2012 POLICY COMPETITION Team Subgame perfect

1. Correcting Illinois Pension Program 2012 POLICY COMPETITION Team Subgame perfect Brandon Williams Eric Napierala BhayuPurnomo

2. The situation The Illinois Pension Program has been unsound since its inception, but has recently experienced substantial setbacks due to poor management as well as uncontrollable economic forces We will be examining the current situation of the program and proposing solutions to the issues involved

3. Illinois pension fund: the facts • $73 billion in unfunded teacher retirement pension liabilities* • 2.7 ratio of active/retired employees, on a decreasing trend • Created in the late 1930’s, was declared “unsound” by an TRS actuary in 1950. * http://sunshinereview.org/index.php/Illinois_public_pensions

4. Illinois pension fund: the facts • Was not required to plan ahead until 1986 • Situation worsened in 2000’s • Recession damaged vital equity markets • Mismanagement of funds • Collective bargaining by unions

5. Prior reform attempts • Pension bonds initiated in 2003 • Limit pay increases in final year • Benefit increases must have ready source of funding • Hired consultant Alexander Dhanraj • Proposed pension bonds, different asset allocations, increase taxes and employee contributions, and reducing benefits

6. Incentive structuring • Incentive structure is poorly designed for both policy-maker and constituent • Governor’s incentive is to be re-elected by Democratic constituents • Union’s incentives are to maximize retirement welfare by using their clout during negotiations

7. Core values • Honor all legal obligations • Maintain proper level of benefits for pensioners • Ensure pension payments for future retirees • Long-run sustainable budget • Maintain balance of power between State and Union • Be mindful of increasing taxes in 2013

8. Proposed Solutions Short Run • Due to limited ability to change variables quickly, there are few short run options • Taxes can’t be changed • Pension can’t be changed • Pension bonds netted less than 10% of target

9. Dead-Ends • Should not increase tax • Puts more financial strain on citizens • Companies would leave the state • Bonds • Already used and the market is saturated • Did not raise sufficient funds • Asset allocation • 8.5% rate of return was unrealistic, especially for the long run and in the current economic climate • Reducing state labor pool • Trigger union to strike

10. Proposed solutions • Defined contributions • Create incentives to make more personal contributions to the pension fund • Reduces burden on the budget • Long Run

11. Proposed solutions • Reinstate penalties for early retirement • Exactly as it was before being removed in 2003 • Penalizes monthly pension paychecks by 6% for each year before age 65 that the employee retired • Alter retirement age tiers • Remove 5 and 10 year retirement options • Earliest retirement criteria would be 15 years of work, age 65 • Current workers within 15 years of retirement would be grandfathered in • Deters late entrants, which decreases the labor force and increases amount of time workers pay into pension system

12. Proposed solutions • Transition to Defined Contributions • Consists of a “soft-freeze” • Close the old plan to new employees but benefits continue to accrue to the existing participants • Will soften the blow to those close to retirement • State is legally obligated to pay promised benefits from Defined Benefits plan • Will continue as legally required until the grandfather clause is officially over

13. Conclusions Our plans support a proper incentive structure which will guide the Illinois Pension Plan into a long-run, sustainable future