217.753.2213 iasa@iasaedu.org 01.07.13

Controversial pension reform proposal heads to House floor The battle lines have been drawn, and a pension reform package is headed to the House floor for a vote that could come Tuesday after the House Personnel and Pensions Committee approved the plan by a 6-3 vote Monday afternoon.

The bill’s language is contained in Amendment 10 of Senate Bill 1673 and its framework includes much of what had been proposed in the Nekritz-Biss bill (House Bill 6258), including reductions in the compound cost-of-living adjustment (COLA), increased employee contributions, a cap on pensionable salaries and a stronger “guarantee” that the state will make its future pension payments.

The IASA along with the School Management Alliance opposed the pension reform bill.

The provision to shift the state’s normal pension costs to local school districts is not included, but Rep. Elaine Nekritz (D-Northbrook), the bill’s sponsor and the chair of the committee that approved it, said that she believes the cost-shift issue would be addressed as a separate issue at a later date. The cash balance plan that was part of the Nekritz-Biss plan also was not included.

Despite the facts that the bill passed out of the committee with relative ease and that House Minority Leader Tom Cross (R-Oswego) testified in favor of it, it is still uncertain whether there will be the necessary 60 votes for the House to approve the measure before the current lame-duck session ends at noon on Wednesday. At that point, a new General Assembly will be sworn in and the legislative process would have to begin anew.

Nekritz said after the committee hearing that she was uncertain when the bill might be called for a vote on the House floor.

“When we have the votes, we’ll call it,” she said. The House adjourned Monday without calling it for a vote.

The three “no” votes on the committee were Rep. Raymond Poe (R-Springfield), Rep. Thomas Morrison (R-Palatine) and committee Vice Chairman Daniel Burke (D-Chicago). Poe, whose district includes thousands of state employees, questioned the devastating impact the reduction in the COLA might have on retirees and said he didn’t think the state had any “skin in the game” regarding the proposal.

The testimony at Monday’s committee hearing revolved around two main issues: fairness and constitutionality.

Nekritz addressed the constitutionality issue by saying that employees and retirees were getting a new “right” in the form of a strong state funding guarantee and listed three factors she thinks might help the bill survive an inevitable court challenge despite the strong language in the Illinois Constitution protecting pension benefits. The three factors Nekritz listed include:

The state is facing a fiscal crisis;

The action of reducing pension benefits is necessary because of that crisis; and

The action taken was designed in the narrowest fashion possible.

The bill’s proponents had a college law professor, Mark Rosen from the Chicago Kent College of Law, explain that the seemingly absolute language in the Illinois Constitution is “not actually absolute.”

“We live in a complicated world,” Rosen said. “Sometimes constitutional and sub-constitutional commitments come into conflict.”

The “We Are One” union coalition countered with their own attorney, John Stevens from the law firm of Freeborn and Peters, who said he “couldn’t disagree more” with Rosen’s comments.

“This is an all-out assault on employees,” Stevens said, noting that when the pension protection language was added to the state constitution in 1970 the pension systems were funded at about the same percentage they are today and that the framers of the language intentionally did not leave wiggle room for the state to reduce pension benefits.

Proponents claim if the bill passes there would be an immediate reduction in the state’s $95 billion unfunded pension liability of some $27 billion to $30 billion, and that the state’s pension liability for Fiscal Year 2014 might be reduced by as much as $1.7 billion.

Union leaders hit hard on the issue that the proposal ignored the revenue side and reaps its entire savings on the backs of retirees and employees.

“What’s missing in this bill is shared sacrifice,” said Michael Carrigan, head of the AFL-CIO in Illinois. Henry Bayer, head of AFSCME in Illinois, pointedly identified the savings the bill’s proponents were touting.

“How does the state’s liability go away? By the state saying ‘We’re not going to pay you what you already have earned,’ “said Bayer, who dismissed the state guarantee by saying “there is a loophole in the bill that you could drive a truck through.”

Dan Montgomery, president of the Illinois Federation of Teachers (IFT), said that legislators who vote to go against the language in the state constitution would be in violation of their oath of office and called for a pension summit this month to include all major stakeholders.

Dick Ingram, executive director of the Teachers’ Retirement System (TRS), did not speak to the merits of the bill, but said that as a fiduciary, the TRS Board was concerned about the likelihood of insolvency of the pension system if something is not done to either cut costs or increase revenue.

Rep. Daniel Biss (D-Evanston), who will be sworn in as a member of the state Senate on Wednesday, laid out the specifics of the proposal. They included:

Pausing the COLA for six years. When the COLA resumes, paying the current 3 percent compound COLA only on the first $25,000 of pensionable earnings, on only the first $20,000 for those retirees who also qualify for Social Security. Not paying a COLA until a retiree reaches age 67.

Increasing employee contributions by 1 percent each of the next two years.

Capping the pensionable salary at the higher of either an employee’s salary when the bill passes or the Social Security cap ($113,700 for 2013).

A 30-year plan to pay 100 percent of the state’s pension debt.

When the current pension finance notes are paid off in 2020, using that money to pay down the pension debt.

A strong, actuarially based state funding guarantee.

Biss said the bill is not perfect, but noted that it has three qualities that make it good public policy: 1) It solves the fiscal problem, 2) it has a rational and sensible framework, and 3) it is bipartisan.

Cross, the House Republican leader, explained his support by citing the state’s poor credit rating, how business leaders perceive Illinois, the pressure the pension liability is placing on the annual state budget and that the bill would provide “certainty and stability” for employees and retirees to know they will have a pension in the future as reasons he is supporting the measure.

Even if the House were to pass SB 1673 with the language in Amendment 10, it would face an uncertain fate in the Senate given Senate President John Cullerton being on the record as saying he believes a choice provision is necessary for any pension benefit reduction to be constitutional and his insistence that the House pass the pension reform legislation that the Senate passed last May.

So while the bill getting out of committee certainly was one hurdle cleared for this pension reform proposal, there still appear to be large obstacles to be cleared in order to pass the measure during this session.

Diane Diane L. Hendren Chief of Staff/ Director of Governmental Relations

Illinois Association of School Administrators