The Fifty-Year Plan: A mid-term report. June, 2018.

Bob Lyons (right)

By Robert Lyons, retired teacher and former annuitant representative on the board of the Illinois Teacher Retirement System (TRS).

When is a solution not a solution? When it does not solve the problem. In 1994 the five state pensions plans (TRS, SERS, SURS, JRS, GARS) had a total unfunded liability of $15 billion. That was a problem and the state of Illinois acted. Led by Governor Edgar the General Assembly voted unanimously to follow a plan that had as its goal to achieve a 90 percent funding for the five state retirement systems by fiscal year 2045. By the time the plan went into effect in 1995 the unfunded liability had grown to $20 billion. A year ago at the end of fiscal year 2017 after twenty-two years of the plan the unfunded liability was $130 billion.

 Wait, that cannot be right? But it is.

In 1995, newly retired, I was glad that there was finally a plan to deal with the unfunded liability in the Illinois pensions, but I did not question the details. Well, just last week I heard a state representative, one who taken tough votes in support of retired teachers, say that we should be pleased that the General Assembly had followed the plan in voting to fund the pensions for FY 2019. I think for that reason alone we need to look at what following the plan has meant for the state pension systems.

First, there was a fifteen-year ramp to gradually increase the state’s contributions, which was designed to make it easier to sell the fifty-year plan to the legislators by allowing them to vote to “solve” the problem of funding the pensions while still enabling them to continue to vote for popular projects. Second the plan could be amended when needed to allow the legislators to depart from the plan when they did not have the money, which they did in fiscal years 2006 and 2007, “saving” $2.3 billion which was subtracted from the pensions payments with the approval of the IEA, the IFT, and SEIU to spend the money on more popular causes and gaining the approval of a four extension of the ERO. It is certainly possible that the union leaders did not realize that shorting the pension funds by a little more than $2 billion would in the long run cost over $6 billion in growing the unfunded liability. By the time the ramp had come to an end in 2010 the unfunded liability had grown to almost $76 billion.

With the end of the so-called ramp the legislature realized that with the significant growth of the unfunded liability that they needed to be committed to ever-growing payments.

The real failure of the fifty-year plan was that it allowed for the unfunded liability to continue growing and also that it was heavily back-loaded. The original funding scheme did not call for the pension payments to grow large enough to begin to really reduce the growth of the unfunded liability until 2034 and it called for the total funding in the last five years of the plan to total $75 billion.

 While it could be argued that any plan was better than no plan, but they could have made a better plan. It is equivalent to paying down your credit card. Smaller payments in the beginning mean larger payments in the long run.Any actuary would have told them that the best plan would have called for dividing the amount owed into even payments with a goal of eventually reaching a hundred percent funded. But required larger payments was not what they wanted to pay. The sooner a pension fund reaches full funding the better. Pension funds invest every dollar they can with the hope that their investments will grow and reduce the need for external funding. Illinois pension funds, on the other hand, are currently required to take money out of profitable investments in order to pay annuitants their pensions. “They had to eat their seed corn or starve.”

 The last five years has seen the funding grow for the five state pensions funds while at the same time the funded ratio has barely moved. In 2013 the five funds were 39.3% funded, 2014: 39.3%, 2015: 40.9%, 2016: 39.2% and 2017: 39.9%. In the last five year each of the pension systems made money, their investments grew, but the unfunded liability climbed as well as the state’s payments were less than what was needed and, as already stated, it was $130 billion at the end of FY2017.

 The new budget for FY2019 calls for the state to contribute to the TRS pension fund $4.466 billion, a 9.05% increase over this year’s contribution of $4.095 billion. More than 70% of the payment to TRS is to partially pay what they owe because of the underfunding. You can expect to hear state legislators say with some pride that this payment meets the requirement of the fifty- year plan, but it must be noted that the payment, as large as it is, still falls far short of moving TRS toward full funding by $2.9 billion.

In 2017 TRS reported that its “investment returned 12.6% net of fees and the Systems 30 year-return was 8.1%. Total investment income was $5.5 billion.” We will not learn how TRS has done for FY2018, which ends June 30 until likely late August when the last numbers for real estate and private equity funds are finally reported. We do know that the $49.468 billion that we had at the end of June last year had grown to $51.541 billion at the end of March of this year. While still dependent on how their investments do in the last couple of weeks of the fiscal year, it certainly looks this will be another positive year for TRS, but it will still likely end the year only about 41% funded.

The Teachers’ Retirement System ended 2017 at 40.2% funded, the University Retirement System was at 44.4% funded, the State Employees’ Retirement System was 35.5%, the Judges Retirement System was 35.6%, and the General Assembly Retirement System was 14.9%. Yes, the retirement system for the legislators, which has over 400 annuitants, is just only a market crash away from insolvency, and many of the most recently elected senators and representatives have opted out of the system.

 That General Revenue portion of the Illinois state budget for FY2019 calls for spending $38.5 billion, and of that, the total for the five pensions system is $8.5 billion. In addition the state will pay $1.6 billion in debt service for Governor Quinn borrowing to pay pensions some seven years ago. In almost every state in the nation three to four percent of their budget for pensions is considered normal. In Illinois we are paying 22%, or 26% if we add the cost of borrowing. And recall that is still not an adequate payment to stop, let alone reverse, our underfunding from growing.

That is the dilemma that the state of Illinois and we the citizens of the state are paying for following a plan that was not in reality a solution for the problem that they were trying to solve. Not only has the problem grown, it will continue to grow.

 It is late, but the only real solution is a variation of the one suggested by Ralph Martire of the Center for Tax and Budget Accountability. He calls for reamortizing the debt with equal payments with a goal to reach 80% funding and selling bonds to make the payments. Paying the bonds simply shifts the responsibility to the next generation. I would prefer passing a referendum for a progressive income tax and using the increased tax revenue to try to pay down the unfunded liability directly through equal annual payments. Considering the role the new progressive state income would play in solving what the state owes the pensions, I think we should accept paying state taxes on larger pensions. I do not think it is fair to ask others to pay more unless we are willing to help contribute ourselves to a solution that works.


12 thoughts on “The Fifty-Year Plan: A mid-term report. June, 2018.

  1. I’m ready to pay tax on my pension above 50k. Too bad I don’t live in Illinois anymore so I pay tax on 100% of my pension in Indiana. One of the reasons Indiana has a balanced budget and Illinois is drowning in debt. So much for everyone is moving out of Illinois.

  2. You have to consider the effect of Teir 2 in paying it down in the future. They will well are paying more than they will get out. That helps shave the ramp.

  3. Thank you for the easily understood explanation. I’ll forward this all over the place, & copy to distribute at next IRTA unit meeting.
    But I’m still telling EVERYONE to subscribe to your blog & read everything you post, here…it’s all timely, relevant & necessary.

  4. Of course in 50 years the state legislators who are currently saying with some pride that the plan of the FY2019 budget payment meets the requirement of the fifty- year plan, will be longer longer in office [unless of course you’re Mike Madigan or a facsimile of him].

  5. Dear Bob,
    I disagree about a new tax on retirement income in Illinois. The cause of the underfunding is not because of pensions not being taxed. The cause of the underfunding is that the state spent their employer pension contributions on other things. We retirees paid in every penny owed from the first paycheck to the last. The employer contribution money was spent on bridges, traffic signals, school buildings, and everything else EXCEPT pensions. These things were all built on the backs of teachers and other public employees. This allowed the state to keep taxes low for political purposes, running the state “below cost”. Asking ONLY retired public employees to pay a new tax on their pensions has been suggested by some politicians, but is clearly unconstitutional because it treats public pensions differently then private sector pensions. It would amount to a backdoor pension cut. Also, it would be basically unfair, like a bank stealing money from your bank account, and asking you to start making payments to pay it back. Asking ALL retirees to pay a new tax on their retirement income, while constitutional, will never fly. People with pensions from the private sector would think of it incorrectly as an extra tax that only benefits teachers. They would think “teachers did not pay into my retirement funds, why should I have to pay a new tax to pay for theirs?” In reality, it is the other way around. ONLY teachers and other public employees pension funds were stolen. The state did not take money away from pension funds in the private sector.
    The state has already taken draconian actions against teachers and all other public employees hired after 2010, implementing the Tier 2 pensions. The state did not lower or otherwise interfere with any private sector pension system.
    A progressive tax will require a constitutional amendment, and take years to pass if they can pass it at all. I think the present income tax should be raised but raising the exempt amount to 75000 for individuals and 150000 for couples. Retirement income should remain tax exempt.

    Thank-you for your years of hard work as the annuitant rep at the TRS.


  6. Selling bonds is a belt plus suspenders. Getting the money into the plan gives that money better protection against bankruptcy while leaving to future generations the problem of paying off the bonds. You already have a “contract right” and continuing appropriations. Add to that some collateral and the bondholders also get bankruptcy priority plus public assets. Greater assurance that when the inevitable train wreck occurs, bondholders and retired public employees will get everything that’s left.

    Depending on the side of the tracks where you live, this is either a great solution or a very one-sided regressive solution. One could say that (s)he wants everybody to have great pensions and health care and that all (particularly those on the right side of the tracks) should pay so that everybody does. But the plan being put forward — real world — is to provide that even greater protection and even more of society’s wealth goes to y’all in the better neighborhoods. Just sayin’.

  7. Illinois state income tax on teacher pensions? Yes, I could “afford” to pay. As a retiree out of HS District 214, Arlington Hts., Ill, my TRS is substantial. However, I live now in Morris, Illinois as I could not “afford” to remain and live in the North West suburbs of Chicago. Most certainly, “downstate” retirees would have difficulty “living” if a tax on TRS were to be imposed.

    Dr. Charles W. Birch, Morris, Illinois

    1. Charles, not to worry. I learned that legislators had no interest in taxing pensions and JB Pritzker and company will feel the same way. It will be tough enough to pass a progressive income tax., adding taxing pensions would doom the proposal. Republicans would campaign, “ Pritzker wants your Social Security check! .” They will leave us out.

      1. Bob, I agree with your prediction. As for a progressive state income tax, I have always supported one. Tax-supported services and projects are essential for all the people.
        Keep up your fine work for public schools and public servants!!

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