Tier II — remember that reference.
Chances are pretty good that Illinoisans who pay attention to state government will hearing it often — perhaps sooner than later. State Sen. Chapin Rose, R-Mahomet, said action could come in January, right before the newly elected General Assembly is sworn into office.
What is Tier II? It refers to those public employees — teachers, university and state workers — who were hired after Jan. 1, 2011, and placed in the state’s Tier II pension plan.
Tier I workers hired before Jan. 1, 2011, are beneficiaries of a far more generous public pension plan — so generous, in fact, that the state’s elected officials changed the rules for Tier II workers to make the system affordable.
But authors of the Tier II program apparently made a mistake that requires correction, and that’s what Gov. J.B. Pritzker and legislators will be discussing.
It’s not clear whether the Tier II plan is in line with federal “safe harbor” provisions that require pension benefits to be at least equal to Social Security benefits.
A report prepared by the Fitch Ratings services states that “if Tier II does not meet safe-harbor requirements, the state risks paying (and requiring employees to pay) Social Security taxes, likely at significant expense.”
That’s why legislators who have long avoided the issue are discussing solutions. But along with a solution to the safe-harbor issues are proposals to vastly upgrade Tier II benefits.
Representatives of organized labor, a political powerhouse in Illinois, contend that, as a matter of fairness, Tier II benefits must be dramatically improved.
The “We Are One Illinois” coalition has proposed a more generous final salary calculation, reducing the full retirement age from 67 under Tier II to the same as in Tier I and annual 3 percent simple-interest cost-of-living increases.
Pat Devaney, vice president of the Illinois AFL-CIO, called those measures “common-sense reforms that would address the major issues driving workers to leave the public sector.”
But the Fitch study said “broadly” enhancing Tier II benefits “could negatively affect the state’s credit rating or limit the potential for future positive rating actions.” The state’s credit rating is vitally important to Pritzker, who takes pride in the upgrades that have occurred on his watch.
Public-pension woes have long been a financial millstone around the state’s neck, one driven by failures by past governors and legislatures to make the required payments into the systems.
The five systems — teachers, state employees, university employees, legislators and judges — are underfunded by roughly $140 billion, meaning they owe far more than they can pay.
The move to Tier II was meant to reduce the unfunded liability by reducing benefits for employees hired after Jan. 1, 2011.
Legislators tried unsuccessfully to reduce future benefits for Tier I employees by slowing increases in benefits yet to be earned while allowing them to keep what they had already earned.
But the Illinois Supreme Court ruled unanimously that the pension clause in the Illinois Constitution barred any benefit reductions once an employee joined the system, even for benefits not yet earned.
The political dilemma facing legislators, many of whom are indebted to organized labor for donations and campaign help, is whether to address the specific “safe harbor” problem or fall prey to the political pressures to enhance Tier II benefits.
Former Gov. Pat Quinn, who wrestled with the pension problem during his years in office, said it’s a matter of affordability.
“It was always a concern that sometime down the road, there might need to be some tweaking” of Tier II benefits, he told The News-Gazette.
He said “Tier II has helped our state begin to recover” financially and that improving benefits is not “in the financial interest of Illinois taxpayers.”
