Legislators Weigh Pension Buyouts

Mar 7, 2016

It’s been 10 months since the Illinois Supreme Court struck down the state’s last attempt at a pension overhaul. Legislators have yet to decide what to do about Illinois’ worst-in-the-nation pension debt, but they are beginning to weigh their options.

One set of proposals would let employees collect their pension as a single payment when they retire.

There are certain legislators for whom the problems of Illinois' pension systems are chiefly problems of math. You have this many employees who’ll live for that many years, factor in the annual three-percent raises and you come to the conclusion that Illinois is in a terrible situation.

One of the main measures people use to assess the health of pension systems is called the “funded ratio” — how much money the systems have on hand compared to what they’ll eventually have to pay out. Illinois's funded ratio is about 42 percent (PDF). That means for every dollar we’ll eventually have to pay, we only have 42 cents socked away.

That might sound bad. And it is. But it’s not an immediate crisis — the systems are not going to run out of money anytime soon. Rather, it’s a problem that will be with us for decades to come. And that is where some legislators see an opportunity.

“The basic idea starts with the fact that the unfunded liability that we’re faced with in Illinois is tied to the anticipated returns on investment," says Rep. Mike Fortner, a Republican from West Chicago.

He says currently those anticipated returns are up to 7.5 percent a year for the state’s largest pension systems.

He’s proposing Illinois invite in a bank or some other sort of financial firm. They’d calculate how much a retiree will make from his or her pension, and based on that, offer a lump sum payment. Then the bank would be entitled to collect its customer's annual pension payments from the state.

Fortner says Illinois would be paying the vendor at an interest rate well below that 7.5 percent. “Very much like if you were refinancing a mortgage," he says. "If it’s at a high rate (and) I want to take advantage of lower rate, I can use that money to have a lower rate to pay it back."

From the standpoint of the retirees, the idea is to let them take their chips, cash out and go home. For starters, the choice would only be available for employees at retirement — not before or after. Depending on the plan, they could collect on the full value of their pension or some smaller percentage — one proposal capped it at 75 percent. The money could only be transferred into an IRA or comparable plan.

"At that point then the retiree is totally opted out of the system — they don’t have any role to play in the system, and their liability is then removed from the system," he says.

Fortner and other backers of this approach say there are a number of reasons an employee might choose it. Perhaps they have a spouse who’s still working, and they don’t need a pension right away — or the taxes that come with it. A lump-sum might also seem like a good idea if someone finds out they’re terminally ill. Unlike a pension, money in a retirement account can be willed to the next generation.

'How do you trust Springfield with their money?'

Rep. Mark Batinick, a Republican from Plainfield and author of a slightly different pension buyout plan, offered another reason: “It takes state risk out of the equation and provides peace of mind. As I talk to state workers, teachers … a lot of them just want the peace of mind. They want control. I get a lot of people asking me: How do you trust people with their own money? How do you trust Springfield with their money?"

For a lot of state workers and teachers, the past few years have been a time of great uncertainty over pensions. The bet that Batinick and Fortner are making is that some workers might appreciate being given the choice to cash out and move on.

The proposal got a reasonably decent reception from the Democrats who hold the majority on the House pension committee.

But Rep. Elaine Nekritz, a Democrat from Northbrook and chairwomen of that committee, says it’s important to remember that this would not solve the state’s pension problems.

“This will maybe bend our cost curve a little bit, maybe take a little bit off the unfunded liability," Nekritz says. "But we’re really doing what we can, but it’s not a great big step."

Of course, Fortner argues that even a small reduction in liability — like refinancing a home mortgage to shave a point off the interest — can add up to a lot of money over the course of decades.

Additional hearings on the pension buyout proposals are expected later during the spring legislative session.