When the Illinois legislature voted to pass a budget and then to override the governor’s veto they quietly included some bad medicine for public employees. They added a Tier III to the state’s Teacher Retirement System.
The new tier III offers a hybrid pension plan of a defined benefit and a defined contribution option. The current situation for Tier II teachers is terrible. They pay more then they will ever receive back in retirement and basically prop up with their overpayment a system only 40% funded. The underfunding is due to the failure of the state to raise adequate revenue and pay what they owe.
With the new Tier III they can move some of their payment to risky Wall Street investments, putting into constant jeopardy their retirement savings.
They have a choice. It is a Hobson’s Choice.
The industry publication, Pensions and Investments reports on how these hybrid plans are working in other states.
“While it’s important to note that Pennsylvania preserved a good portion of its defined benefit plan, I think this (new) plan is not saving all that much money and is just forcing employees to take a benefit cut,” said Bailey Childers, executive director of the National Public Pension Coalition in Washington.Ms. Childers said Pennsylvania is an outlier in that, while most states’ pension plans are well-funded, politicians in the Keystone State didn’t make full payments to the state pension plans for years, so Mr. Wolf “was stuck fixing a big problem.”
“The employees didn’t do anything wrong; they’ve been making their contributions through every paycheck, so states like Pennsylvania should take a step back and push for changes,” she added.
In 1991, West Virginia closed its teacher retirement system to new employees to address its underfunding issue, according to a 2016 NIRS survey shared by Ms. Oakley. After 10 years, the replacement DC plan was costing the state twice as much, so it went back to a pension.
“Switching to the DC plan did not help with the funding or legacy costs. When (West Virginia) realized most teachers couldn’t retire, they switched back to a DB plan,” said Ms. Oakley.
In 2005, Alaska moved all employees hired after July 1, 2006, into a DC plan from its two DB plans. At the time, the state faced a combined unfunded liability of $5.7 billion for its two plans and retiree health-care trust, Ms. Childers said.
Although the switch to DC was made to slow the increasing unfunded liability, the total unfunded liability more than doubled, ballooning to $12.4 billion by 2014. Legislation has been introduced to move back to a DB pension plan, according to an NIRS case study.
Shamefully, the state’s public employee unions did nothing to oppose the enactment of Tier III and the move to defined contributions.
None of those running to oppose governor Rauner have offered up detailed solutions as to how the $130 billion pension liability will be paid.