Longo: Some ideas for effective pension reform

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Longo

Updated: February 28, 2012 8:17AM

As legislators return to Springfield, pension reform is the “hot legislative topic” in a struggling economy. When the unemployment rate in Illinois remains higher than the national average, individuals with guaranteed pensions unjustly become the target of the public’s frustration.

Senate Bill 512, which addresses pension reform, passed the Senate in March and is pending before the House. The bill provides a three-tier option for the Teachers’ Retirement System of Illinois:

Tier I teachers (those hired before Jan. 1, 2011) could keep their current TRS benefit package, but their annual contribution to TRS would increase to 13.77 percent of their salary until 2016.

Tier I teachers could contribute a lower percentage of their salary (at least 6 percent) but would be shifted into the Tier II structure (required for those hired as of Jan. 1, 2011 and after). In Tier II, a teacher is not eligible for full retirement benefits until age 67. Also, it’s estimated that Tier II pension benefits will be 30 percent less than those for a Tier I teacher.

Tier I and Tier II teachers could switch to a Tier III option, a 401(K)-style defined-contribution plan. Teachers would pay 6 percent of their salaries, or more if they choose, and the state would contribute 6 percent.

I believe this bill is not the most effective solution to reforming the teachers’ pension system. It may not withstand constitutional challenges and will surely initiate expensive lawsuits by unions and professional organizations.

To avoid such challenges, why not enact legislation that would actually provide a funding source and ensure the viability of Illinois’ five public pension systems while providing relief for taxpayers?

As an example, why not tax pensions and reduce the state income tax increase that was passed a year ago? Illinois is one of only seven states that do not tax pensions. Use the revenue accrued from a pension tax to help fund the pension system from which the member retired.

The Legislature also needs to set a guaranteed annual contribution from the state to the pension systems and ensure that contribution is met. The continued underfunding of the pension systems by the state is the primary factor in Illinois’ pension problems. Enact legislation that would protect this money and prevent the borrowing or misuse of state pension money by corrupt officials, as evidenced during the Blagojevich years.

Here are other needed steps toward reform:

Place caps on salary “hard caps” within teacher union contracts. School districts can maintain local control and raise compensation within contracts, but the money would not be creditable for pension purposes beyond the designated TRS hard-cap amount.

End the annual 3 percent pension increase and tie an increase to the Consumer Price Index with a cap. The cost savings to the state has been estimated at $20 billion for the five pension funds.

Increase employee pension contributions on a graduated scale, with those with higher salaries paying more toward their pension.

Phase out the TRS Early Retirement Option. The cost to the taxpayers within a school district as well as the retiring educator is exorbitant by anyone’s standards.

Enact legislation that would allow an employee to retire from one pension system only. Someone who gets a pension from one system may not retire from that system and begin accruing pension benefits from another Illinois public pension system.

Require pension contributions by retirees who are employed in interim public positions.

The Teachers’ Retirement System reported a 23.6 rate of investment return for the fiscal year that ended June 30. This impressive return, however, will not provide the necessary solution to the system’s long-term funding woes as long as the state’s contribution continues to fall seriously short.

Including the above measures in reform legislation in concert with proper state funding will ensure the continued viability of the state’s pension systems and provide relief to Illinois taxpayers.

Margaret W. Longo is superintendent of Forest Ridge School District 142, which is based in Oak Forest.