Taxpayer Limited Liability Pension Reform Bill – Part 1

From the archive:

Taxpayer Costs Must Be Fixed Not Unlimited.

Pension costs must be part of total compensation not separate and apart.

The biggest single problem that needs to be addressed as part of any comprehensive pension reform in Illinois is the idea that taxpayers are responsible for every shortcoming of the current system whether it is investment returns, benefit increases or 8.5% interest charges on assets that do not exist. Currently this is accomplished by having the state pay pensions separate from the operating budgets of each government unit. Thus one party determines salaries, fringe benefits, vacations, sick leave etc. and the pensions are paid by the state regardless of the cost.

What needs to be done is to fix the taxpayer portion of the cost and assign all pension costs above that amount to the operating budgets of each government unit whether State Police, community colleges or K12 school districts. Total compensation paid to each public employee should include the costs of pensions and when that is not the case salaries automatically rise to fill the gap left by pension cost not being part of total compensation. This is exactly what happens in Illinois now because those who determine salaries and fringe benefits are not assigned pension cost responsibility. This results in Illinois taxpayers paying more both for salaries and pensions.

This pension proposal assigns pension costs to operating entities and shows how to pay for them. It fixes taxpayer pension cost at 15% of payroll and all pension cost in excess of that must come out of departmental budgets and employee compensation costs.

The goals of this pension reform proposal are as follows:

1. Fix taxpayer pension costs at a reasonable figure similar to what would be paid in a Social Security/401K plan.

2. Force managers to manage by assigning all compensation and health care costs to their budgets. Freeze those budgets for 5 years.

3. Make employees understand that there are only so many dollars available and that pension contributions are part of their pay and if they go up pay or fringe benefits must come down. A compensation dollar can only go towards one compensation element.

4. Give employees some flexibility by allowing them to switch compensation elements around as long as the total does not exceed their assigned total compensation value. More insurance and less pension or less insurance and more salary for example.

5. Give employees more cash-out options than they have now as long as it does not increase pension costs. This can be done by adjusting pension payouts down slightly and will make pensions more portable similar to 401K’s.

6. Attempt to get reform buy-in from all groups by emphasizing the draconian cuts (including employment itself) that will and must be made if taxpayer pension costs are not reduced substantially.

7. Quick resolution is mandatory and a legal resolution will take years to resolve. Amending the constitution will also take years unless we can round up 300,000 signatures.

We need to get Illinois Open for Business by solving the problem quickly and efficiently. As it stands now no business in their right mind would open shop here and many are leaving. We must be competitive or we will wither and die on the vine. We can either be the next Indiana or the next Michigan.

The bomb is ticking and time is running out.

Part 1 of this 3 part series explains the purpose, reasoning and implementation plan.

Part 2 then goes into how the excess pension costs can be allocated as part of the standard budgeting process.

Part 3 then explains in detail what happens if agreement is not reached between taxpayers and the members of the five state pension systems.

Part 1: Purpose, reasoning and implementation

State of Illinois Pension Reform Outline:

PURPOSE: Limit taxpayer liability to 15% of state employee payroll.

REASONING: As the pension law is currently constituted, taxpayers are required to pay all shortages in the pensions’ short and long-term liabilities plus interest at 8.5%. Employees’ liability is limited to their current contribution rates (4% to 8%). Thus whatever the unfunded pension liability is ($85, $150, $200 billion?) 100% of it must be paid for by the taxpayers via higher and higher taxes.

(Argument for: why do the 95% of Illinois workers who do not belong to the state pension system have to pay 4 times as much as the than the 5% who do?)

JUSTIFICATION: The very best private sector pension system costs about 14% of employee payroll – 6.2% for Social Security and 8% matching 401K contributions. Therefore this bill, at 15% of payroll, would provide the highest paid employer pension/retirement contribution in Illinois.

(Argument for: What could be fairer than the highest contribution in the state?)

A. IMPLEMENTATION:

Step 1: Define “Total compensation” for every job description as consisting of the following elements for budget purposes:

1. Salary

2. Plus overtime cost

3. Plus pension contribution (local, state, federal) cost

4. Plus health insurance cost

5. Plus other insurance (life, disability) cost

6. Plus sick days accrual cost

7. Plus personal days cost

8. Plus vacation days cost

9. Plus holiday’s cost

10. Plus education reimbursement cost.

(Argument for: every one of these costs is paid for by the taxpayer therefore the taxpayer must control them as part of the total employee cost.)

Step 2: For state and university employees freeze that compensation cost at 2010 levels thru 2015 at which time it will be reviewed. For K-12 employees see below.

(Argument for: they probably should be cut not frozen.)

Step 3: State and university departmental budgets are frozen at 2010 level plus pension contribution (equal to 15% of payroll) and health care costs from state. Then from this point forward the managers of each state/university department/unit-of-government are now responsible for allocating costs for all 10 elements of “Total Compensation” as listed above. Thus pension costs over 15% of payroll would have to come out of the rest of the budget see “Allowable Pension Budget Adjustments” below.

The state would no longer accept responsibility for funding pension and health-care costs on an unlimited, ad-hoc basis. Costs would be allocated to the departments that generate and control those costs by their hiring and promotion policies. It is up to the managers who are being paid to manage to control and allocate costs just like in the private sector. No more “we don’t care because the state picks up the cost.” Their pay will depend upon how well they manage their costs as well as the execution of their business plan. For health insurance multiple lower-cost options would be provided including HSA’s.

(Argument for: it’s time to make managers manage.)

Step 4: Schools K12 are independent units with independent sources of elected control and revenue sources therefore it is only proper that they too be responsible for controlling all of their costs including pensions. Therefore pension cost equal to 15% of payroll would be paid by the state but all amounts in excess of 15% would be allocated back to the schools based upon average certified full-time salary. Thus schools that paid the highest salaries would be allocated the highest portion of excess pensions to pay, formula to be determined. Salary increases in excess of 5% or the average of other workers in the pension system (whichever is lower), as determined by state actuaries, would also be the responsibility of the local district with that portion in excess being allocated to school districts under the average thus lowering pension costs for schools who control salaries. In addition if administrative costs are above a certain level (50%) then districts would be liable for all pension costs. Alternatively, state funds could be withheld from high pension cost districts in lieu of pension payments.

(Argument for: those that create the pension problem with excessive salaries should pay for the pensions.)

Up next: Part 2 – How pension costs can be allocated.

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 back on March 2nd of this year.

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