On November 14, the Civic Committee of the Commercial Club of Chicago, which leads the effort to overhaul Teachers’ Retirement System and the state’s other pension systems, sent a letter to Governor Quinn that said that there is no solution to fixing the long-term financial problems facing TRS and the other systems. This is a quote from the letter: “Our latest sobering analysis has led us to conclude… that under current circumstances the pension system is unfixable.”
Despite the finality of this statement, the Civic Committee nonetheless proposed a series of changes they said would “minimize the long-term damage.”
- “Eliminate all cost-of-living increases”
- “Institute a pensionable salary cap”
- “Increase the retirement age to 67”
- “Shift annual costs to local employers over 12 years or more”
- “Before undertaking these reforms, it is critical that the pension funds immediately lower their discount rate (investment return) assumptions… Moody’s has suggested the high grade long-term corporate bond index rate, which was 5.5% for 2010 and 2011.”
Answer: The Civic Committee’s statement is fundamentally untrue. The long-term TRS financial problem can be fixed. In fact, if current state law is left unchanged, in 34 years TRS will be 90 percent funded. This path, however, does require tough choices and regular and increased funding from state government and TRS members.
The Civic Committee’s statement never gives any evidence that the pensions systems are “unfixable,” but only that in the future the state will pay more every year for public pensions than the Civic Committee says it wants the state to pay.
The Civic Committee has always been clear that it wants less tax money spent on pensions so the funds can be spent on other priorities. They also have pointed out for years that the majority of citizens do not enjoy a public pension. These are quotes from the statement:
“It’s crushing our ability to educate students, ensure adequate public safety and provide health care and social services to those who are most in need.”
“But moreover, it’s a slap in the face to the 95% of Illinois residents who do not participate in these pension systems.”
While the Civic Committee’s statement leaves an impression that there will not be enough money to pay for pensions in the future, in reality the opposite is true. Sufficient money is there to pay for pensions. The problem for legislators is deciding how to spend the available money and how much should be devoted to TRS and the other pension systems in order to ensure financial stability in the future.
The fiscal year 2013 state budget is $53 billion, not counting federal money. The total state contribution for TRS and the state pension systems in FY 2013 is $7.5 billion. There is enough money. The question is, as it has always been: where will that $53 billion be spent?
For TRS, the state’s contribution in FY 2013 is $2.7 billion, which is 5 percent of the entire state budget.
Left alone under current state law, the pension systems get fixed over the next 34 years – but this fix is expensive, will take a long time and carries serious consequences. The fix works if the state continues to pay its entire annual contribution – which is a lot of money every year – and if Tier II members continue to subsidize the system – which is fundamentally unfair to them.
Under current state law, Tier II members pay the same contribution to the state from every paycheck that Tier I members pay – 9.4 percent. However, because the Tier II member benefit costs less than the Tier I member benefit, the Tier II members are paying the entire cost of their benefit and a little extra. About 36 percent of the Tier II member’s 9.4 percent salary contribution is a subsidy that offsets the costs of Tier I benefits.
Between 2012 and 2038, the number of Tier II members paying into TRS will continue to grow and eventually will eclipse the number of Tier I members paying contributions, so the Tier II subsidy will continue to grow.
In fiscal year 2038, TRS estimates show that the System will be 68 percent funded and by 2046 will be 90 percent funded. The Tier II subsidy will be so large that by FY 2038 the state’s annual contribution will be devoted to paying off the unfunded liability. The entire annual cost of pensions after 2038 is paid for by members. According to estimates, the state’s annual contribution in FY 2038 is $9.1 billion and tops out at $10.2 billion in FY 2045, but in the next year drops substantially to $1.3 billion.
Finally, the Civic Committee’s latest suggestions to reform the pension code are contradictory and will not, taken together, lower the state’s costs.
While the first three suggestions drastically reduce benefits for retired members and therefore the overall cost, these savings are wiped out by the Committee’s fifth proposal – to have TRS and the pension systems “immediately” lower their assumed rates of investment return to 5.5 percent.
The current TRS assumed rate of return is 8 percent. Lowering the rate of 8 percent to 5.5 percent will automatically increase the state’s cost every year by billions of dollars. When you assume that TRS will be earning less from investments, the state must pay more to meet the total cost of pensions because total contributions from members and school districts is a revenue stream set by state law.
For FY 2014, TRS lowered its assumed rate of return from 8.5 percent to 8 percent. That 0.5 percentage point reduction alone added $473 million to the state’s annual contribution.
The Committee’s fourth suggestion – shifting the annual cost of pensions to local governments – does nothing to lower costs for taxpayers. The proposal is just a transfer of responsibility from a larger group of taxpayers to a smaller group of taxpayers. The cost of the pensions remains the same. For TRS, the shift means that the annual cost of a pension for a school district’s teachers will not be spread out statewide among millions of taxpayers, but only spread among thousands of people who live in that school district, much like the way municipalities pay for the pension costs for police and firefighters.