Madigan Cost Shift? He's Scored Already!

Local Districts: Caught Holding the Bag, Pt. Two

“There is more hope for a fool than for someone who speaks without thinking.” (Proverbs 29:20 – New Living Translation)

According to Representative Tom Morrison (District 54 – Palatine), his bill HB3303 surpasses the two competing bills currently in the General Assembly that deal with pensions: Madigan’s SB1 and Cullerton’s SB2404. 

Morrison’s bill, which has the backing of Tea Party colleague Representative Ives and new Senator Oberweis, “provides a clear path toward sustainability by converting the entire system into a modernized 401K-style contribution plan.  Private and public entities have embraced these types of contribution plans because they are sustainable and serve the ultimate purpose, ensuring an individual’s retirement…The economy is dynamic, individuals are living longer, and the government - which is supposed to serve taxpayers, not the other way around – must change its retirement system to reflect these new realities” (Representative Morrison in email response to questions by Robert Zahniser, May 22, 2013).

In other words – stop the pension, freeze current payouts for residual actives, and provide 401K’s like they do in the private sector.

What Representative Morrison omits or overlooks in his tutorial to Mr. Zahniser is that 401K’s are not accepted as a valid retirement program that can meet federal muster by the Social Security Administration.  In fact, 401K programs are simply self-directed savings plans offered by some companies and on occasion with matching incentives for employees to save funds to augment federally acceptable retirement programs like Social Security or a qualified Pension Program. 

Note: A 401K does not meet federally acceptable levels as a legitimate retirement program for public school teachers.

In Illinois, like almost all other states, public employees face the Windfall Elimination Provision (WEP), which provides a substantial offset to any earnings outside the public arena in which that same employee paid social security taxes.  Public employees like teachers in Illinois do not pay into social security; instead, the state instituted the pension system in 1939, and opted out of the payments to Social Security.  Instead of paying his own 6.3% of income to the federal system, the public teacher in Illinois pays 9.4 % toward his pension/retirement contribution. 

In the spring of 2010, SB1946 passes the General Assembly in less than a day and established Tier Two.  That change in benefits included increased retirement age (67), a maximum pensionable salary calibrated to social security, a simple COLA with lesser increases, and the same payment of 9.4% in contribution despite reduced benefits.

Note: It is also very likely that Tier Two does not meet federally acceptable levels as a legitimate retirement program for public school teachers.

Comptroller for the State of Illinois Judy Baar Topinka sagely warned in her 2011 Fiscal Focus publication: “The new ‘Tier Two’ pension benefits for non-coordinated systems may no longer meet the minimum standards for the Social Security tax exemption.  If the IRS determines that the new plan no longer provides sufficient retirement benefits, the employees and their employer would each owe 6.3% of payroll for Social Security taxes for coverage in addition to current pension contributions.  It is not clear whether this would apply to all employees in the plan or just those who fall below the Social Security requirement” (http://www.ioc.state.il.us/index.cfm/linkservid/C0426A73-1CC1-DE6E-2F485B26D3820194/showMeta/0/ ).

At first, one might think that bill is going to fall on the State of Illinois – an additional 6.3% of salary for each Tier Two employee – and perhaps some Tier One’s as changes like Representative Morrison promotes are applied?  That’s a lot of money. A real lot.

Note: But, believe it or not, it will be the local school districts who will pay for this possible, probable penalty for not meeting federal standards.

When determining responsibility for the payment to meet a federally acceptable retirement program, the “common law control test” is used to ascertain fiscal responsibility to pay the Social Security payment of 6.3%.  While the common law test has several aspects, one primary determiner is whether “a relationship exists between the worker and the firm they work for…(and)…the employer has the right to tell the employee what to do, how, when, and where to do the job” (www.ssa.gov).  This reasoning is reinforced in 1950, and it was first established in 1939, when the Pension System was advanced to replace Social Security for public teachers in Illinois.

Tier Two is a ticking financial time bomb, just waiting to go off.   

According to Kathleen Farney, a director of research at TRS, roughly 3000 Tier Two teachers currently work in the public system in Illinois; that is, an incoming number of about 1000 annually since inception.  According to the TRS Financial Annual Report of June 2012, the average age of an active in Illinois was 42 with an average of 12 years of earned service.  As would be expected, the population of Tier Two workers will inevitably increase as more and more Tier One teachers leave the workforce, and the exodus of Tier Two workers from the profession will begin after 2035 and swell moving forward to 2045.

Even the director of TRS, Richard Ingram, is counted among that number, and the inequities of his financial position were not lost on him.  “It is what it is.  I pay the same 9.4% of my salary towards my pension that everybody else does. The value of our benefit only costs about 5 percent or a little less. Half of what I’m contributing every two weeks is somethingI’m never going to see or never get the benefit of. It’s monies that reduce the cost of the state” ( http://www.sj-r.com/top-stories/x1274367255/Tier-2-teachers-helping-pay-off-states-pension-debt ).

Interestingly, when 2035 begins to roll steadily on to 2045, The Social Security System may want to weigh in as well.  And any comptroller sitting in an office in a local district might want to consider the impact that this yet-unopened gift from General Assembly will might provide in a few decades. 

And for local districts?  They may be worried about the possibility of a future Madigan Cost Shift, but he’s scored already!