Proposal fights padding of pensions

Illinois Municipal Retirement Fund wants to penalize governments that spike executives' pay

Monday, September 27, 2010

A major Illinois pension fund is proposing that local governments be penalized for using one of two common tactics to pad the pensions of its employees before retirement.

Following a Tribune investigation showing widespread pension padding among local executives, Illinois Municipal Retirement Fund officials said Friday that local governments should operate under the same penalty standard that the state now holds over school districts and colleges that do late-career pay spikes.

The proposal would have to be approved by state lawmakers before taking effect.

In the teacher and university pension funds, any raises of more than 6 percent still count toward pensions, but the local agencies who gave the raises must pay the retiree's immediate pension costs up front. Advocates say it discourages overly generous late-career pay boosts that can cost taxpayers big over time when it comes to pensions.

"The IMRF strongly opposes spiking. There are no ifs, ands or buts about it," said the president of the fund's board of trustees, Ruth Faklis.

The proposal, however, does not go as far as some other Midwest states that try to limit the types of job perks counted toward a pension, such as bonuses, car allowances or extra pay sent to 401(k)-like accounts. Some lawmakers say they will push for such limits, although the pension fund's executive director, Louis Kosiba, cautioned that employers could get around such limits by reclassifying pay for perks as base pay.

The Tribune investigation found that perks routinely boost the pensions of top retiring administrators in suburban and downstate local governments that pay into the fund. Reporters found that 44 of them had retired since 2008 into six-figure pensions, and if their pensions had been determined just on their base pay, taxpayers would have saved $13 million.

The fund determines pensions by averaging the pay over the most lucrative, continuous four years of an employee's career, usually the last four. The pension is a percentage — up to 75 percent — of that average pay, depending on an employee's age and years worked.

The fund currently has one rule to limit padding: not letting the calculations be swayed by any pay boosts in the last three months of more than 25 percent. It was put in years ago as a way to limit the effect of common end-of-career payouts to government employees for unused sick and vacation time, payouts that sometimes can equal a year's worth of pay.

But, the Tribune found, governments routinely have found a way around that, at times approving union contracts or writing policies that specifically structure big payouts in a way that counts every dime toward a pension. Costs for the boosted pension then are hidden with other, routine pension payments made by local governments over time.

The proposal would force governments, at least those spiking pay more than 6 percent a year, 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.

At its meeting Friday, the fund's overseeing board asked the staff to write up the proposal, as well as study how local governments use early-retirement incentives.

Ultimately, lawmakers are the only ones with the power to change the rules, Kosiba said. But public pressure can help stop people from gaming the system.

"Transparency and civic engagement by the public is key," he said.