SPRINGFIELD -- When state lawmakers, business interests and public employee unions meet over the summer to try to deal with Illinois’ staggering pension obligations, they’ll have to navigate a series of hardened positions and possible disagreement over the nature of the problem.

SPRINGFIELD -- When state lawmakers, business interests and public employee unions meet over the summer to try to deal with Illinois’ staggering pension obligations, they’ll have to navigate a series of hardened positions and possible disagreement over the nature of the problem.


At the heart of the dispute is the belief by members of the Illinois House members, as well as of the influential Civic Committee of the Commercial Club of Chicago, that what government workers pay now toward their pensions will not cover the costs of the benefits in the future.


Senate Bill 512, which would have revamped the state’s pension system, was scuttled after union members and other public employees flooded lawmakers with calls opposing it.


Representatives of the Illinois Federation of Teachers, the Illinois Education Association and the American Federation of State, County and Municipal Employees aren’t convinced that their members’ contributions won’t cover future pension costs.


“We must clearly define the difference between the unfunded liability caused by skipped pension payments and the ‘normal cost’ of pension benefits,” said IFT spokesman Dave Comerford. “We wouldn’t be having this discussion if the state had made the required payments.”


 


Skipped payments


“Normal cost” refers to the benefits accrued by all active employees during a year. Each year, the state is supposed to pay the normal cost plus part of the cost of paying down the unfunded liability that has accumulated over decades because governors and lawmakers underfunded or skipped previous pension payments.


Under a 1995 law designed to bring the systems to 90 percent funding by 2045, the state eventually would contribute enough to cover the normal cost and the principal and interest on the unfunded liability. But the ramp-up in state payments is not complete and the unfunded liabilities are not projected to drop until 2035, according to the Commission on Government Forecasting and Accountability, the legislature’s nonpartisan research agency. The unfunded liability now stands at $86 billion.


In fiscal years 2006 and 2007, the state was supposed to contribute $4.6 billion to the pension systems. Instead, legislators changed the law to pay only $2.3 billion.


COGFA’s executive director, Dan Long, says the state bears most of the blame for the hole it's in.


“Over time, the No. 1 cause of the unfunded liability has been the insufficient employer contributions,” Long said.


Two benefit tiers


Ty Fahner, president of the Commercial Club, and two lawmakers, state Reps. Kevin McCarthy, D-Orland Park, and Tim Schmitz, R-Batavia, who led helped negotiate SB512, believe current contributions don’t cover the costs. They also want to reduce the amount of the state budget that goes to funding pensions.


In fiscal 2012, the state will be required to spend $6.4 billion on pensions, which includes interest on borrowing the state did in fiscal 2003, 2010 and 2011. By 2045, the pension payment is projected to be $22.1 billion, according to COGFA. 


The IEA has gone a step further than AFSCME and the IFT, saying that its members would be willing to consider contributing more if the numbers are that bad – but that promise carries a major caveat.


“Before we could agree to any kind of adjustment in that contribution,” IEA president Ken Swanson said, “my members will absolutely want to know what guarantee is there this time the state will honor what it needs to do.”


Starting over?


AFSCME and the IFT declined to say whether they would specifically consider increased contributions.


The IEA has suggested that the 1995 law be revised to either extend the timetable or reduce the funding goal from 90 percent to 80 or 85 percent. If a pension plan is 100 percent funded, that means it could pay out all of the obligations it owes retirees and currently working employees immediately.


“Just as people sometimes need to restructure their own home mortgage … perhaps the state needs to look at restructuring this mortgage,” Swanson said.


But Fahner isn’t impressed with that suggestion.


“It doesn’t do a damn thing. It helps pay the interest over a more sustained period of time, so it’s not taking from the overall state budget,” he said. “But it doesn’t do a damn thing if the people aren’t willing to fund their own pensions going forward more closely.”


 


Finding a balance


AFSCME’s Anders Lindall said AFSCME believes the Civic Committee’s true motivation is to destroy defined-benefit pensions. SB512 proposed increasing required employee contributions by 50 percent to 100 percent in order for an employee to remain eligible for current pension benefits, called Tier 1. Employees who didn’t want to pay that much were to be offered either Tier 2, which offered reduced benefits, or a defined-contribution pension plan. Either choice would have reduced the employee’s pension contribution.


However, Tier 1 contribution rates were to be recalculated every three years, and the cost would have gone up with each recalculation because of retirements and migration out of Tier 1 by people who couldn’t bear the cost. Fewer people paying into Tier 1 would mean increased costs for those who remained. 


“You quickly wind up with too few participants paying in,” Lindall said, calling called Senate Bill 512 “a self-destruct mechanism for the pensions.”


Fahner said the Civic Committee is not anti-union. The group wants to ensure that retired workers receive what’s owed to them, while also balancing the state’s other needs.


“My wife was a teacher. My older brother is a retired teacher. My father-in-law was a teacher. My dad worked for Chrysler for 44 years. He was the president of a UAW local,” Fahner said.


“I’m not anti-union. This stuff is so basic in terms of the integrity of people getting what they’ve been promised.”


 


Chris Wetterich can be reached at (217) 788-1523.


 


The Civic Committee of the Commercial Club of Chicago


The Commercial Club of Chicago describes itself as a group of “senior business, professional, educational and cultural leaders who seek to address social and economic issues important to the Chicago region.” The club was founded in 1877 by 17 businessmen “who believed Chicago needed a strong and cohesive civic force to help shape the course of the city’s development.”


The club’s Civic Committee was created in 1983 “to undertake projects to bolster core industries and pursue new economic opportunities for the region.” It has nearly 90 members, most of them chief executives or senior offices in Chicago’s largest corporations.


Ty Fahner, a former Illinois attorney general, is president of both organizations.


Spotlighting the state’s dismal fiscal situation and the pensions’ role in it has been one of the Civic Committee’s three major projects.


Some of the committee’s most prominent members are: Miles White, chairman and CEO of Abbott; Gregory Case, president and CEO of Aon Corp.; Mary Dillon, president and CEO of U.S. Cellular; Thomas Fitzgerald, managing partner of the Winston and Strawn law firm; W. Bruce Johnson, interim CEO and president of Sears; Paul La Schiazza, president of AT&T Illinois; Timothy Maloney, Illinois president of Bank of America; W. James McNerney Jr., chairman, president and CEO of Boeing; Thomas Pritzker, chairman of Hyatt Hotels; Irene Rosenfeld, chairman and CEO of Kraft Foods; John Rowe, chairman and CEO of Exelon; James Skinner, vice chairman and CEO of McDonald’s; and Greg Wasson, chairman and CEO of Walgreen’s.


Websites: http://www.commercialclubchicago.org/ and http://www.civiccommittee.org/


 


Pension system funding history


The 2008 economic collapse resulted in steep investment losses for all five state-funded pension systems.


“These extremely large investment losses are the main reason for the significant jump in unfunded liabilities during FY2009,” according to a report released in March by the Commission on Government Forecasting and Accountability.


Here are changes in funding ratios for each system over the past 10 fiscal years:


System, FY2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010


Teachers’ Retirement System, 59.5, 52, 49.3, 61.9, 60.8, 62, 63.8, 56, 39.1, 40.5


State Employees’ Retirement System , 65.8, 53.7, 42.6, 54.2, 54.4, 52.2, 54.2, 46.1, 33.9, 31.4


State Universities Retirement System, 72.1, 58.9, 53.9, 66, 65.6, 65.4, 68.4, 58.5, 41.9, 40.2


Judges’ Retirement System, 40.7, 33.7, 30.7, 46.2, 45.7, 46.4, 48.4, 42, 31.2, 28.8


General Assembly Retirement System, 34.9, 29.3, 25.4, 40.1, 39.1, 37.1, 37.6, 32, 22.7, 21.7


All systems, 63.1, 53.5, 48.6, 60.9, 60.3, 60.5, 62.6, 54.3, 38.5, 38.3


Source: Commission on Government Forecasting and Accountability