Here Comes the Pension Bill: Devilish Details, Part I

Rich Miller at Capitolfax.com notes the following (which didn't get by me but is lost in the fire burning over this issue):

"The media has completely ignored this aspect of the plan, and it’s buried way down in the SJ-R story today…

The Tier 1 contribution rates are subject to revision after the first three years and every three years thereafter. If the contributions become too burdensome, an employee can move down to Tier 2 or Tier 3 but never back up.

In other words, those numbers you see above aren’t final by any means. The contributions will automatically be recalculated every three years, and those contributions could very well be recalculated upwards as people leave the system. That scenario is a huge political nightmare for many, many legislators." (bold added for emphasis)

URGENT [EDITED]: Springfield pols out to Clean your Pension Clock: Read Amended SB 512

Read the whole bill before tomorrow's hearing (ha, ha) because the devil is in the details.

*UPDATE* I've learned from SUAA that the "actuarial formula minus six percent" (in effect after three years of pension reform) WILL be higher than the 15.3% pension contribution set for 2013-2015 (could be up to 28%; be grateful, it is less than the 34% demanded of judges now). 

Get off your Tier I pension or lose it all. A lose-lose scenario. The beauty of the thing: while legislators will have to stand and vote for 15% (12.75 percent K-12), the actuaries will do the real kill job in three years. Brilliant! 

But, remember, we will earn at least the equivalent of Social Security! Now there is another "contract between generations" that will stand the test of time (snark). Unless they spend our newly "deleveraged" dollars on something else and decide that we only need 3% and throw us on Social Security like they did federal employees. 

ORIGINAL BLOG:

This is written fast and furious because the hearings are tomorrow. Excerpts from the gobbledygook amendments made to SB 512 below:

Great indeterminacy. The only definite thing is a) the state won't pay more than 6%. Your retirement will be at least equal to Social Security benefits (what a joke).

To keep (for now) our "constitutionally guaranteed" defined benefit packages, we must all pay more, 15.31% of compensation (presumably salary and not all "compensation" including benefits?). Thereafter it is based on some actuarial formula that is in the hands of the state with history of rigging numbers. So your future contribution amount may be higher or lower (assume higher).

Sum up: it reads like it was written by mafia lawyers: sign or we kneecap you.
..
Sec. 8-103.3. Traditional benefit package. "Traditional
benefit package": The defined benefit retirement program
maintained under the Fund for employees who first became
participants in the Fund before January 1, 2011.
. . .
(1) Participants who elect the traditional or portable
defined benefit package shall contribute:


(A) In fiscal year 2013, fiscal year 2014, and 

fiscal year 2015, an amount equal to 15.31% of salary [teachers only increase 3.35% but SURS employees must pay 7.3% more than we are now].

(B) In fiscal year 2016 and in each fiscal year
thereafter, a percentage of salary equal to the
actuarially determined normal cost of the traditional
defined benefit package ["We'll tell you later and you accept the numbers we give you, sucker!"], minus employer contributions [6%]
...
The following clause is a puzzler: they want us in Self-Managed Plans but no more than 20% of us?

Sec. 10-110. Maximum self-managed plan participation. By
July 1, 2012, the Fund shall certify the total active
participant population. When the number of participants that
elect the self-managed plan is equal to 20% of the total active
participant population, then no participant may elect the
self-managed plan.

RETIREMENT SALARY CAP:

(e) Notwithstanding any other provision of this Article,
the required contribution of a participant who first becomes a
participant on or after January 1, 2011 shall not exceed the
contribution that would be due under this Article if that
participant's highest salary for annuity purposes were
$106,800, plus any increases in that amount under Section
2-108.1.

But they will adjust it for cost of living increases which are half the rate of inflation or 3% whichever is lower (if inflation is 4%, then you get 2%!). Not clear whether the half-inflation adjustments are annual DURING employment (i.e., cumulative increases) or only when you retire. If you start work now and retire at 67 (another requirement), then $106,000 will be worth a fraction of $106,000 today. Makes for good envy-based politics though and people (voters) don't think ahead.

Good news (cough, cough): The state promises -- PROMISES! -- that your retirement package will at least equal what  you would get under Social Security. OMG! My wife worked for social security and the motto was "retirement is a three-legged stool; Social Security is only one leg, a good pension is another, then there is savings." Unless you work for the State of Illinois.

Making Sense of Pension Reform: Defined Benefit versus Self-Managed Plans

NOTE: If there are any inaccuracies, please report them in the comments.

There is misunderstanding on the part of those with Self-Managed Plans (SMPs) that the proposed pension reform places them in a better position than Defined Benefit (DB) plan members. True, the biggest hit will happen to those in Defined Benefit (DB) plans. The lower impact of the proposed "reforms" (on SMPs) occurs because DB plans (traditional, portable) are much more generous. Nevertheless, keep this in mind: if you are in a DB plan, you KEEP ALL PAST EARNINGS: employee AND employer contributions plus interest (averaged 8.5% in past 15 years). The effective rates below:

9–1–97 thru 8–31–98 9%
9–1–98 thru 8–31–99 9.5%
9–1–99 thru 8–31–02 10%
9–1–02 thru 8–31–03 9%
9–1–03 thru 6–30–05 8%
7–1–05 thru 6–30–09 8.5%
7–1–09 thru 6–30–10 8%
7–1–10 thru 6–30–12 7.5%

Source: SURS

This money doesn't disappear if the legislature effectively forces DB members into 401(k) style SMP plans. Here are the advantages of DB over SMP:

1. Under SMP stock investment plans, it would be hard to match the 8.5% over those years. Example: employee hired in January 1998. The Dow Jones ("stock market" average) was 6450. Thirteen years later end of 2011, the stock market was at 11,577. That is an 80% increase. HOWEVER, if that employee had earned 8.5%/year (on average) his/her money would have doubled after 8.5 years and tripled after 13 years. In other words, SMP stock market investments would have had to TRIPLE to match the DB plan -- that is equivalent to a stock market average of 20,000 at end of 2011 rather than 11,577. 

Source: http://www.econstats.com/eqty/eqea_mi_3.htm

How did DB outperform the stock market? This is controversial: first, keep in mind that the pension contributions are invested in a mix of stocks and bonds. Critics, however, believe that the pension board has goosed the numbers to please legislators: the higher expected rate of return, the less legislators must contribute! The truth is probably in the middle.

2. DB is more generous because the politicians are attacking it. Numbers aside, they are like the bank robber who was asked "why did you steal from the bank?" Answer: "Because that is where they keep the money!" Why?

3. Employers contribute 9.1% versus 7.1% for SMP employees (7.5% before expenses removed).

4. Cost of living: this is a HUGE factor -- when I ran financial plans for clients back in the 1980s, they grossly underestimated how much the cost of living (inflation) would erode the real value of their retirement savings. Yet the State protects DB recipients against inflation. SMP recipients are on their own -- each year their retirement fund is worth less.

5. SMPs are favored under the new Madigan/Cullerton bill in the legislature: state contribution "only" drops to 6% (although it may be 5.6% after expenses removed). Wonder why? Tens of billions of dollars in IOUs go POOF! when we are all on SMPs.

"What is to be done?" Note the usual caveat that you should seek advice from a licensed broker, estate planner, laywer, etc. before making any financial decisions. What would I do if I were a DB employee faced with a 7.3% increase in my pension payroll deduction? I'd hang tight until the courts have ruled. I don't expect much of the judiciary since the New Deal Court Revolution rendered government contracts something that could be changed at the whim of those in power. But who knows? Keep in mind you are still ahead of people who chose SMP over the years expecting to "beat the market" (and being handicapped with a lower state contribution!).

I joke that current retirees are "LGRs": the Last Generation of Retirees. It has nothing to do with partisan or class warfare but, rather, generational warfare -- and a "war" that isn't even declared but simply happened due the confluence of past events and current demographics.

On the generational front, there is positive news: if your parents left you or your spouse a trust fund/inheritance, you may still be able to retire and send the kids to private college. The rest of you are screwed. But I must end on a happy note. . .

There is another State of Illinois plan to raise retirement money (scroll down):

Health Alliance: UPDATE!

This year the great State of Illinois dropped Health Alliance HMO from its list of providers and replaced it with two carriers that better serve the Chicago area but have no downstate presence. This caused a bipartisan uproar "downstate," where Health Alliance serves 100,000 state employees. (Disclosure: I am a happy Health Alliance member and cringed when I heard the news that the state was dropping HA).

I contacted Senator Frerichs (D-Champaign), "point man" in Springfield leading the charge to "reset" the button on bidding. Below is his email to those of us who subscribed to updates on this issue:


"There's been some confusion surrounding the State's recent decision to drop Health Alliance's contract for group health insurance. Much has happened in Springfield and we've learned new information since the Governor's office and the Department of Healthcare and Family Services (HFS) first announced this decision on April 6^th. I want to take this opportunity to review what's happened so far, and update you on next steps.

I've posted this timeline on my website which walks us through major events, starting from the initial announcement on April 6 through May 11, when the Chief Procurement Officer at the Executive Ethics Commission officially began his review of Health Alliance's protest. I'd encourage you to explore the relevant documents and news articles linked to in the timeline to gain a full perspective.

 Click here to view the Timeline of Events surrounding the Health Alliance decision.

I particularly want to highlight two important next steps in the process which will determine if Health Alliance will continue to be an option for quality, affordable health insurance in downstate Illinois.

First, it's important to know that upon discovering their contract was not renewed, Health Alliance immediately filed a protest of the decision. The review of this protest officially began May 11 at the Executive Ethics Commission. Look for a decision from Matt Brown, the Chief Procurement Officer, in the next few weeks.

Next, and regardless of the outcome of the protest review, current statute requires the Commission on Government Forecasting and Accountability (COGFA) to "advise and consent" on the new group health insurance contracts. There are some disagreements about what power this "advise and consent" language actually grants COGFA, but in my opinion, the language clearly implies COGFA's ability to reject new contracts. As I explained in a recent Op-Ed in the Champaign News-Gazette, my intention as one of the members of COGFA is to vote against the new contracts. Look for COGFA to announce its next meeting sometime in the next few weeks.

The best outcome we can hope for from either of these upcoming steps is this: the process will be re-started and contracts will be re-bid. If the protest review yields a favorable outcome, or if COGFA does not approve the new contracts, it essentially hits the "reset button." Current health care contracts could be extended during the re-bidding process so no one's current health care would be disrupted.

Keep an eye out for these next steps in the process, and I'll do my best to keep you informed as new information becomes available. Thank you to the hundreds of you who have reached out to my office to express your concerns. I appreciate your input and I'll continue to do my best to ensure access to quality, affordable healthcare for our community.


In order for us to continue to stay in touch, it's important that you have my updated email address, which is frerichs@senatedem.illinois.gov. Please don't hesitate to email my office with any comments or concerns you may have.

Sincerely,

Senator Michael Frerichs

45 E. University Ave.
Suite 206
Champaign, IL 61820
Email: Frerichs@senatedem.illinois.gov
Office: (217) 355-5252     
Fax: (217) 355-5255

Danville Office:
28 W. North Street
1st Floor
Danville, IL 61832
Office: (217) 442-5252

Pension Reform for all but Judges: Craven Effort to Buy Judicial Favor?

A northern Illinois newspaper notes how the Democrats in Springfield excluded judges, apparently (according to paper) in an effort to head off any personal animosity judges might feel in response to pension cuts. You see, judges are state employees too. The civics drivel taught in government schools about judicial review, lifetime tenure, separation of powers . . . well, it hasn't caught up to America in 2011, especially the Illinoisan corner of the USA.

Excerpt:

The Illinois Constitution says public employee pensions “shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” Senate President John Cullerton, D-Chicago, has said changing pension benefits for current employees is unconstitutional but plans to allow a vote in his chamber if the bill passes in the House.

“Half the people think that’s it,” McCarthy said of the hope that the law will not be struck down if it doesn’t affect judges. “Many of the members are legal people, so I think they have a vested interest in not irritating the judges they have to appear in front of.

“I’m sure no judge would do that, but you know.... I wish they were in, to tell you the truth.”

Rep. Rich Brauer, R-Petersburg, criticized the exclusion of judges.

“That’s the only way they can get that thing passed,” Brauer said.

Quote of the Week: Glenn Poshard's One Liner Defending Our Pensions

In a recent email memo to SIUC staff, Glenn Poshard talked at length about the likelihood of major cuts to our pensions (all types, not just defined benefit). He included a great one liner worth repeating:

POSHARD:

In my view, this plan, including all of these options, represents no less than a forced migration into lower pension benefit plans for university employees. The notion that proponents of this legislation are suggesting that this plan can somehow withstand scrutiny on the constitutional issue of diminishment of benefits because it somehow provides a choice of options for employees, is comparable to the idea that there are free elections in Venezuela.

I'd Rather Be in Wisconsin: Illinois Democratic Leadership Attacks Pension -- Bye, Bye Constitution

http://www.substancenews.net/articles.php?page=2255&section=Article

“....Madigan and Cross intend to run a new bill that changes the benefits for current employees. According to the current legislative proposal (not quite fully shaped, but soon to be inserted into a Pension Bill —currently an amendment to SB 512) current employees will have three "options" beginning in June 2012:

OPTION ONE: Teachers may remain in the current plan and pay a considerably higher employee contribution (possibly as high as 15 percent);

OPTION TWO: Teachers may move to the new "Tier II" plan passed last year for new employees.

Tier II reduces benefits dramatically (retirement age increases, COLA changes, using 8 years instead of 4 for average salary for pension purposes, etc.) and pay the same 9% contribution;

OPTION THREE: Chose to have an employer contribution (6%) made to a separate "Defined Contribution" plan along with your employee contribution.

In recent weeks, the Illinois Democratic leadership "works together" with IEA. The IEA opposes and then relents to anti-union acts, stating "this is not Wisconsin."

It sure ain't -- it's far worse: latest pension bill (SB 312) requires those of us with defined benefit pensions to increase our contributions from 8% to 14.5% --- a 6.5% increase (pay cut)! That's to keep our "constitutionally guaranteed" pension.

"Pinkie promise."

Even worse, because the state is contributing so little (2%?) the feds will probably add Social Security tax (another 6.5% for retirement) based on the reasoning that our employer isn't offering a satisfactory pension.

Do the math: 6.5 + 6.5 = 13% pay cut to keep a pension not to be "diminished or impaired" (IL state constitution).

In Wisconsin, Republican Senator Scott Walker went after making workers pay half the pension contributions or 5.8%. Wisconsin: 5.8 versus Illinois 14.5% (even without added SSA tax).

Why are people on the Left surprised? This is progressive law coming home to roost. The men and women in Springfield are not progressives but some of their opponents call themselves "progressives." Yet progressives were never very big on "original intent" or "plain meaning" of constitutions," were they? The state constitution means as little as the federal constitution. And now the Left is "shocked! shocked!" that people aren't looking at the letter of the constitution or even top Democratic legal counsel analysis (worth reading - below):

http://www.illinoissenatedemocrats.com/images/pensions/D/Madiar%20Pension%20Abstract%2003-02-11.pdf

Full 76-page analysis:

http://www.illinoissenatedemocrats.com/images/pensions/D/Pension%20Clause%20Article%20Final.pdf

Where is the SIUC FA? No word on their site? They are busy demonizing Chancellor Cheng for her temporary 2% pay cut while ignoring the tsunami in Springfield. But, hey, it may all be over by next week. Making politics personal can sometimes be counterproductive . . .

“O(h no) Canada!” MTV Signature Song Banned

When I grew up in the 1970s and 1980s, the stereotypical bowdlerizers of speech--the people excising "offensive" lyrics and literature-- were the uptight blue-nosed sort who feared that "someone, somewhere, was having fun." (H.L. Mencken).

Now, the "progressive" Left has replaced the Puritanical Right as the great policer of speech. "Progressives" have always policed speech ("you are politically incorrect, comrade!") so this is really nothing new. Both Left and Right have a long history of searching out words they feel are too sensitive to the ears of minors or thin-skinned individuals.

(Apologies in advance for those who suffer from blue noses or thin skin).

Latest example: the Canadian "Standards Council" has banned the Dire Straits song for using the word "faggot" in the classic 1980s tune "Money for Nothing." I learned this after listening to the song on the Dire Straits' album "Brothers in Arms." The song brought back memories of my youth so I searched out the video which was as good as I recalled (classic MTV video of the 1980s). Alas, the video has also been excised so that it is "good for all countries." Now Canada can join the Religious Right in America and the Muslim bloc (in the United Nations) in bullying or outlawing "hate speech." Perhaps the result will be some Universalist Code of Speech.

What makes this even more chilling is that they are attacking not only present speech but scouring the past for things that might offend someone if ever read or heard now. Shades of Fahrenheit 451.

The new rule of thumb: don't say anything that might offend any one one hundred years from now. Good luck guessing what might be on the "hit list" in the year 2111!

Coda: the secondary definition for "bluenosed: "Canadian."

Kind of appropriate, eh?

Libertarian Defends Professor Cronon (while blasting the hypocrisy of the Left)

Over at the leading libertarian magazine, Reason, writer Shikha Dalmia attacks conservatives for using FOIA laws to invade the privacy of historian William Cronon. At the same time, Dalmia defends Open Records laws while noting that groups may abuse their rights by going after individuals. On that score, the Left comes in for a tongue lashing for politicizing the process (and so much else in academia).

Frankly, I'm surprised that Professor Cronon was so clueless about the dangers of work email addresses. I've said it before (here, here, and here): your work email is state property and open to reading by your university or outsiders who file FOIA requests.

Bottom line: DO NOT USE YOUR .edu account for anything unrelated to work. Use another account.

"Last and final offer": Full Text

The Faculty Association has it buried in their links and not on their front page. Here is the offer made by the administration and rejected by the union:

http://www.ieanea.org/local/siucfa/assets/siucfa-1yearagreement32511.pdf

Interesting that the Board couldn't agree to an index for a future contract but did feel it necessary to be politically correct by adding "transgendered" to the language of this offer!

"Section 1.02. Gender. Unless the context in which they are used clearly requires otherwise, words used in this contract denoting gender shall refer to the masculine or feminine or transgendered."

I know we have transgendered bathrooms but do they have one in Anthony Hall? How could the two sides and three genders bargain amicably if there was no bathroom for the third gender?

More seriously, check out the changes to the contract.

*No pay raise

*ARTICLE 18: Furlough Days

*ARTICLE 19: Layoff procedures ("Reduction in Force")

Key phrase:

"19.02. If the Board decides it is necessary to fully or partially lay off Faculty members in accordance with this Article, the factors which will be considered in light of the University’s program needs, in determining which, if any, employees will be retained, are: length of full-time service at the University, including approved leaves; length of full-time service in the department, including approved leaves; educational qualifications; professional training; and professional experiences. The full or partial layoff of Faculty members in the level of organization as determined by the Board to which the layoff applies shall be in the order listed below:

a. Full-time untenured tenure-track Faculty;

b. Tenured Faculty."

*Distance Learning section stripped from the Addendum B but retained in Addendum D.

OPEN FOR COMMENTS