OPINION: Tier 2 State worker pensioners could use Amendment 1 to revolt for a fair deal

Among many consequences going unreported that will ensue if Amendment 1 passes is the end of exclusive bargaining power for government unions.

If voters approve the amendment in November, any group of public workers will have a constitutional right to bargain for most anything they want through whatever representatives they want. In other words, they could create their own union of sorts to make demands different from, or in addition to, those of the big public unions. The drafters may not have intended that, but it’s what the proposed amendment says plainly.

That’s one of the few potential consequences we’ve identified that might be positive on some matters if voters approve the amendment. For example, Chicago teachers who don’t like the Chicago Teachers Unions’ hard left agenda could collectively bargain for their different agenda.

A group that might find that option particularly appealing is Tier 2 participants in Illinois’ public pensions.

Tier 2 pensioners are everybody hired after 2010 who is participating in almost every state and local government pension in Illinois. They get far worse benefits than older employees in Tier 1. Tier 2s face a later retirement age, a stingier cap on pensionable salaries and other inferior benefits. At Wirepoints, we don’t like Illinois’ defined benefit pension system or the benefits Tier 1s get, but when it comes to Tier 2, we are on their side.

The deal Tier 2 pensioners get is so bad that that Tier 2 personal contributions exceed the amount needed to fund their own benefits (assuming you use the same discount rate the pensions use*). The excess is diverted to subsidize the unfunded liability for Tier 1s. Tier 1 retirees will more than exhaust all assets in the system – there’s nothing set aside for Tier 2s.

*Andrew Biggs, a resident scholar at the American Enterprise Institute, made the following point that we reported in 2019: “Not denying that Illinois Tier 2 is much less generous than Tier 1. But the 9% employee contribution exceeds the normal cost only at a 7% discount rate. At a more reasonable 4%, the normal cost rises to 15.3%. So the net employer cost is still 2x the typical 401k match.” In other words, Tier 2s really aren’t getting a bad deal if you compare it to another plan where you could only reasonably expect 4% per year on investments. And if 4% is all that really materializes, the state will end up bearing the real cost of Tier 2 promised benefits, not the employee, and they will be heavy.

Most importantly, in our view, only 18.5 percent of Tier 2 teachers will reach the full age requirement for vesting, according to research by Bellwether Education Partners. All those who don’t vest will only get their own contributions back plus interest earned – no employer contributions and no Social Security for their term of service. That’s catastrophic for retirement planning. No rational young person should sign up for that.

Tier 2s got that bum deal because it was negotiated with the legislature by senior union leadership who were themselves Tier 1s and, obviously, there weren’t any Tier 2s around to object.

But the number of Tier 2s has been growing, and it has long been recognized that they would eventually have the numbers to stand up against Tier 1s in union leadership.

That time is essentially here for the biggest state-sponsored pensions.

For both SERS (the State Employee Retirement System) and SURS (the State University Retirement System), the number of Tier 2 employees will surpass Tier 1s this year. That time will arrive in 2026 for the state’s biggest pension, TRS (the Teachers Retirement System). That’s from a new pension report published last week by the Commission on Governmental Forecasting and Accountability. Those three pensions comprise almost all of the state-sponsored pension system in Illinois.

All those Tier 2s are no doubt tired of exactly what the executive director of TRS complained about over six years ago. That’s Dick Ingram, who was himself a Tier 2, who wrote this in a TRS report at the time:

“Tier I member’s pension costs roughly 20 percent of an active member’s salary. Because of the benefit reductions in Tier II, a Tier II member’s pension is worth just 7 percent of an active member’s salary. However, by law, active Tier II members of TRS…pay the same 9.4 percent salary contribution to the System that active Tier I members pay. What all this means is that Tier II members are paying the entire cost of their pensions plus an extra 2.4 percent to TRS. That extra 2.4 percent subsidizes the pensions of Tier I members.“

Amendment 1 would allow Tier 2s who are fed up with subsidizing Tier 1 to create their own bargaining unit and demand a better retirement deal. They wouldn’t even need to reach the threshold of being 50 percent of workers to form that unit or have sufficient power to get results. Keep in mind that everything in existing law respecting union certification and exclusivity would be overridden by a new fundamental constitutional right if amendment 1 passes.

Pensions are definitely something they would have the right to bargain for under Amendment 1. Most everything would be subject to collective bargaining by any group – anything affecting their “economic interest” or that of other Illinoisans.

What would it cost to fix Tier 2? The state has never put up any numbers on that, even though it has long been recognized in the General Assembly that a fix will be needed eventually.

The end of exclusive bargaining might be a good result in this instance if you share our sympathy for Tier 2s. However, it may create an awful mess on other matters. Amendment supporters have made clear that they interpret the amendment to allow for worker demands over not just their own economic interests but any other Illinoisan’s. It’s therefore easy to foresee multiple, conflicting demands arising from that on most every political issue.

Mark Glennon is founder of Wirepoints.