Wednesday, January 25, 2012

Part 3: A look at pension reform across the country

By Jamey Dunn

All four legislative leaders and Gov. Pat Quinn have said that pension reform is a priority in the upcoming legislative session, but their opinions differ on what would be best for the state and legal under the Illinois Constitution. Recent reforms in other states could provide models as lawmakers move forward. This is the final installment in a three-part series that looks at different aspects of reform in other states.

While labor issues in some states have turned into ugly fights that involved sit-ins and heated rhetoric, one state managed to work out pension changes through negotiations with its unions.

In Vermont, state officials sat down with labor leaders and worked out a deal that will save the state about $15 million a year, which was about 10 percent of the state’s budget deficit at the time the deal was struck. Employees will contribute more of their pay toward their retirement costs. It varies for different workers, but it will mean about 1 percent more of their salaries would go to their pensions. Workers will have to wait longer to retire, but will see a bump in benefits. The deal also includes a two-year 3 percent pay cut for state employees, a first in Vermont.

Employees in many states have had to pay more for their retirement benefits. In 2010, 11 states increased the amount employees must contribute to their retirement. In 2011, it happened 16 more times, although some of the same states that had raised contribution levels the previous year made the move again. “If you were to look across the country in cases where required pension contributions has been raised by employees you would find a range for different reasons,” said Keith Brainard, research director for National Association of State Retirement Administrators.

He said, “It’s more the absence of something — the absence of a constitutional provision, the lack of a statute” that allows states to increase contributions. According the National Conference of State Legislatures, 12 of the 2011 increases applied to at least some current employees. However, David Draine, senior researcher for Pew Center on the States, said: “We’ve seen more states considering — though not necessarily going for it — models where employees can keep their current benefits but have to pay more for them.”

That is what House Minority Leader Tom Cross said needs to happen in Illinois. Under Cross’ proposal, Senate Bill 17, workers who want to stay in the current benefit system would have to pay more. “You’ve got to truly pay for the cost of your benefits,” Cross said at a recent news conference.

What sets Vermont apart is that state workers — not legislators — approved the increased contributions through their unions.

“I think what happened in Vermont is that the governor and others sat down with labor and said, ‘We’ve got this problem. There’s only so much money to go around, and something’s got to give,'” Brainard said. The state is facing a deficit, a pension funding shortfall and, according to Vermont Public Radio, 25 percent of Vermont state workers will be eligible to retire by 2015. Other key factors in the negotiations may be the fact that Vermont is a small state and has a tradition of public civic engagement.

Brainard said Vermont is an example where defined benefits plans can continue to be workable and states do not have to switch to 401(k)-type defined contribution plans to tackle their pension problems.

Senate President John Cullerton said he would like to see Illinois negotiate a deal with its unions. “We can affect current employees … with laws that have a contractual basis. If there’s a reduction in benefit, there has to be a corresponding consideration, and there has to be acceptance," Cullerton said at a recent news conference.

Cullerton believes that any changes imposed by the state to benefits for current employees would be unconstitutional. Cullerton said Cross’ bill is unconstitutional and lacks the support to pass. “It hasn’t even been called, so apparently they don’t have enough votes for it.” He said that pension reform is also a priority of his, but that it should be achieved through negotiations with unions. “Politically, it would be real, for some people, just easy I guess to pass a bill, claim you did something, have it [blocked by the courts], spend millions of dollars in legal fees and then two years later find out it is unconstitutional.”

That is what former Vermont Treasurer Jeb Spaulding, who worked on the agreement in his state, wanted to avoid. “It would have been a Pyrrhic victory if we forced through a plan that was enjoined or overturned and we didn’t have any savings at all,” Spaulding told Stateline.

However, Brainard said states such as Illinois might have little to offer unions besides the avoidance of negative outcomes. “I think Illinois is almost in a class by itself in terms of its chronic neglect of its pension plan.” He said. “The best they might have to offer in a lot of cases is that they would forestall attrition and layoffs.”

Illinois union officials say they want to be at the table for any talk of pension changes, but they say that workers should not have to pay for the underfunding of the pension system after lawmakers and governors skipped required contributions year after year. The only way to solve the pension funding problem is for the unions that represent public employees — whose retirement security is dependent on the health of the pension funds and whose deferred compensation makes up 100 percent of the funds’ assets — to be full partners in discussions that are appropriately structured and focused on the real problem, funding,” Anders Lindall, spokesman for the American Federation of State County and Municipal Employees Council 31, said in a prepared statement.

Brainard said that Illinois' constitutional provision creates a “higher hurdle” to pension changes. However, he said, “I would not consider any single provision to be absolutely iron clad, with the one exception of benefits earned to date.”

Both Brainard and Draine agreed that states also need to consider the role that pension benefits play in recruitment.

“A lot of the focus has been on the pension side of things,” Draine said. “States do need to balance the need to control costs with the need to recruit and retain a public sector work force.”

Brainard said the promise of retirement security can help to attract quality workers and keep them on the job. “You have to find a set of solutions that will get you a work force capable of delivering the results that your constitutions want and deserve, and you have to do that at a cost that’s sustainable over the long term.”

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