The first thing we all need to accept is this: what we owe for public employee retirement benefits, as currently constituted, cannot be paid.
Under any reasonable scenario, the tab for public employee pensions and healthcare is in excess of $1 trillion over the next 35 years. That cannot be paid and pretending otherwise will lead to more problems.
So here is our ten-point plan to resolve the pension and health care cost issue:
1. Increase Employee Pension Contributions.
- 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 received 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.
- Could be adjusted to compensate for low-pensioned retirees.
SAVINGS: $180 million per year, $13 billion over 35 years.
3. Pensions would be taxable for all retirees with income over $50,000/yr
SAVINGS: $125 million/yr, $10 billion over 35 years.
4. Eliminate all Early Retirement Plans, automatic 6% increases and sick leave pension accruals. Extend average salary for pension calculation to average of last 8 years.
- Asking public employees to work 35 or 36 years before they retire on full pensions is not unreasonable.
- Accrued sick leave would be paid at $50 day instead of being applied to pensionable years.
- Automatic six percent increases for four years for no reason is unacceptable.
SAVINGS: $110 million/yr $15 billion over 35 years.
5. 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 and payoff the pension bonds.
- 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.
- This would only be implemented after agreement on all other cost-reduction issues.
SAVINGS: $20-30 billion off of the $80 billion unfunded liability saves at least $900 million/yr, $70 billion over 35 years.
6. 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.
7. 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.
8. 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 unfunded.
- 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.
9. Make public employees pay for 50% of their health-care premiums pre and post retirement.
- The state health care plan is gold-plated and available to retirees. Paying half is reasonable.
SAVINGS: $1.1 billion/yr in 2011, $65 billion over next 35 years.
10. One-half of current and all future unfunded pension deficits would be paid via reduced pensions until deficit is paid off. Taxpayers would pay the other half.
- Why should taxpayers be liable for poor investment performance, increased retiree benefits and poor mortality estimates?
SAVINGS: $2 billion in 2011, $200 billion over 35 years.
My 10-point plan will save the state well over $5 billion a year and over the next 30 years will completely pay off the pension deficit. There is no other viable solution available.
Urgency is mandated.
This plan will require all affected parties to compromise and must be put into effect ASAP. Therefore to encourage speedy deliberations I will suspend all pension payments until agreement on all issues are reached and will veto any legislation increasing public compensation.
Illinois is already losing population, over 600,000 since 2000 making Il the 49th worst state for emigration. More are sure to follow if we do not act quickly. As for businesses moving to Illinois, that is in reverse also. Who in their right mind would move a business to Il knowing that without massive reform $1 trillion will be payable in taxes over the next 35 years to fund retirement for 5% of Illinois workers? Why not just move right over the border to Wisconsin instead?
Illinois is in a financial death spiral and will not be saved unless enormous changes are made to the way we do business especially in the area of public pensions and compensation. This critical issue must be resolved in short order or the state will be bankrupt before my first term is over.
There is no substitute for action – disaster is the only alternative.
Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address. Click here to read more by Mr. Zettler.
