The last few days I have been posting about the decision of state legislators, with the agreement of Governor Rauner and Illinois Dems and Repugs, to create a Tier III in the state’s Teacher Retirement System.
If you haven’t heard about it other than from among us blogging old timers like John Dillon, Glen Brown and Ken Previti, you shouldn’t be surprised. But you should be concerned. Where are those who are responsible to act as guardians of future retirees pension interests like the IEA, the IFT and We Are One?
But today there is more news.
When I originally read that the new budget contained a pension savings of $1.5 billion I immediately perked up because when the legislature uses the word “savings” that means TRS and the pension system is getting less money then it should.
Shifting some of the pension costs to local districts is part of the Tier III. This will be a real problem for already cash-strapped school districts. I figured that is where some of the $1.5 billion in “savings” will come from.
See. It’s never really savings. Somebody has to pay or it doesn’t get paid.
If I don’t pay the rent or the mortgage or my credit card bill, it is somewhat problematic to say that I am saving money this month.
Because the cost shift only accounts for some of the $1.5 billion in what they are claiming as savings.
They are also saving by simply not paying into the pension fund and so increasing the unfunded liability which is now $130 billion dollars.
Last year, overseers of the Teacher’s Retirement System and other large state employee retirement funds joined counterparts at public pension systems around the country in reducing assumed investment returns to around 7 percent from unrealistically high levels that prevailed for several years. It was a prudent step, based on actual long-term investment performance and current economic trends.
But it had the unpleasant effect of revealing that Illinois’ pension gap was even larger than previous estimates. A lower assumed rate of return means the pensions need more money now to generate enough investment earnings to cover future pension payments. And that, in turn, means legislators must allocate more current funds to pension contributions, not less.
Less is what the pension funds will get under the new budget, which delays implementation of the more-realistic investment return assumptions. Rather than impose the new rates of return immediately, as they should, lawmakers are phasing them in over five years. This allows them to contribute less while claiming to meet pension funding obligations.
Ironically, this is a rare area of agreement between arch-foes Madigan and Rauner. The governor excoriated Madigan’s 32 percent income tax hike, but uttered not a peep about his pension legerdemain. Perhaps that’s because he proposed “smoothing” in reduced rate-of-return assumptions in his own budget blueprint earlier this year.
Thus, both sides share blame for perpetuating pension funding practices that created the massive shortfall in the first place. For years, Illinois failed to make contributions sufficient to fully fund obligations to future retirees. Only recently did the state step up contributions. But now Illinois is taking a step backward. Even in a best-case scenario, smaller contributions will slow the return to pension solvency. And the enormous pension shortfall will grow larger if the rosy return assumptions embraced by our political leaders don’t come true.
Rather than putting Illinois on course to fiscal stability, reducing pension contributions sets the stage for a deeper budget crisis in the future. Meanwhile, the state’s largest financial obligation remains a source of uncertainty hanging over Illinois businesses and taxpayers.
This is just like taking another one of the legislature’s infamous pension holidays.
This is not just a paper shuffling. It is less money going into the teachers’ pension fund, increasing the pension debt that everyone blames for the current state budget crises.
I asked gubernatorial candidate Ameya Pawar what was his solution to the pension debt.
“Pay what we owe,” he said.
Illinois legislators and the governor are taking a different approach.