Public labor unions push for more power over municipal, teacher pension funds
Bills backed by Illinois public-sector unions would give them more power in administering pension funds despite evidence of worse outcomes.
Public labor unions are a powerful force in Illinois, but that power too often works against their members’ best interests.
Unions have been able to block bipartisan policies that are in the interest of their own members. They have been able to use their resources and influence to push a proposed constitutional amendment through the Illinois General Assembly that would put union contracts above state law. And recently, unions have pushed to give unions more control over the Teachers Retirement System and the Illinois Municipal Retirement Fund.
HB 3474, passed into law on Aug. 20, lays out new requirements for membership on the IMRF pension board. The board is made up of four executive trustees, three employee trustees, and one annuitant trustee. HB 3474 adds to the requirement that those who meet the qualifications to be an executive trustee – chief executive officers or other officers or executives or department heads of municipalities – may not serve as an employee trustee. In other words, if someone meets the qualifications of an executive trustee, that person is not permitted to become an employee trustee. It effectively limits who can represent employees on the board.
The TRS board consists of seven members who are not part of the retirement system appointed by the governor, five members who are teachers and elected by contributing TRS members, and two annuitant members who are elected by annuitants. SB 2574 would reduce the number of board members not part of the retirement system from seven to five, giving annuitants and teachers a majority on the board.
Both of these bills give more powers to union members within their particular pension systems. But in trying to gain more control over the pension systems, the unions may actually cause the systems to perform worse than they might otherwise. In general, it is in pensioners’ interests for the systems to be administered by people with knowledge and experience that give the funds the best chance to perform well.
Employee members generally may have little to no financial expertise. Decreasing expertise tends to decrease the fund’s performance.
Employee members also have an incentive to make pensions appear cheaper than they are. That way, employees are more convincingly able to argue for additional benefits such as increased salaries and pension sweeteners. This desire to make pensions appear to cost less leads employee trustees to tend to vote for higher discount rates – an accounting assumption used to determine the present cost of future promises. Voting for a higher discount rate allows employers and employees to contribute less to the funds. When discount rates are too high, the contributions can become insufficient to keep the funds solvent in the long run, leading to future problems.
Research shows having more executive-appointed trustees positively impacts fund performance. Employee trustees have either no impact or a negative impact on fund performance. Even though some research also shows pension boards having member-elected trustees have a positive impact, those positive impacts do not accumulate after a certain point. That study found no impact on performance when the board consisted of half or more member-elected trustees.
While these two bills tilt the power on the pension board towards the employees, they could decrease the actual performance of the funds for pensioners who rely on them. In their grab for increased representation, union leaders risk harming the rank-and-file members they represent.