The House Personnel and Pensions committee discussed the idea Monday with the overall goal of reducing Illinois’ massive unfunded pension obligations, which now exceed $111 billion.
Pensions currently eat about 25 cents of every tax dollar the state spends from its general funds - the same funds that pay for most services.
Two bills on the subject were discussed during a testimony-only hearing Monday: House Bill 4427 by state Rep. Mark Batinick, R-Plainfield, and House Bill 5625 by state Rep. Mike Fortner, R-West Chicago. Neither was moved to the full House, and both will be the subject of more hearings.
Why would any employees take a lesser lump sum? Because they’re not all in the same financial or life or tax situations, and some might simply prefer taking charge of their retirement money from Day 1 of retirement, the sponsors said.
“A lot of people would prefer to have control of their money and cash out with the state — even if it’s a discount,” said Batinick.
Both proposals revolve around the net present value of a given employee’s pension benefits, or the projected amount it would take to fund that pension for the remainder of the retiree’s life.
For instance, under one scenario in Batinick’s plan, it would take the state a $700,000 up-front investment to fund the pension of an employee projected to draw $50,000 annually.
The new legislation would essentially leave the employee three choices: Accept the $50,000 annual pension; take an immediate payout at about 75 percent of $700,000; or take an immediate, partial amount and still get an annual pension payment — although smaller than $50,000.
Rep. Elaine Nekritz, D-Northbrook, the committee’s chairwoman, said she wanted it made clear the state would not force anyone into a reduced, lump sum payment.
That decision, Nekritz said, “would have to be completely voluntary and only at the whim and desire of the participants.”
Some other points that became clear in Monday’s hearing:
-- The committee and the General Assembly have a lot of work to do. Lawmakers have several concerns, and they are awaiting financial projections from the state’s fiscal arm, the Commission on Government Forecasting and Accountability. They also are awaiting more input from the retirement systems. Some retirement system spokespeople suggested the five systems would also need about a year’s lead time to implement such a major change.
-- The choice for a lump sum payout or conventional payout, should one of these bills or some combination of their parts become law, would have to be made only at retirement and only once.
-- Health insurance benefits would not be affected. The Illinois Supreme Court has ruled that those are protected under the 1970 Illinois Constitution’s pension protection clause.
-- Lawmakers want some sort of “floor” built into the system. Said Rep. Robert Martwick, D-Norridge: “My biggest concern is that if we offer this to employees, especially those who are not entitled to receive Social Security benefits, there is some protection for the long term, that we’re not wiping people out. People are making bad choices all the time; (we need to try to) make sure they don’t make a bad choice and wipe themselves out.”
Several committee members said they were amenable to a maximum pension buyout or a plan that allowed partial immediate buyouts coupled with smaller conventional payments.