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posted: 9/4/2012 5:00 AM

Local employers, taxpayers part of pension solution

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  • Tyrone C. Fahner

    Tyrone C. Fahner

By Tyrone C. Fahner

The Aug. 21 op-ed by Marc Levine, titled "Cost shift would worsen pension problem," raises critical points that need to be addressed when considering Illinois' pension reform efforts and the potential shift of future pension costs to local employers.

First, Illinois needs a major restructuring of its pension systems. Given the historical unwillingness of our General Assembly to address this issue, we are now in a dire situation in which the state's ability to make pension contributions while continuing to provide critical public services is in question. Illinois' state pension funds have reported unfunded liabilities of $83 billion, but according to Moody's rating agency these liabilities could actually be as high as $200 billion. The contributions needed to pay the annual cost of the pensions and reduce the unfunded liabilities continue to grow and crowd out critical services such as education and human services. By Gov. Pat Quinn's estimation, pension contributions will exceed the total state budget for education by 2016.

Second, given the legislature's inaction over the past few years, the reform proposals currently under consideration are no longer adequate. A major restructuring of our state's pension plans needs to resemble, and most likely exceed, the nature of the substantial changes that were undertaken in Rhode Island last year -- including a suspension (or elimination) of cost-of-living adjustments and the creation of a hybrid plan for all employees going forward.

Third, a shift of the future "normal cost" (the cost of pension benefits earned each year) of a reformed pension system to local employers, i.e. school districts, universities and community colleges, is the right thing to do. As currently structured, the pension system has split the responsibility of the costs of employment between downstate school districts, universities and community colleges and the state. This has resulted in a system in which employers negotiate salaries and contract terms but are not responsible for the pension costs of their own employees. In many instances, local employers increase pay and provide end-of-career sweeteners that cost the state substantial dollars in increased pension payments but cost the local employer relatively little. In addition, 62 percent of school districts "pick up" all or a portion of the pension contribution that employees themselves are supposed to make. This pension pickup means that, for some employees, the local district and state provide all contributions to their pensions -- untaxed.

As a matter of policy and fundamental equity to those that do not live in a particular school district, the cost of retirement benefits should lie with the direct employer. Any pension reform effort implemented at the state level must move the future normal cost of a reformed system to the local level. Before such a transfer, the system must be reformed in a sustainable manner, have a long phase-in period (10-15 years) and leave the responsibility for the legacy liabilities with the state and current employees. While the question of who will decide the level of future pension benefits still needs to be determined, it is critical that employers have some accountability for the cost of these benefits during labor negotiations. In addition, a phase-in of a well-structured pension system need not result in any significant increase in property taxes.

Illinois and many of our municipalities, including Chicago, are in dire financial straits. The overhang of the already-accrued unfunded liabilities of the state's pension funds is crippling our ability to provide for state retirees as well as provide critical public services such as education, social services and health care to the needy. At this point, no other policy matter has greater importance. It will require everyone to work together and rationalize the system. That includes local employers and taxpayers.

• Tyrone C. Fahner is president of the Civic Committee of The Commercial Club of Chicago.

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