SPRINGFIELD — Officials from several public employee groups told state lawmakers Thursday that the pension reform measures enacted in 2010 are patently unfair and possibly illegal.
And, in the case of public school teachers, the relatively new pension structure might soon fall out of compliance with federal regulations, something that could cost taxpayers billions of dollars in the future.
At issue is what’s known as the “Tier 2” system, which lawmakers enacted during the 2010 session when the already-beleaguered pension funds were still reeling from additional losses suffered during the Great Recession. Nick Yelverton, legislative director for the Illinois Federation of Teachers, recalled how it was rushed through the General Assembly in about nine hours, with little or no notice to groups that would be affected.
Under that plan, starting in 2011, new employees pay 9 percent of their salary into the pension system, the same as Tier 1 employees. Of that amount, however, only 7 percent is actually used to fund those employees’ pensions. The other 2 percent goes to pay down the unfunded liability of the Tier 1 employees.
Tier 2 employees also get smaller benefits. They don’t vest in the system until they’ve worked for 10 years, instead of five. And their annual cost-of-living raises after retirement are capped at either half the previous year’s rate of inflation or 3 percent, whichever is less.
“This is unacceptable to our members,” Yelverton told members of the House and Senate pension committees during a joint hearing. “We are now starting to see a lot of individuals who you normally wouldn’t think would be concerned about retirement security are very much aware of this fact, because they feel like money is being stolen from them that they will never see in retirement, and there’s good reason to believe that.”
The Tier 2 system applies to all five of the state’s pension plans, but there are particular concerns about the state Teachers Retirement System, or TRS, which covers all Illinois public school teachers outside the Chicago school district.
With more than 160,000 active members, including more than 41,000 in the Tier 2 system, TRS is the largest of the state’s five pension systems and the one that accounts for more than half of the state’s estimated $133.6 billion in unfunded pension obligations — the difference between the value of the pension funds and all of the obligations they’ve accrued to date.
The concern, however, is that Illinois teachers do not participate in Social Security. Federal law allows state and municipal governments to do that, as long as the benefits they pay out are at least equal to what Social Security pays, a law known as the “safe harbor” provision.
But Andrew Bodewes, TRS’s legislative director, told the panel that because of the small cost-of-living increases built into Tier 2, those pensions soon are likely to fail to meet the federal adequacy test.
“So that means once the Tier 2 teachers are retiring, each and every school district will have to perform a test on that member to see if they get a benefit at least as good as Social Security,” he said. “And if they don’t, they (the school districts) will have to enroll in Social Security. They’ll have to enroll going backwards.”
That means school districts would have to make as much as 10 years’ worth of back payments into Social Security.
“This is not a TRS issue. We will not be involved in any way, shape or form,” Bodewes said. “This is a school district issue. It will come at an enormous cost to the school districts, both from an administrative cost and the additional cost, 6.2 percent of pay, that’s associated with Social Security.”
Officials from other pension systems — state universities, municipal employees and downstate firefighters, to name a few — also told lawmakers that the Tier 2 system was making it difficult to attract and retain employees. Some also mentioned the awkwardness of having two sets of employees working side-by-side, doing the same job, and earning vastly different pension benefits, with one group of employees paying a premium to subsidize pensions for the other group.
“When are we going to start being honest with the people that you folks work for and tell them they’re getting screwed by Tier 2 and pretty soon there are going to be chickens all over the place coming home to roost,” Rep. Steven Reick, a Woodstock Republican, asked at one point during the hearing.
Local government officials, meanwhile, said that while they understood the concerns about Tier 2 pensions, they could not possibly afford to enhance those pension benefits because some of their pension funds are already on the brink of collapse.
“The fact that Illinois (lawmakers) passed the Tier 2 system in 2010 gives a lot of credence to the pressure on them that it was needed,” Jeffrey Scott, legislative director for the Illinois Municipal League, told the panel. “Even with that, our funds are in trouble.”
A report in November from the state Commission on Government Forecasting and Accountability estimated the five state pension plans — those covering teachers; state employees; state universities; judges and the General Assembly — have only about 40 percent of the assets they would need to pay off all of the obligations they have accrued to date.
There are numerous bills pending in the House Personnel and Pensions Committees to change the Tier 2 structure for various public employee groups. Rep. Robert Martwick, a Chicago Democrat, said he hopes to work with Gov. J.B. Pritzker’s administration to produce some kind of reform legislation this year.