Board Policy
2007 State Finance Proposal
July 12, 2007
Introduction
Because of the state’s current financial difficulties, representatives of the major Illinois business and policy groups have joined together to make this proposal. It is based on the premise that the state has an obligation to meet its commitments – to its employees, service providers and the public. Failure to properly fund its financial obligations is unfair to state employees whose rights have vested, to healthcare providers who do business with the state, and to future taxpayers who will eventually bear the costs that we avoid today.
However, in addition to meeting commitments that the state of Illinois has already made, it must bring the expensive pension and healthcare benefits, provided state employees, into line with those typically available in the private sector. Pensions and healthcare plans for state employees and retirees should be aligned with those generally available to taxpayers who pay the state’s bills. Healthcare benefits provided to Medicaid enrollees are also too expensive; in particular, comparisons to other states suggest that Illinois is not taking advantage of a number of opportunities for Medicaid expense reduction.
The state and local school districts have important roles in ensuring the quality of education provided to our children. The opportunities to reform and improve public education in Illinois are incalculable. Chief among these are measures to increase transparency and accountability in our public schools and to provide families with better choices as to where their children go to school. These reforms are crucial to ensuring that the money we spend on public education leads to improved student achievement.
This reform proposal would generate significant savings in the state’s budget, which should be used to help balance the budget.
Pension Reforms
The state should keep its commitment to adequately fund pensions for past, present and future employees. The state should make an annual contribution adequate to cover the normal cost of its pension plans, reasonable amortization of the remaining unfunded pension obligations built up from previous years, and interest and amortization payments for the state’s outstanding pension obligation bonds.
Pension benefits available to state employees should be aligned with those generally available to the taxpayers who pay the state’s bills. For new employees, state pension benefits and employee contributions should be aligned with private sector standards.
- New Hires:
- Implement a defined contribution plan for eligible new employees.
- Increase minimum age for new employees to receive full benefits to 65 years of age with 8 years of service. [The years of service should be ramped up to the national average within a reasonable period.]
According to the 2005 Governor’s Blue Ribbon Commission report, this would save approximately $12 billion in state contributions between 2006 and 2045.
- Limit automatic annual pension increases for new hires to lesser of the CPI or 2%.
According to the 2005 Governor’s Blue Ribbon Commission report, this would save approximately $5 billion in state contributions between 2006 and 2045.
- Current Pension Plan Members:
- 10 year moratorium on all state-funded pension benefit expansions.
A recent Civic Federation report identified $5.8 billion in unfunded or inadequately funded benefit expansions between FY 1995 and FY 2003.
- Increase employee pension contributions by 1%.
According to the 2005 Governor’s Blue Ribbon Commission report, this would save approximately $14 billion in state contributions between 2006 and 2045.
- Investigate and correct instances where state employees are receiving pension payments and regular salaries (“double-dipping”). For example, repeal provision that allows state University Retirement System (SURS) participants to retire, then return to their previous position after 60 days of retirement and thereafter receive both their retirement benefit and normal wages.
State Employee/Retiree Healthcare Reforms
The state should recognize and fund the increasing obligations now being incurred each year in the area of retiree healthcare, rather than continuing with its current “pay as you go” approach.
Employee/retiree healthcare benefits available to all state employees should be aligned with those generally available to the taxpayers who pay the state’s bills. In particular, employees/retirees should be encouraged to participate in HMO plans or similarly-priced PPO plans, and employee/retiree premiums should be aligned to private sector charges. The timing of implementation of these reforms may be affected by existing contracts.
- Provide incentives for state employees/retirees to shift from Quality Care plan into HMO plans or similarly-priced PPO plans. Require employees/retirees continuing to participate in Quality Care plan to pay all additional costs associated with Quality Care plan vs. less expensive HMO and PPO plans.
According to a recent Civic Federation study, shifting all current Quality Care plan enrollees into the state’s HMO plans would save as much as $253 million annually.
- Bring employee premium contributions into line with national averages.
According to a recent Civic Federation study, aligning state employee premium contributions with the national average for all large plans (those that cover more than 200 workers) surveyed by the Kaiser Foundation in 2006, so that employees with individual coverage contribute 15% of their health insurance premium costs and employees with family coverage contribute 22%, would save about $67 million annually.
- Make a health savings account option available to all state employees.
- Require retirees currently receiving 100% state subsidy of their health insurance to make premium contributions in line with national averages.
According to a recent Civic Federation study, requiring retirees currently receiving free health insurance to contribute premiums equal to 40% of the total premium cost, which is the average for the largest private sector plans surveyed by the Kaiser Foundation in 2006, would generate up to $146 million in annual savings.
- Increase length of service and age requirements for employees to receive full healthcare benefits in retirement – for example, increase age to receive full benefits to 65 with 20 years of service.
Medicaid Reforms
At present, the state is not taking advantage of potential Medicaid savings from switching enrollees to risk-based or other effective managed care plans. Instead, the state has dealt with its rising Medicaid costs by paying its bills more slowly, in effect borrowing from its service providers.
The state should commit to paying its Medicaid service providers on a timely basis and reimburse at 100% of provider cost, while aggressively taking advantage of opportunities to reduce its Medicaid costs.
- Shift all children and non-disabled, non-elderly adults into managed care programs.
About 63% of the recipients of Medicaid nationally are in managed care programs – the majority of which are risk-based managed care. Illinois has fewer than 10% of its Medicaid enrollees in risk-based managed care.
- Deposit federal drug rebates into the prescription drug line item of the Illinois Department of Healthcare and Family Services.
- Pay Medicaid providers within 60 days.
Education Reforms
While public education in Illinois is largely funded through local property taxes, the state has a significant role in funding educational programs. The state also has an obligation to ensure that public funds are used most effectively and efficiently to promote student achievement. To this end, the state should institute reforms that require greater transparency and accountability and inject more choice and competition into the public school systems.
- Charter Schools
- Eliminate the current cap on charter schools.
- Allow universities to authorize the creation of charter schools.
- Provide equal access to all school funds for charter schools, and restore startup grants to new charter schools.
- Comprehensive Value Added Student Assessment System
- Create a value added student assessment system for all grades and all students. This should be part of a P-16 data system, including student and teacher identifiers, to support efforts to improve student achievement.
- School Budget Reform
- Require improved budget transparency, planning, reporting and accountability.
- Track school district spending to the school level to improve funding linkages to improved school performance and student learning.
- Establish process to review Education Funding Advisory Board recommendations for foundation level funding, with particular emphasis on what schools were selected and how costs were allocated.
- High School Core Curriculum and Graduation
- By 2012, all high schools will offer all students a core curriculum in math, language arts, science and humanities that is fully aligned to the Illinois Learning Standards.
- By 2012, all students who fail to meet/exceed state standards on the PSAE in the 11th grade must be tested again in the 12th (Senior) grade. If they fail to meet/exceed state standards in both the 11th and 12th grade tests, upon graduation they would receive an alternate diploma (e.g. certificate of completion).
A Note on the CTA Plan
The CTA and its employees have reached an agreement that calls for substantial pension and healthcare reform, including both increased funding and significant benefit reductions. In the area of pensions, the agreement calls for the CTA to deposit $1 billion in proceeds from a Pension Obligation Bond issue into the pension fund, and for both the CTA and its employees to double their current pension contribution levels. The bond issue would not be used to justify any “pension holiday” by the CTA.
The agreement modifies the pension benefits offered to all employees hired after January 1, 2008. It also significantly reforms the CTA’s retiree healthcare plan. The CTA will create a Retiree Health Trust modeled on private sector agreements. The Trust will no longer offer the lavish indemnity plan, which covers 100% of all medical expenses, that is currently offered to retirees. Retirees would also bear a share of the monthly premiums.
We strongly support this reform initiative, both because of the CTA’s importance to the region and because it’s current financial difficulties highlight the true cost of pension and retiree healthcare programs to government entities, and their potential for creating a financial crisis if not properly managed. The CTA’s proposed reforms may serve as a model for the state of Illinois, and underscore the importance of immediately implementing significant reforms in the state’s own pension and healthcare plans.
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