Why the pension cost shift and HB 6258 make sense

Editor’s note: Two suburban lawmakers wrote differering opinions about a pension proposal for the reform group Reboot Illinois. State Rep. Darlene Senger, a Naperville Republican, fears the legislation before the House will mean higher local taxes. State Rep. David Harris, an Arlington Heights Republican and co-sponsor of the legislation, disputes that and calls for urgent action. Excerpts are reposted here with permission. For the full text of Harris’ article, click here.

Ah, “pension reform” — just mentioning the phrase either causes one’s eyes to glaze over because of the complexity of the subject or it stirs one’s spirit to fight the mere thought of any action that might touch a pension benefit.

People will disagree on how we got into the situation we face. However, our financial condition is not going to get better until the legislature and the governor take action.

The pension payments that Illinois makes to its state-funded pension systems are consuming more and more of our General Revenue Funds. In FY ’13, that fund is expected to increase by about $700 million.  However, the payments to the pension systems will be roughly $900 million.  

The time for action has clearly come, and thanks to the hard work of state Rep. Elaine Nekritz, chair of the House Personnel and Pensions Committee, and state Rep. Daniel Biss, an Evanston Democrat, HB 6258 was introduced in the House. The key difference between HB 6258 and previous bills was that this bill has support from a large number of members. The sponsorship was bipartisan, too — mainly Democrats, but some Republicans. I am one of those Republicans.

HB 6258 addresses some of the most contentious pension reform issues in creative ways.  It preserves an automatic yearly increase on the first $25,000 of one’s pension. While it eliminates the compounding, it provides protection for those with smaller pensions. HB 6258 also raises the retirement age, but does it on a tiered-age basis.  There is also a phase-in of employee contributions, instead of an immediate increase.

One of the key elements of HB 6258 is for local school districts and universities to pay the normal pension costs for personnel going forward. The unfunded liability costs that currently exist for the Teachers’ Retirement System and State University Retirement System would be paid for by the state, but future normal costs going forward would be born by the school districts. This provision has been called the “cost shift.”

There is a fear among many legislators, especially Republicans, that this shift would result in sharply higher property taxes for local school districts. I respectfully disagree.

There is an understanding by all involved in this issue that the current unfunded liabilities remain the responsibility of the state. Additionally, the objective was to transfer the payment responsibility slowly over a long period, perhaps a decade or more.  Initial actuarial scoring of HB 6258 indicates that the impact to locals of the transfer of responsibility could be very minimal as measured as a percent of payroll.

In my mind, there is a simple logic to the transfer of responsibility.  Employers determine what an employee’s salary is. Normally, the pension liability of that salary stays with the employer, but that is not the case when it comes to TRS and SURS.  The pension liability is transferred to the state of Illinois; yet the state does not determine salaries. Yet, it is the final salary that drives so much of the pension cost.

Other provisions of HB 6258 also have been scored positively. Estimates are that the state’s annual pension payment for FY ’14 could decrease by nearly $2 billion, a 28 percent drop. And by 2043 the pension contribution could drop by 30 percent, from $16.8 billion to $11.7 billion. Those are significantly positive impacts that would strengthen our state’s financial condition considerably.

It remains to be seen if HB 6258 can gain the “critical mass” of support to get the 60 votes needed in the House and the 30 votes needed in the Senate to get it to the governor. But time is running out. If we again do nothing, then the credit rating agencies will downgrade the state’s bond rating. The taxpayers of Illinois will pay more in interest as a result, and, more immediately harmful, the needed services that we provide to our citizens will continue to suffer as we struggle to make higher and higher payments to the pension systems.