STATE UNIVERSITIES ANNUITANTS ASSOCIATION
MINI BRIEFING
March 20, 2009

Governor Quinn and His Budget Address

Those who work for the State must have found the Governor’s Budget Address quite daunting. Opinion articles and press releases began to swamp the media before Governor Quinn finished his speech on Wednesday. In an effort to balance the budget and find a way to fund an $11.5 billion deficit, the Governor must have thought that the best place to start was at home so to say — with those who serve the public. While everyone will not be infringed upon this go-around, the precedent could be set if the budget would be accepted as is. Therefore, it is most important to remember that the budget that was presented has not been agreed on; no votes have been cast. The negotiations are just beginning. With everything, there has to be a starting point, even when we are not favorable of the original content. This budget is not the final outcome; it has a long way to go.

Providing information is the best way to keep everyone knowledgeable about the current implications of the Illinois State Budget. The following page (2 – 2) is taken verbatim from the budget book:

REFORM

As Illinois struggles to stay afloat, Governor Quinn’s fiscal year 2010 budget proposal lays out two plans that will help with a financial turn-around. This is now the opportunity to take action on issues that have long been ignored and also to help families.

Pension Uniformity

The governor believes that state employees deserve a secure retirement after years of service. He also believes that benefits should be affordable to the state’s citizens both now and in the future. The state currently has five public employee retirement systems. These systems have no uniformity – they provide different benefits, require different employment contributions, have different provisions for early retirement, allow for different retirement ages, and offer differing death and disability benefits. The governor proposes in his budget the following changes to state retirement system provisions applicable to new hires:

• Retirement Age – Work patterns have changed over the years, but the Illinois pension systems have
not kept up. People work longer and live longer. The Social Security system has been updated to
reflect these new work patterns. That’s why the governor proposes linking retirement age to Social
Security. Eligibility for unreduced benefits would become the age at which the employee would
become eligible for unreduced Social Security benefits. Early retirement could occur no earlier than
age 62, just as for Social Security. There would be no combination of age and service that would
qualify an employee for a full retirement benefit prior to achieving eligibility for unreduced
Social Security benefits.

• Benefit Formula – Currently, there are multiple benefit rates that have developed
over time, but the original rationale was lost. This budget returns to principled benefit
rate calculations. Participants covered by Social Security would earn 1.5 percent of
final pay per year of service. Participants not covered by Social Security would earn 2
percent. Final pay would be defined as the final 8-year average and considered
compensation would be limited to base pay. Credited service would be limited to 35 years. The
benefit would be payable as a life annuity.

• Cost of Living Adjustments (COLA) – Retirees should not be placed at risk as costs increase and
that Illinois’ systems should reflect others around the country. The COLA would be 50 percent of the
change in the consumer price index or 3 percent, whichever is lower. The annual COLA would be
applied to the amount of the annual benefit awarded upon retirement. This change would bring the
five state retirement systems roughly in line with other public employee systems.

• Employee Contributions – New hires will pay one percentage point less than the currently required
contribution rates. Current employees will be asked to share the burden for the pension benefits to
which they are entitled. The current contribution rate would be increased by two percentage points.

Pension Payments – Fiscal Year 2010

Each year, the state makes a contribution on behalf of employees to support their future retirement cost. This contribution is currently based on a statutory formula with automatic annual increases (ramp-up period), plus a calculation based on investment performance. Notably, no component of the calculation is based on the actual amount needed to cover the cost of the pension benefits, nor the enormous outstanding interest due to historical underfunding.

The five state retirement systems incurred an actuarial loss on investment performance in excess of $9 billion in fiscal year 2008. This effectively increased the state debt by $9 billion – a debt which will require an annual interest payment of over $700 million. So far in fiscal year 2009, the state retirement systems have incurred an actuarial loss in excess of $20 billion.

The Governor proposes to limit the state’s contribution to the five state retirement systems to the normal cost for fiscal year 2010. Normal cost represents the present value of the benefits earned by system members during each of those fiscal years.

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What needs to be noted is that NORMAL is not the full funding amount established in P.A. 88-0593.

Rather than recreate the language that would explain P.A. 88-0593 a Google search provided this information from The Center for Tax and Budget Accountability.

SB1734 – The Treasurer’s legislation to merge the investments of the five pension systems is awaiting discussion in the State and Local Governments sub-committee of the Senate Executive Committee. It is under Rule 2 -10, Committee Deadline Established as April 3, 2009.

“When the Commission on Government Forecasting and Accountability (COGFA) released the 2008 Report on the Financial Condition of the State Retirement Systems last February, the actuaries for the five systems had projected a total FY 2010 contribution of $3,537.3 million (this projection was based on the June 30, 2007 actuarial valuations of the systems). That projection assumed an 8.5% return on investments in FY 2008. However, due to the poor economy, the systems did not return 8.5% on their investments.  Hence, the total FY 2010 contribution will be approximately $510 million higher than originally assumed, due in large part to negative investment returns in FY 2008. That makes the total increase in FY 2010 State pension payments over FY 2009 $1.2 billion. 

COGFA reports that P.A. 88-593, commonly known as the "1995 funding law," requires that state contributions to the retirement systems must be made in order to achieve a 90% funded ratio by June 30, 2045. The Act stipulated that for fiscal years 2011 through 2045, the required state contribution will be calculated as a level percentage of payroll, following a 15-year phase-in, or "ramp," which began in FY 1996. If the FY 2010 contribution is made in accordance with the requirements of P.A. 88-0593, then FY 2010 will be the last year of the ramp. In FY 2011 and each fiscal year thereafter, contributions to the pension systems will be made as a level percentage of payroll, and the yearly increases will not be as drastic as in recent years.”

If the law is not followed the cost continues to mount because the interest will continue to compound on the outstanding payment; thus making it difficult to meet the 90% funding level by 2045.

The discussion will continue on this issue as SUAA meets with other coalitions to help deter the notion that a Pension Holiday is in order by proclamation from the Governor.


HB3722 - Rep. William D. Burns, Sidney H. Mathias, Lisa M. Dugan, Mike Boland, Jack D. Franks, Robert W. Pritchard, Luis Arroyo, Paul D. Froehlich, Emily McAsey and Careen M. Gordon

Synopsis As Introduced
Amends the Illinois Governmental Ethics Act. Requires members of the board of any pension fund or retirement system established under the Illinois Pension Code to file a statement of economic interests. Amends the State Officials and Employees Ethics Act. Includes appointed or elected commissioners, trustees, directors, or board members of a board of a State agency, including the boards found in the Illinois Pension Code, in the definition of "employee". Amends the Illinois Pension Code. Makes changes in provisions concerning the definition of "fiduciary", allocation and delegation of fiduciary duties, and prohibited transactions. Adds provisions concerning investment advisers, consultants, and investment services for investment boards, pension funds, and retirement systems other than downstate police and fire pension funds; investment transparency; prohibitions on monetary gain on investments; fraud, prohibitions on gifts; contingent fees; and procurements for pension funds, retirement systems, and investment boards, except downstate police and fire pension funds. Requires the University of Illinois to create the Illinois Fiduciary College for the purpose of education pension fund, retirement system, and investment board members and staffs on ethics.

This is the companion bill to SB1656 which is now being held in the Subcommittee on Ethics in the Senate. It is also under Rule 2 – 10, Committee Deadline Established as April 3, 2009. HB3722 is being heard on Tuesday, March 24th. All pension systems will provide testimony.

The concern over SB0303 (Sen. Brady’s attempt to introduce Defined Contributions into law) was not called in hearing; but studying the content of the State Budget, it would not be difficult to have language appear in one of the many shell bills that are available. For clarity: a shell bill is used as a vehicle for policy ideas that are not fully developed before the deadline for introduction.

To provide a bit of humor this amendment was found. It was written to amend HB0442. “(n) any penalty shall be waived if the violator delivers two bags of tea to the city attorney of the municipality from which the violation occurred.”
The bill has to do with traffic sensors.

Please forward any questions you might have to either suaa@suaa.org or linda@suaa.org . Stay tuned!