SB17: Eric Madiar, Master Architect
"We have a state fiscal system that is so poorly designed that it failed to generate sufficient revenue growth both to maintain service levels from one year to the next and to cover the state's actuarially required contributions."
- Eric Madiar, Senate President Cullerton’s Advisor, Consultant and Designer of SB17 to the City Club of Chicago, Sept. 2015
Despite Mr. Madiar’s unblemished observations before the City Club of Chicago nearly a year ago, his draft of a new “reform” measure to reduce the costs of unfunded pensions by placing the burden directly upon the backs of those who work as public employees illuminates the characteristic politicians’ unwillingness to accept a clear, legal and moral path earlier provided by the Illinois Supreme Court.
Enter stage right: SB17. The offering to an obstinate Governor Rauner to possibly break the ongoing deadlock in the state budget while guaranteeing the certainty of another battle in the courts over Article XIII, Section 5 of the Illinois Constitution.
“Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an
enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
From a Cullerton “Issue Background” Memo: “Savings would be recognized by giving Tier 1 public sector employees a choice of benefits related to raises they may receive in their careers and the annual cost of living adjustments to their pensions in retirement.”
In legally, overly- simplistic words, Madiar’s argument for Cullerton to Rauner is that as the employer, the state has the right to decide compensation. And compensation is never guaranteed. Just as a faculty or union may argue for an increase, so may a state (the employer of a public educator) define a raise or decide to withhold one.
In other words, this is not “consideration; it’s an employer’s negotiable prerogative.
In SB17, Tier 1 employees are asked to give up the 3 percent compounding COLA increase for which they would be eligible each year after retirement. Instead, they would elect the lesser simple compounding formula for Tier 2 employees, but their future raises would qualify for figuring their final base pensionable annuity.
Sweeteners include a refund of what they have already paid into the pension funds of 10%, and a 10% reduction in payments going forward. On the other hand, if they retire early? – no (simple)Cola until age 67 or five years after departing the profession.
But the state’s argument will identify the right of the employer to determine salary, not the choice between two diminishments. Emphasis on salary adjustment, not choice.
Disagreement is sure to follow. A recent bulletin from IRTA reminds all retirees “The legal team who represented the IRTA Members against Senate Bill 1, Gino DiVito and John Fitzgerald, recently wrote an opinion concerning Senate President Cullerton's proposed "consideration" language in the bill.”
In short, the attorneys for IRTA do not accept Madiar’s position regarding SB17 or the vulnerability of Tier 1 active teachers; however, they do not represent them.
Likewise, Madiar himself never really supported his own scheme either:
“Our current pension disaster cannot be blamed on salary or pension cost increases. Between 1985 and 2014, pension funding liabilities grew by $97 billion. Benefit increase only counted for 8%, or $8 billion of that growth. Pay increases were actually less than actuaries had assumed they would be. And the actually helped bring down the unfunded liability by $1.3 billion. The state's failure to fund the system accounts for 49 or 47% of that growth. So simply out, the main reason we are in this mess is for insufficient pension contributions” (City Club of Chicago).
Yet, SB17 provides no recognition for future salary increases over the years for those Tier 1 employees who “choose” to accept the status quo in pension law. Their salaries will be frozen when it comes to computing a compounded benefit of cost of living.
Yes, it all begins to become complicated unless you happen to be someone in Tier 1 looking at your future and a possible retirement some 5 – 10 years away. Then it gets downright terrifying.
Complication aside, another laurel to Rauner includes the offering of a 401K buy-in for the up-to-5% Tier 1’s who just want out of this whole legal labyrinth. The 5% limit prevents the stampede of people (will there be?) from further undermining the pension system funding by employees.
A good friend of mine who called me on the morning of May 8th 2015, to inform me of the Illinois Supreme Court’s unanimous decision overturning Madigan’s Pension Reform SB1, reminded me that they’ll (General Assembly) never stop. “They’ll be back again because they won’t ever do the ethical or moral or right thing.”
He was right, but Madiar knows this too. He’s given them momentary hope with another method to avoid the larger issues: a progressive income tax, taxes for services, a re-amortization of state debts, an increase in income taxes, etc. But he also commented:
“In the end, while contract principles and other permissible options can help mitigate the burden of State and municipal pension obligations, the state must still restructure its revenue system so it can meet, not simply defer its fiscal obligations. As Paul Simon observed in 1971, "We mortgage the future not only when we create bonded indebtedness; we also mortgage the future when we don't pay into the pension systems as we should.
“Revising our State's revenue system, of course, will require political courage and entail tax increases. Welching on public pensions, however, is still not an option for Illinois”.
Political courage? In Springfield?