A groundbreaking effort to switch a public employee pension system from a defined benefit plan to a defined contribution plan is underway in Chicago.
The Chicago Transit Authority wants to follow a growing trend in the private sector toward a 401(k)-type retirement system in which the employer and employee make regular contributions into a retirement account controlled by the employee. Supporters say this approach can save taxpayers money while still providing solid retirement income for state workers.
A CTA spokeswoman said Chicago Mayor Richard M. Daley, the state’s most powerful Democrat, has signed on to the retirement restructuring.
CTA’s traditional pension fund currently covers only 34 percent, or about $1.2 billion, of its $3.5 billion in liabilities, due to years of under-funding. A state law passed and signed in June 2006 now requires that by 2009 CTA and its employees begin paying into the pension plan every month with enough money for the plan to be 90 percent funded by 2058.
This new obligation, along with other higher operating costs, translates into a $110 million CTA deficit this year. That has prompted a search for a more cost-effective retirement system.
“Our current retirement and health care benefits are too rich for what we can afford,” CTA Chairwoman Carole Brown told the Chicago Tribune, referring in part to employees paying nothing to cover their retiree health care benefits. Also, in-network health care expenses for retirees are covered 100 percent after a deductible.
Plan for New Hires
Under the proposal, submitted May 22 by Brown and CTA President Ron Huberman, only new employees would be required to join the defined contribution plan. Existing employees would keep their traditional retirement plan but would be required to double their contributions.
Unions representing CTA employees oppose the plan, arguing, among other things, it would be unfair to new employees.
But state Sen. Bill Brady (R-Bloomington), the author of pending state legislation that would create a 401(k)-type pension system for all new state employees, said in an interview the plan would benefit employees by giving them more control over their own pension and ensuring it would be 100 percent funded.
Brady said his research concludes CTA doesn’t have to go through the state legislature to implement the new pension system. Going without the state legislature’s approval, however, could prove to be a problem because unions representing CTA workers have already signaled they would oppose the changes in collective bargaining.
Under the collective bargaining agreement, when negotiations for a new contract reach a stalemate, as they usually do, the dispute is submitted to binding arbitration, where the pension plan might have less chance of success.
$34 Million Savings
Under the proposed plan, CTA’s new retirement fund would be given a start with a $150 million bond issue and be administered by a separate trust. CTA estimates the plan would save the agency $34 million a year.
The retirement restructuring is part of a larger bailout package CTA is seeking from the Illinois legislature. Without legislative approval of the bailout and pension reforms, CTA said it would have to impose drastic service cuts and a fare increase.
This isn’t the first time CTA has asked the legislature for financial help. Two previous restructurings and sweetened financial aid packages, in 1973 and 1983, were supposed to provide long-term solutions to the region’s mass transportation ills, not just for CTA but also for suburban rail and bus operations.
Mass transit is just one of several major budget problems facing the state. Gov. Rod Blagojevich (D) has added new health care and education initiatives to the usual menu of problems, putting the legislature in a deadlock that made it miss its budget deadline.
And CTA is not alone in facing a pension crisis in Illinois. Five retirement plans covering Illinois employees are underfunded by an estimated $42 billion, the worst of any state.
Dennis Byrne ([email protected]) is a Chicago newspaper columnist and freelance writer.