The Federal Securities and Exchange Commission announced March 11 that Illinois broke federal securities laws and misled investors when then-Governor Rod Blagojevich’s office hid the true health of the state’s depleted pension funds between 2005 and early 2009.
Illinois Senate Republicans called for the SEC investigation in 2005 when they found Blagojevich’s budget office claimed savings from pension changes that did not exist. The savings were linked to a restructuring of pension payments (Senate Bill 27) that was pushed through the Senate with no Republican support in 2005.
Republicans had argued that the pension changes were not being adopted to “correct” pension payments as Blagojevich and legislative Democrats argued, but were instead a raid on pension funding to free up money for other state spending in the run-up to the Governor’s re-election campaign.
At the time, the spokeswoman for Governor Blagojevich’s budget office stood by its disclosure standards and belittled the concerns as “just another desperate attempt by the Senate Republicans to twist and turn facts and rewrite the very poor fiscal history in Illinois that they created.”
Reporting the securities fraud did not raise costs for Illinois taxpayers, as the finding doesn’t carry any fines or penalties. However, it does highlight the financial mismanagement of the past decade and the decisions made by majority Democrats that have significantly contributed to the state’s $96 billion pension crisis.
Pension reform measures advance to full Senate
Also during the week, two pension reform measures were advanced by the Senate Executive Committee.
Senate Bill 1 incorporates two choices for pension reform.
Part “A” includes unilateral benefit cuts, including a freeze on cost-of-living adjustments (COLA) on retirees’ benefits and higher employee contributions. It also strengthens the state funding formula for the pension systems, but does not include a cost-shift to pass pension responsibilities onto local school districts.
Part “B” of Senate Bill 1 takes effect only if part “A” is ruled unconstitutional. This plan offers employees and retirees a choice between reduced COLAs and keeping retiree health insurance, or keeping a full COLA and losing health insurance. This component would also strengthen the state funding formula for the pension systems, but does not include a cost-shift.
The other pension reform bill, Senate Bill 35 would create new “Tier 3” pension recipients, establishing a hybrid of a defined-benefit plan and defined-contribution plan for new teachers and college staff. Tier 3 does include a cost-shift, and would apply to employees hired after January 1, 2014. Those now in “Tier 2” (hired after January 1, 2011) may switch to Tier 3 benefits.
The defined-benefit plan will require contributions of 4% of salary from Tier 3 employees, and those employees will earn benefits each year based on 1.1% of final salary. The age of retirement would be increased to 67. Tier 3 also includes a defined-contribution plan that requires employees to contribute 5% of salary, with schools and colleges contributing at least 3% and as much as 10%.
Senate Bill 35 also makes changes to “Tier 1” benefits for all Illinois retirement systems, except the judges’ retirement system. It reduces and would delay COLAs. Cost-of-living adjustments would be paid only on the first $25,000 of benefits for those without Social Security, or the first $20,000 for those with Social Security. Retirees would receive no COLA at all until age 67 or five years after retirement, whichever comes first. The retirement age would also be increased to five years longer than current law, and phased in over time. The proposal also phases in a 2% of salary increased contribution from all Tier 1 employees over two years, caps pensionable salary at the Social Security base (now $113,700), and strengthens the state’s funding formula.
Review of state education funding formulas reveals significant disparity
For months now, downstate and suburban legislators have heard that the state’s contribution toward teacher retirement benefits constitutes a “free lunch” for school districts outside of Chicago.
The rationale for this claim was that Chicago Public Schools (CPS) pay much more toward their pension system than do suburban and downstate school districts. “Free lunch” is a phrase coined by the House Speaker to rationalize support for a plan that would reduce state pension costs by shifting the responsibility for pension payments onto cash-strapped local school districts.
The Senate Republican Caucus recently undertook an in-depth analysis to see if the claim of a “free lunch” was legitimate. Their report found that the pension payments provided by the state to downstate school districts tell only a small part of the story. When reviewing overall school funding in Illinois, the inescapable conclusion is that CPS receives far more state support through special considerations and grant lines.
Senate Republicans are not trying to ignite a regional war or to strip Chicago schools of their funding. The initial intent was to put to rest a distracting and misleading argument that threatens to derail the already difficult challenge of finding a solution to the state’s massive underfunding of our teacher retirement system.
However, a thorough review of the data showed that even though Chicago Public Schools account for roughly 18% of Illinois’ public schoolchildren, CPS receives $722 million more than it would under a fair distribution of state funding. In contrast, the downstate and suburban schools that educate 82 percent of Illinois’ students receive substantially less – a subsidy valued at about $104 million.
There has never been any public debate over this shift in priorities. It has occurred without public oversight, and without input or approval by policy makers. Instead, bureaucratic decision makers who do not answer to the Legislature or the public have quietly made changes in how state funding is allocated.
The net result is a significant budget disparity that treats Illinois’ schoolchildren differently, simply based on where they happen to live.
The Senate Republican Caucus sought to provide a balanced picture of where funding equity stands today. The Caucus report can be found online: “School Funding in Illinois: An Examination.”