Pension Reform – Diminish and Impair Everything Except Pensions

The Illinois Constitution famously contains the words “diminish or impaired” which are commonly used by teachers and others to justify outrageous and costly pensions: 

Membership in any pension or retirement system of the State, any unit of local government or school district, orany agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired. 

What the constitution does not guarantee is every other employee benefit paid for by the taxpayer for the benefit of the public employee working and retired. Therefore it only makes sense that we taxpayers “diminish and impair” other employee and retiree benefits in order to pay for that which is not “diminishable” or “impairable” namely pensions. 

So here is a list of 14 items we could legally “diminish” and use the savings to pay for the pensions that we cannot “diminish”. Seven we can easily assign cost savings and 7 others that would certainly saveIllinoistaxpayers money but the amount is more difficult to calculate. 

Seven identifiable cost cuts that could be made without Constitutional challenges.

  1. Suspend the COLA.
    Recent court cases in MN, CO and SD have ruled COLA’s can indeed be cut or eliminated. That is worth over $200 million a year and could be earmarked to pay off the pension bonds over the next 22 years. And, according to a recent Harvard study, it would also reduce the unfunded liability by about $38 billion thus reducing it from a theoretical $83 billion to theoretical $45 billion. I say “theoretical” because the unfunded is certainly much higher than the $83 billion advertised politicians and union bosses.
  2. Tax pensions.
    Under current law no income tax is collected on state pensions. This leaves us with the rob-the-poor-and-give-it-to-the-rich scenario where an unemployed factory worked collecting $20,000/yr. unemployment will pay $1,000 in state income tax while Tapas Das Gupta pays zero income tax on his $426,876 state pension. A deduction of $30,000 would protect low-income retirees from a new tax. This would generate another $200 million and could also be directed to pension bond payment.
    NOTE: Pension bond payments are about $800 million/yr.
  3. Make current workers and retirees pay for their health insurance.
    Health insurance costs the state $2.5 billion/yr. for employees and retirees. State employees, including university employees, pay zero while they are working and when retired if they have worked 20 years. Teachers pay either 25% or 50% depending on the policy they choose. Forcing all of them into HMO’s and making them pay 25% would save about $1 billion/yr.
    NOTE: without changes health care costs will exceed pension costs in 30 years.
  4. Eliminate the ERO (Early Retirement Option) for teachers.
    This is a particularly egregious give away to the teachers for no reason except they are teachers and have undue influence of politicians. It allows teachers to retire early without any discount in pensions. Since 2004 schools have paid out more than $650 million to TRS in pension payments for ERO. Note these are the same whiny school districts that have complained loudly that they could not possibly afford to pay for their own employees pensions when in fact they have been paying $100’s of millions under the radar and without the local taxpayers knowing about it. For example supposedly cash-strappedElgin district 46 has somehow managed to pay out over $20 million for early retirement. Eliminating ERO is an easy way to save $90 million/yr.
  5. Eliminate sick-leave pension credits.
    This item really sticks in my craw. Taxpayers are currently paying pensions on 100,000 years of pensions that were never worked. There is no reason for this give away. Eliminating it would save $150 million/yr. at current rates.
  6. Out of state purchase credits.
    Under this provision, employees can buy into the lucrative IL pension system for time worked in other states pension systems. This applies mainly to K-12 but can be used by anyone. The problem is employees do not pay the full cost of the pensions. We have one example where a superintendent paid $27,000 to receive an increase in his pension of $75,000/yr. Obviously the difference is paid for by the taxpayers. How about we payIllinois pensions forIllinois work and other states can pay for work done in their state.
  7. Revert to pension rules in effect in 1998.
    In 1998 under the Edgar administration teacher pensions were increased by up to 30% by increasing the annual accrual to 2.2% per year and reducing the years needed for full retirement from 38 to 35. According to most legal scholars, pension guarantees are for benefits in place at the time of hiring and all benefits added after the hiring date are “gratuity” meaning they can be reversed. In other words no new contract is implied when a pension enhancement is given to a current employee. Assuming this is true then reverting the 65,000 K-12 employees hired before 1998 to the rules in effect at the time of their hiring would reduce the current years TRS pension cost by about 20%. 

There are other changes that could be made that would reduce the overall cost of employees which in turn would lower the cost of pensions since the two are directly related. 

Seven less identifiable cost cuts that could be made without Constitutional challenges. 

  1. Eliminate or modify the Illinois Tenure Law.
    Illinois has a written tenure law passed by the legislature. It is unrelated to pensions but quite obviously can be used to reduce them by lowering the cost of employing teachers. As it stands now only the lowest paid teachers can be laid off while the 7,856 teachers with salaries over $100,000 must be kept employed, accruing huge pension benefits as a percentage of their huge salaries. If we made tenure start at 20 years employment rather than four years then we could, if needed, lay off up to 2,500 teachers making more than $100,000. This would save on pensions and local costs.
  2. Institute Vouchers and Education Tax Credits.
    The purpose of vouchers and education tax credits is to return education decisions to the parents and taxpayers. Currently all decisions are made by politicians and teacher unions, both self-interested parties. Either or both of these options would increase parental control, would lower costs by eliminating the very high student cost associated with public education (avg. $16,000 per student) and would increase education competition which can only improve outcomes. Trading a $5,000 credit for a $16,000 cost would obviously save taxpayers billions of dollars although some of those savings would be offset by current private school parents getting credits whereas in the past they had none. But overall vouchers and credits would result in an increase in quality, a decrease in cost and a stifling of the Teacher-politician Industrial Complex which has controlled public education to their own benefit for the last several decades.
  3. Freeze salaries and hiring for three years.
    In 2009 Ireland, in the midst of a huge economic downturn, cut public employees’ salaries by an average of 14% and froze them at that level. Here in Illinois we did neither. Freezing salaries would have a very positive effect on pensions because of compounding. In the case of teachers, the freeze would save local schools 21%, more than enough for them to pick up the pension cost from the state.
  4. Ban teacher strikes.
    This should be a no brainer. You could even allow strikes but include a provision that any teacher that goes on strike loses their tenure and for the next four years would be subject to layoffs just like every other non-tenured teacher. High salaries don’t do you any good if you’re not working.
  5. Ask teachers K thru university to teach one more period per day.
    Most K-12 teachers teach 4 or 5 periods a day out of 8 or 9. Most could be asked to teach one more period a day or 3 a week without undue stress. Maybe relate it to salary the higher the salary the more periods you have to teach. Increased periods taught would require fewer teachers and thus lower pension costs. For college teachers at the community college level typically teach 15 periods a week with some required office time on top of that. I do not think a few more periods would be devastating. After all with modern software most test grading is (or should be) automated eliminating the old saw that those teachers spend hours and hours grading papers. Even English teachers have it much easier than their predecessors with the built in spelling and grammar checks built into modern word processors.
    NOTE: 80% of pension costs are educators and 96 of the Top 100 pensions are educators.
  6. Minimize overtime for those who can include it in their pension calculation.
    Almost all of the 220 plus state troopers with pensions over $100,000 got to that high level by maximizing their overtime in their last year of work. Since troopers’ pensions (and other state employees categorized as “Security”) are based on their last years wages only there is an unofficial policy that people ready to retire get first crack at overtime. Official policy could be implemented that would minimize overtime for those in the last year of employment thereby saving millions of dollars per year. Long-term overtime should be eliminated from all pension calculations.
  7. Restrict governments from deducting union dues from workers’ paychecks if the money will be used for political purposes.
    The results of the new WI law restricting the withholding of public employee union dues from teachers paychecks show how powerful this idea is. More than 50% of union members, including teachers have decided not to pay dues. That means prior to Walker and the new laws 10’s of thousands of public employees were being forced against their will to contribute their hard earned money to organizations they did not care to support.

On Nov. 6, 2012 California will have a ballot initiative called “Paycheck Protection Initiative” which will prohibit the government from deducting union dues from government employee paychecks that will be used for political purposes.According to the famous Supreme Court decision in 1988, Beck versus the Communications Workers of America, 80% of member dues are for political purposes and only 20% are for negotiating pay and benefit purposes. In Illinois this would mean the IEA (Illinois Education Association) and the IFT (Illinois Federation of Teachers) could lose up to $108 million of their annual $135 million in dues. Why don’t we have a “Paycheck Protection Initiative” in Illinois?

There is more than one way to skin a fat-cat.

This is just a partial list; I am certain we could come up with many more such as vacation and holiday policy that matched the private sector. The point is the current stable of IL politicians would rather see the state go bankrupt than really deal with the problem of excessive union power. There is no Scott Walker on the IL horizon.

However we can make a good start with the Illinois Republican Renaissance PAC’s 2012 motto “Six plus six minus one”. That is six new state senators and six new state reps in 2012 will give Republicans control of the legislature and probably force Michael Madigan into retirement. That by itself would be a huge plus.

Then in 2014 minus one Democratic Governor and we will be in the position that WI was in in 2010. Real progress could result from those changes.

And there is no reason we cannot reform pensions and institute some of these 14 items too. They are not mutually exclusive.

1 Comment

  • Wolf says:

    There is no Constitutional Protection outside of normal contract law for Public Sector Pensions…and examining the Labor Agreements one see outright fraud in the spiking of the pensions in the last six years by nearly 50% …more importantly these fraudulent millionaire pensions would never have been approved by the taxpayers but through the collusion of the politicians and the unions this rape of the taxpayers has been orchestrated over the last 50 years…clearly the massive over staffing in the public sector by 50% and the excess compensation by 40% is criminal in itself but these millionaire pensions are outright fraud to any rational person examining this…the best solutions for taxpayers is to let the state go bankrupt to eliminate all these fraudulent obligations and maybe start the process of cleaning this house of criminals in the entire public sector…

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