Officials with the Illinois Municipal Retirement Fund (IMRF) say they want the state to end the practice of pension “spiking,” which adds millions of dollars annually to the retirement benefits local government workers receive.
Spiking allows government workers to substantially pad their future retirement incomes by receiving large pay hikes during the last years or even months of employment.
“The IMRF strongly opposes spiking. There are no ifs, ands or buts about it,” said board president Ruth Faklis in a statement.
The IMRF’s call for an end to pension spiking followed a Chicago Tribune investigation in September that disclosed “perks routinely boost the pensions of top retiring administrators in suburban and downstate local governments.” The newspaper estimates Illinois taxpayers have shelled out an extra $145 million over the past 10 years because of pension spiking.
Pressure on Lawmakers
An end to pension spiking practices would need the blessing of the state legislature.
State Senator Randy Hultgren (R-Wheaton) said he is all for pension reform including an end to “spiking” practices.
He cited a pledge he has made to local constituents and said, “I will continue to push for further pension reforms to keep our debt manageable and improve the fiscal outlook of the State of Illinois.”
The IMRF has just one rule to limit padding: It does not allow the pension calculations to be swayed by any pay boosts of more than 25 percent in the last three months of work. That limitation is meant to limit common end-of-career payouts to government employees for unused sick time and vacation days. The payouts sometimes can top a year’s worth of pay.
‘Antithetical to a Sound System’
“Compensation increases paid during the final years of employment with the purpose of increasing a participant’s pension beyond the [pension code] limitations are not compatible with good pension plan administration and may be one cause of pension plan underfunding,” said the IMRF’s Faklis in her statement. “Such compensation increases are antithetical to a sound and efficient system for providing retirement income.”
In a written statement from IMRF Executive Director Louis W. Kosiba, the Board of Trustees stated its “unequivocal opposition to compensation increases paid during the final years of employment with the purpose of increasing a participant’s pension beyond the limitations” and will “support measures designed to end such compensation increases.”
Kosiba said the Fund is writing up such a proposal to end pension spiking that state lawmakers could consider, perhaps as soon as the year-end veto session.
‘Pay Costs Up Front’
According to Kosiba, a portion of the IMRF proposal “would force governments to have separate line items for the extra pension costs, so they can pay those costs up front, versus payments made over time.” Kosiba compared it to “the difference between making payments with a credit card versus a debit card.”
In Illinois’ pension systems for grade school and high school teachers and university employees, any raises of more than 6 percent still count toward pensions, but the school districts and state universities that give the raises must pay the retiree’s immediate pension costs up front. This limitation was put in place several years ago after taxpayer backlash against pension spiking that was becoming commonplace in the public schools and universities.
While many state and local government pension systems are stressed, no state has a bigger unfunded pension liability than Illinois.
“Chances that the funds will run short of cash are high,” said Illinois Policy Institute Executive Vice President Kristina Rasmussen. “They’ve already got an $80 billion unfunded liability and you may recall that the state has no plan for paying its $4 billion annual contribution this year. Until a mechanism that prevents irresponsible spending while protecting pension payments is put into place, Illinois will continue the long, slow economic decline that has been underway for over 30 years.”
John W. Skorburg ([email protected]) is associate editor of Budget & Tax News and a lecturer in economics at the University of Illinois at Chicago (UIC).
IMRF statement on pension spiking: http://www.imrf.org/info/home_page_jumps/2010/09-24-10_salary_spike_resolution/salary_spike_resolution.html
The Pension Funding & Fairness Act, proposed by the Illinois Policy Institute: http://www.illinoispolicy.org/news/article.asp?ArticleSource=2678.