October 5, 2018
UPDATE: The State Universities Retirement System (SURS) does not expect to be ready to fully implement pension buyout plans for its members during FY2019, according to documents provided to the Civic Federation. SURS attributed the delay to complex benefit provisions, limited staffing and poor quality payroll information. As discussed below, the other two large State pension funds, the Teachers’ and State Employees’ Retirement Systems, expect to be ready to start offering the plans as early as December 2018 or January 2019, but SURS does not expect to begin processing applications until June 2019, the last month of the current fiscal year, and will need four to six weeks more to finalize payment claims. The Governor’s Office of Management and Budget, which is counting on savings from the buyout plans to help balance the budget, is working with SURS to expedite the process, officials said.
Content originally posted Spetember 27, 2018
When the State of Illinois enacted this year’s budget, it had a razor-thin surplus that depended on several aggressive assumptions. A quarter of the way through fiscal year 2019, questions remain about whether the revenue and spending estimates will be met.
As explained here, the $38.5 billion general operating budget for the year that began on July 1, 2018 assumed $445 million in pension savings and $300 million in revenues from the sale of the James R. Thompson Center in Chicago. In addition, the budget did not account for as much as $400 million in wage increases withheld by the State since the contract with its biggest labor union expired at the end of FY2015.
Together, these items improved the FY2019 budget balance by $1.1 billion. After they were included, the projected surplus was only about $11 million, and even this figure relied on borrowing $800 million from accounts outside of General Funds.
Like everything else related to pensions, the projected pension savings in the FY2019 budget are complicated and subject to misinterpretation. There has been confusion about how much of the savings would come from curtailing State costs from pension spiking—end-of-career salary increases designed to boost pension benefits.
Only $22 million of the budgeted $445 million in savings involves pension spiking. That provision of the budget legislation requires local school districts, universities and community colleges, instead of the State, to pay for additional pension costs due to salary increases above 3%. The previous cap was 6%.
Most of the projected pension savings stem from two new buyback plans, which allow members of the State’s largest retirement systems to give up future benefits in exchange for an immediate payment from the State:
- Automatic Annual Increase (AAI) Reduction Buyout: Tier 1 members, who receive the most generous pensions, will have an opportunity to get an upfront cash payment into a private retirement account in exchange for agreeing to a lower automatic annual increase in their benefits. Upon retirement, these employees will give up the 3% annual compounded benefit increases now paid to Tier 1 retirees and instead receive yearly increases of 1.5% of their base pension amount. In exchange, they will get a lump sum payment equal to 70% of the difference between the value of their benefits with the higher and lower annual increases. Assuming 25% of those eligible choose to take the buyout, savings to the State are estimated at $382 million in FY2019.
- Pension Buyout: Inactive Tier 1 and Tier 2 members, who are no longer employed at their State pension-eligible jobs but are qualified for State pensions, will be able to receive 60% of the current value of their benefits as a lump sum payment into a private retirement account. State savings in FY2019 are assumed to be $41 million if 22% of those eligible participate.
Despite the precise savings projections, the State acknowledged in recent bond documents, page 32 that the numbers are speculative: “(T)he State can provide no assurance as to the amount of savings realized from such programs.” As discussed here, the $382 million savings estimate for the AAI buyout was based on an actuarial review of a different proposal. The major uncertainties, according to page E-33 of the bond documents, are “whether the Programs will be implemented” and “the degree to which members choose to participate in the Programs.”
Since the budget was enacted, the Teachers’ Retirement System (TRS), State Employees’ Retirement System (SERS) and State Universities Retirement System (SURS) have been gearing up to offer the buyout plans to members. TRS said it will be ready in January 2019 to offer the AAI plan and as early as March 2019 to offer the pension buyout plan; the comparable dates for SERS are December 2018 and March or April 2019. SURS did not immediately respond to a question from the Civic Federation.
Launching the buyouts has involved a myriad of technical issues. TRS said preparations have required the development of actuarial formulas to estimate the payout for each member based on their particular circumstances, including expected life span; programming computer systems to accommodate the buyouts; establishing administrative procedures; and checking with the Internal Revenue Service to make sure the payouts are in line with federal laws and rules.
The pension buyouts will be financed by selling up to $1 billion in bonds through FY2021, when the buyout offers end. The date for the bond sale has not yet been determined, but the bonds will be issued after the buyouts are offered, according to State budget officials.
Sale of the James R. Thompson Center
The FY2019 Budget also relies on $270 million of net revenues from the sale of the State’s main office building in Chicago. The proposed sale was similarly included in the FY2018 budget and the Governor’s FY2017 budget proposal (which was not enacted), but the transaction was not completed during either year. There is some concern that even if the sale does occur, it may not produce the budgeted $300 million in revenues.
However, even to begin the sale process, the State must have legal authorization. The bill authorizing the sale was passed by the General Assembly in May 2017, but has been held by a motion to reconsider—a legislative maneuver that prevents the bill from being presented to the Governor for signature. The Governor’s Office has stated that it is working with the Senate President on moving the bill forward.
Payments for Step Increases
The FY2019 budget does not account for any payment of step increases to members of the American Federation of State, County and Municipal Employees (AFSCME) under their last contract, which expired at the end of FY2015. AFSCME has said that about 15,000 workers are eligible for the automatic annual increases given to workers in the first seven to ten years of their careers.
An appeals court ruled in November 2017 that the State violated the law when it stopped awarding step increases after the contract expired. The State appealed the ruling to the Illinois Supreme Court, but the high court on March 21, 2018 declined to hear the case.
The ruling means that the State could have to pay about $400 million in retroactive and currently owed step increases in FY2019, according to page 33 of the bond documents. However, State officials have reportedly estimated the cost at $194 million in filings with the Illinois Labor Relations Board. A compliance officer for the labor board ordered Governor Bruce Rauner's administration to report by October 1, 2018 the amount owed to each employee based on salary steps that would have been in effect under the expired contract.
Actual budget results will depend on many factors that could outweigh the impact of the issues discussed above. In FY2018, for example, the State collected $961 million more than expected in General Funds revenues.
It should be noted that even if the budget achieves its stated balance at the end of FY2019, Illinois will have done little to reduce the remaining backlog of bills during the fiscal year. The backlog peaked at $16.7 billion in November 2017 and now stands at $7.3 billion.