The SB 1687 cost shift doesn’t go far enough

A “cost shift” pension plan was introduced today, Senate Bill 1687 Amendment #2, for the State Universities Retirement System, or SURS. Here are the ins and outs of the plan: What the cost shift does: A significant driver of Illinois’ $97 billion pension crisis is the fact that the state makes pension contributions to SURS...

A “cost shift” pension plan was introduced today, Senate Bill 1687 Amendment #2, for the State Universities Retirement System, or SURS. Here are the ins and outs of the plan:

What the cost shift does:

• A significant driver of Illinois’ $97 billion pension crisis is the fact that the state makes pension contributions to SURS on behalf of universities, even though university employees aren’t employees of the state. Beginning July 1, 2014 SB 1687 requires universities to begin paying a portion of the employer share of their employees’ pension benefits.

• Universities will be required to pay the normal cost of benefits phased in at 0.5 percent of payroll per year until the full normal cost is reached. Absent future benefit changes, this phase-in is expected to take 12 to 14 years.

• The state will remain responsible for the current accrued liability but universities will be responsible for additional benefit increases that add to the unfunded liability. The state must make payments so that SURS is fully funded by 2045. Once the state’s unfunded liability is zero, the state has no further obligations to make contributions to SURS.

• If the employer fails to make the contribution, then SURS will certify the amount to the Comptroller and the Comptroller will divert that amount from grants or state funds in order to cover the contribution. Tax dollars may also be diverted from the county treasure to cover the contribution if the university levies property taxes.

• Amends procurement code to give universities greater flexibility in purchasing goods and services.

What the cost shift doesn’t do:

• The phase-in is expected to take 12 to 14 years. Illinois has the worst pension crisis in the nation which means it will take the boldest reforms in the nation to address the problem. A 12 to 14 year phase-in does little to address the crisis today and frees up time for lawmakers to make changes to these requirements before the full implementation of the bill.

• Any savings from a pension cost shift should be directed towards tax relief. But the savings from the SB 1687 cost shift plan simply free up money for the state instead of directing it toward tax relief. Remember how the 2011 income tax hike was supposed to be temporary? Dedicating money from a real cost shift plan to a comprehensive tax relief plan would help politicians keep their sunset promises to all of us.

• Benefits are not right-sized for future service. Without real reform, pensions will continue to crowd out funding for education. And the longer we delay, the worse our pension debt crisis will become. Only major reforms, like those heavily centered on defined-contribution plans and that tackle automatic cost-of-living adjustments, can get the problem under control.

• This plan leaves out the Teachers’ Retirement System, or TRS. The state pays more than $632 million a year in retirement costs for local suburban and downstate school districts. The current arrangement allows school districts to offer teachers overly generous benefits, including end-of-career salary spikes, sick day accumulations and other pension sweeteners, with little incentive to curb retirement costs because the state picks up the pension payments. In fact, this arrangement provides an incentive for school districts to continually increase teacher benefits. As more school districts enhance benefit packages to attract talent, other districts compete by doing the same – which ultimately perpetuates the cycle of unaffordable and unsustainable retirement benefits. That’s why real cost shift plan should include TRS.

The bottom line: The cost shift plan in SB 1687 looks good on paper but fails to achieve real reform. The phase-in is too long giving bureaucrats more time to tweak the system going forward. It is not part of a comprehensive pension solution and fails to dedicate savings toward tax relief. This is just another example so-called reform that covers up a severe problem with a band aid.

The Illinois Policy Institute has outlined a real cost shift plan that’s better for employers, government workers and taxpayers. See Budget Solutions 2014: Pension reform and responsible spending for state and local governments.