service and Auto repair we could eliminate another 300 or so $100k salaries (see $100K salaries here).

– Eliminating 400 $100K plus salaries would save $1.6 billion in pension payments in addition to the salaries.

– We could offer classes to ex-public employees to set up their own small business to provide these services to the public. Let’s make entrepreneurs’ out of them.

8. Open all employee contract negotiations to the public.

– Make all payroll/employment contract agreements approved by public referendum.

– Put all public salaries (over $40,000/yr) and calculated benefits on the internet.

9. Add one classroom period a day to all teacher work schedules (K-University).

– This should reduce the number of teachers needed state wide by about 15% reducing not only local real estate taxes but also statewide pension taxes.

– Currently, by contract, teachers teach 5 of 8 or 9 periods per day. College teachers have even lower requirements (3hrs/day) and could easily provide 1 more class a day for their gold-plated retirement benefits.

10. Place pension liability at the district level.

– If schools want to pay Drivers Ed teachers $170,000/yr then let them pay the $3 million pension too.

– As it stands now the poorest district taxpayers fund the pensions for the wealthy districts, Robin Hood in reverse.

– This would be constitutional as long as the state guaranteed payment if district went bankrupt.

– An example of the added district cost: Dist 211, $39 million more in local taxes for 2008.

Teachers Claims That State Underpayment Has Caused Liability is False.

Looking at the TRS records back to 1995, shows only four years where the normalized costs were not met totaling a little over $200 million. In 2004, state taxpayers borrowed $10 billion to give to the pensions to catch up with prior shortfalls.

The real reason the unfunded liability is so high is excess salaries, increase in the number of teachers and administrators per pupil and a law passed in 1998 that increased pensions by up to 30%. The new plan reduced the number of years needed to retire at max pension to 34 from 38.

The annual rate of pension accumulation was increased from 1.67 to 2.2% per year. This resulted in an increased pension of 30% for those with 10 years experience, 23% for those with 20 years and 16% for those with 30 years experience.

In addition the claims of low average pensions are disingenuous at best. The average is low because pensions are available after 5 years of service. The meaningful pension number would be the average of all teachers who retired with full 75% service credit. That number would be much higher than the average they are quoting now.

Give em A Million, Save $70 billion.

We could eliminate the state’s entire $70 billion unfunded pension liability completely by handing every retired state worker a $1 million check after 35 years service in lieu of his current pension ($60,000/yr ending salary minimum) using current contribution rates and actuarial assumptions.

Those numbers give you an idea how tilted the playing field is in favor of public employees. The fact that we have these huge deficits is because we are giving public retirees much more than a million dollars when they retire, not counting health care benefits. It is in effect a legal form of corruption, politicians buying public employee votes with high pension payments.

So do not believe Gov. Quinn’s claim that he wants to reform pensions until he admits that taxpayers should not have to make public employees multi-millionaires and institutes real reform to that end.

Until then he’s just another in a long line of Illinois politicians so blinded by generations of political favoritism that they do not recognize the corruption inherent in transferring huge amounts of wealth from one group of citizens to another. It is not only unfair but unsustainable.

This article originally posted April 7, 2009.

Bill Zettler is a free-lance writer and consultant specializing in public sector compensation.