Ill. Considering Use of Private-Sector Tactics to Reduce Pension Liability

Two bills propose to offer retirees lump-sum payments.

An Illinois House committee has begun hearings about a new approach for dealing with the state’s crushing pension debt, according to news reports.

Two bills propose allowing workers at retirement to take pension benefits as a lump-sum cash payment and give up guaranteed pension payments for life. However, a retiree would not have to take the entire amount as a lump sum, but could take a certain amount as a lump sum and leave some in the retirement system to continue getting a monthly payment from the state, albeit at a reduced level.

For some workers, this could mean a payout of hundreds of thousands of dollars. At the same time, proponents say, it would help reduce Illinois’ crushing pension debt that now stands at $111 billion, the news reports say.

State Representative Elaine Nekritz said she believes the buyout plans would be found constitutional. “To my mind it is clearly constitutional because the choice is completely within the control of the annuitant,” she said. “If you don’t want to do it, don’t do it. We’re not changing your benefit. We’re offering you an additional benefit, frankly.”

NEXT: How to pay for the lump sums

The key for employees is the payout would be based on the present value of their pension benefits. As an example, State Representative Mark Batinick said, a teacher about to retire at age 62 with a $60,000 annual benefit would have a net present value of nearly $800,000.

He added that the value of this plan to the employee is two-fold. Assuming the worker puts the lump-sum payment into a retirement account, it can help reduce the federal tax liability on the pension benefit. Also, money in a retirement plan can be willed to other family members in the event of the retiree’s death, while pension benefits cannot.

“Pensioners don’t have access to basically what is their money,” Batinick said. “The money’s in a piggy bank. The state gives them an allowance for the rest of their life.”

The news reports note that finding a source of money to pay for the lump sums could be an issue. “At the level at which we are funded, it would be challenging to take assets out of the pension systems to pay for this,” Nekritz said. “Is the state willing to bond the dollars to do this and does that make financial sense for us to do this?”

Nekritz said she anticipates several hearings will have to be held on the plans to bring in additional experts who can advise lawmakers about who is likely to participate in such a plan, how many people would participate and how it has worked in the private sector, where similar proposals have been used.