POLICY PERSPECTIVES

Public employee pensions

ILLINOIS PLAYS CATCH-UP ON STATE WORKERS' RETIREMENT BENEFITS

by Jennifer Davis

When Gov. Jim Edgar signs the pension package approved by the General Assembly last spring, the average state worker will get a 50 percent boost in retirement benefits. Big as the increase is, though, it merely helps Illinois' employees play catch-up with their colleagues in other states.

In fact, this state's employees haven't gotten a pension increase in more than a quarter of a century. As a result, Illinois ranks next to last in the benefits it pays its retired state workers. Only Maryland fares worse. When the plan, negotiated by the administration and union officials, takes effect January 1, Illinois will rise to the middle of the national pack.

"It took us 12 years to get this done," says Michael Mory, executive secretary of Illinois' State Retirement Systems, referring to the change in the formula used to calculate state retirees' benefits.

Both sides had an incentive. The American Federation of State, County and Municipal Employees, the union representing state workers, made increased pension benefits a key part of its contract negotiations this spring. The three-year contract, covering 40,000 state employees, expired June 30, the end of the state's fiscal year.

"We surveyed our members and, by far, what they talked about was pensions. How, in some situations, you could work for the state your entire career and then retire and live in virtual poverty," says Wayne Ranick, an AFSCME spokesman. Although the union went to the bargaining table for its members, the agreed-upon pension package covers more than 80,000 Illinois state employees.

Under that agreement, the average state worker's pension benefits will increase by about $350 a month. Ranick uses this example: a 65-year-old state employee earning a $32,305 annual salary who retires after 23 years. Currently, that average retired worker earns $670 a month in pension benefits. Under the new plan, he or she will get $1,034 a month, not including Social Security.

The measure approved by the General Assembly also includes a boost in pension benefits for Illinois' 78,000 higher ed workers.

In fact, there are five public employee pension systems that receive part of their income from annual state appropriations. Aside from state and university workers, those plans cover the General Assembly, judges and downstate schoolteachers. (At the tail end of the legislative session, some lawmakers also moved to boost pension benefits for retired Chicago schoolteachers; the proposal failed.)

Each of those five plans is different. Indeed, state workers are playing catch-up to workers eligible under the General Assembly's pension plan. Overall, the legislative system pays higher benefits for years of service. And, until the loophole was closed in 1995, retirees in the General Assembly system could collect benefits from that system based on higher salaries earned in other government pension systems. As a result, according to an investigation by the Chicago Sun-Times last month, some former state lawmakers manage to earn more in retirement benefits than they made while they served in the legislature.

While Mory-notes that retired lawmakers don't receive Social Security under their pension plan, he acknowledges the difference in benefit levels between legislators and state workers is vast. "They've always been very different. I'm sure they always will be."

Assuming the political will to boost the monthly benefits of state workers further, the state couldn't afford to bring the five pension systems into line. In fact, state workers will have to forego other sweeteners just to cover the cost of this increase. They won't get the standard 3 percent cost-of-hving hike this fiscal year; and they can no longer cash out unused sick days accumulated after January, a 13-year practice; and workers who retire before 20 years of service will be required to pay a small portion of their retirement health insurance, which is now free. The combined savings from these three changes will fund most of the base increase.

"Negotiations are a two-way dialogue," says Ranick of AFSCME.

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"We feel very good about this. It's being accepted overwhelmingly by our membership." It's not perfect, Ranick and Mory agree. But it's better. And it's the first major change since 1971.

"Most states increased their benefit levels over the years," Mory explains. "Since [our benefits weren't increased], as time went on, we fell further and further behind until just to bring us up to the average involved a significant cost."

Illinois is playing catch-up in other ways, as well. Most states, unlike Illinois, have enough money in their pension systems to cover 90 percent of their obligations. This state's employee retirement system, says Mory, was funded at 59.5 percent of assets in 1996. That may be low compared to other states, but it's high compared to the other state- financed systems.

There's no worry that any of the state's systems will go bankrupt, but less money invested now means less money available later. Illinois has a plan to reach the 90 percent goal, but it will take the next 47 years. This fiscal year, the contribution to the five plans will cost the state $891 million, up from $718 million the year before. "For years, we funded our pension plans with whatever [money] was left," says Mory, explaining Illinois'$20.8 billion pile of pension debt. "Pension costs will continue to rise. We're playing catch-up ball."

During the years Illinois ignored its state worker pension system, other states were going forward. Now, as Illinois begins to pull in line with other states on the basics, some of those states are forging ahead with experimental new ways to cover benefits for their retirees.

Last year, Michigan lawmakers approved an overhaul of the way that state funds pensions. They instituted what is known as a defined- contribution plan. While similar to the private sector 401 (k) investment plan, it represents a striking divergence from the standard public pension. Mory is not a fan. "We've watched what Michigan has done. We don't agree with their approach," he says.

That approach means employees are not eligible for a set annual retirement stipend — a pension, in other words. Instead, Michigan contributes to each state worker's "account," which the employee can also choose to pay into. The state's responsibility stops there. The employee makes all investment decisions and, upon retirement, he or she collects the earnings on those investments — for better or for worse.

"This is, by far, the biggest [public pension] reform in, probably, forever," says Ken McDonnell, an analyst with the Employee Benefit Research Institute, a Washington, D.C.-based research group devoted to pension and health issues. "If it proves successful over the next five years, then you may see more states do it."

For now, the change doesn't apply to all of Michigan's employees — only those hired after March 31 of this year and those who volunteer to enter the program.

Under defined-benefit plans, used by the majority, states promise their retired workers a certain amount of money until the day they die.

But some states considered switching from guaranteed, or defined, payouts to the contribution plan or some version of it back in the early '80s when pension systems were becoming "too damn expensive," McDonnell explains. About two years ago, Colorado and Washington adopted defined-contribution plans on a limited scale as part of a retirement package for educators.

Mory isn't against such programs entirely. In fact, Illinois offers its workers a defined- contribution option. The program — which allows employees to contribute 25 percent of their salary up to a maximum of $7,500 a year to a 401(k)-style account — is an add-on to base benefits. He estimates that between 30,000 and 35,000 state employees take advantage of the plan.

"Participation is up. It's been steadily growing," says Mory, adding he'd still like to see Illinois follow Missouri's and Tennessee's lead to increase involvement.

Last year, Missouri started contributing a nominal amount to supplement employees' contributions. Participation jumped from

New state worker retirement plan Nonuniversity employees: Under the new plan, the "average" state employee's pension will increase about 50 percent. The pension package agreed to by the governor's office and the American Federation of State, County and Municipal Employees covers more than 80,000 state workers. About 63,000 of those will now calculate their pension benefits at 1.67 percent times years of service times average highest salary for four consecutive years. Previously, the benefits were calculated on a sliding scale of 1 percent to 1.5 percent, depending on years of service. To pay for the increase, the majority of these workers will forego the standard 3 percent cost of living increase this fiscal year, though they will get a one-time stipend to help offset that loss. In addition, as of January 1, 1998, they can no longer cash out sick days. And, employees who retire before 20 years of service will be required to pay a portion of their retiree health insurance, which is now free. For every year under 20, employees will pay 5 percent of the premium. Example: retire at 19 years, pay less than $5 a month. Eighteen years: less than $10. The remaining 17,000 state workers (correctional officers) will base their benefits on their final day of pay. University employees: The agreement covers 78,000 workers at the state's public universities, community colleges and related agencies. Their formula for calculating benefits will be set at 2.2 percent for each year of service. Previously, the formula ranged from 1.67 percent to 2.3 percent (after 30 years of service). The maximum benefits will rise to 80 percent from 75 percent of an employee's final rate of pay. University workers will no longer be able to cash out sick days after January, and they will be required to pay a portion of their insurance during retirement. � Jennifer Davis

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30 percent to 80 percent. The advantage for states is a "reduced need for future increases in the base plan," Mory says.

Basically, less money, less debt — that's what all state-financed pension systems are looking for in reform.

People live longer now than they did back in 1857 when the first U.S. public pension system was created. It covered New York City police officers only. In 1911, Massachusetts became the first state to provide a pension for all state employees. By 1947, every state provided pensions for its workers.

The longer retired workers live, though, the more the state pays. And there's no question pensions pull big bucks out of state coffers. For some states, that alone is reason for reform. But McDonnell believes there's more to it. Yes, states may want to do what Michigan is doing for the cost savings. But, he argues, employees want it, too.

"There's more job turnover in the public sector than ever before," he says. "[Michigan's plan] is much more mobile, and you're 100 percent vested right away." Workers don't contribute to most current state-financed pensions, but they also have to wait years to start collecting. People no longer want to feel trapped into staying at a state government job because of the pension benefits, McDonnell says.

States like Illinois — and bordering Indiana, which still refuses to invest its pension assets in anything but bonds, the safest option available — are unlikely to follow Michigan's lead.

There are other, less far-reaching trends, including Massachusetts' decision last year to fold its several plans into one. The move simplifies everything — if a state can get past the politics to get it done. But special interest groups often dictate public policy at the state level.

"Illinois would never go for that," says McDonnell. "Your teacher unions would never agree. They'd say, 'You want to use our money to fund somebody else's pension? No way.'"

Still, if this state isn't ready to experiment, it has taken steps to bring its basic pension plan up to average.

One step at a time. �

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