Better government doesn’t include paying what you owe, it seems.

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The Better Government Association’s solution to the pension liability.

Give me a couple of minutes to review the Illinois pension problem.

Our state pension is now carrying a $130 billion dollar liability because for decades the state didn’t pay their share.

The Illinois Supreme Court ruled that the 1970 Constitution’s pension protection clause which states that current retirees and current members of the pension system cannot have their pensions diminished or impaired.

So, put those two facts together and you must come up with the conclusion that the debt must be paid.

Revenue must be raised.

Try taxing the rich for a change.

Better Government Association policy and civic engagement director at the Better Government Association writes a Sun-Times column which starts with the facts I stated but then ignores the solutions.

Instead she talks about State Representative Matwick’s plan to move future employees to a 401k.

The benefit of such an idea for future state employees aside, will this help pay off the debt?

Nope. Not until all current retirees are dead.

Oops.

I think I get what she means by better government.

 

Bob Lyon’s TRS pension report (unofficial).

bob lyons

By Bob Lyons

Let me say again at the outset, that this is my report and is not any way official. The start of the 2018 fiscal year lends itself to the Good News/Bad News format. My last year on the board was financially a good year, actually a very good year. With the credit going to Stan Rupnik and our professional investment staff, TRS made 13.1% gross of fees and more significantly 12.3% net of fees. Our preliminary report on our assets at the end of FY 2017 had us at $49.1 billion up from $45.3 billion at the start of the year, and is safe to say the final figure should be a little higher as we still have money from last year coming in from real estates sales and private equity returns. With equity markets up since July 1, unofficially the TRS pension fund today in early September is somewhere north of $50 billion. That, of course, is the good news.

But we live in Illinois, and there is, of course, some bad news. As part of the law that this summer gave Illinois a much-needed increase in our state income tax, there also was included a “smoothing” of the effect of TRS lowering its anticipated rate of return. Even though our investments were positive and enjoyed double digit gains this past year, the long- range estimate is that the past returns are not predictive of future income. Over the past five years TRS has brought its expectations down in three steps from 8.5% to 7% annual returns, which would have required the state of Illinois to increase its contributions to make up the difference in smaller expected future earnings. The new law says that for each of three decreases in expected returns that it will now take five years for the full effect to take place. It is easier to understand when you look at the real numbers.

First, what we thought we were going to get before the new law was a state required contribution for fiscal year 2018 of $4,564,952,674. It is important that you understand that that number has nothing to do with what an actuary would have determined is needed for the sound financing of a pension. Instead the number was established by the goal of the 1995 state law that sets what the state of Illinois needs to pay each year to bring the fund to 90% funded in 2045. Plus that funding formula is heavily back-funded with a majority of the money to be contributed during the last five years. If the necessary state contribution would be based on actuarial math with a industry standard goal of 100% funding based on twenty years of even annual funding, the required number would have been $6,876,283,032, or $2,311,330,358 higher, which would be a significant difference, but would actually mean a smaller total contribution in the end. The effect of the new law means that instead for FY 2018 that Illinois will only need contribute $4.034 billion. In other words, the state of Illinois is once again “kicking the can down the road.” It is not so much that the state of Illinois would be characterized as a slow learner, but as a reluctant learner. They know what the result will be, but they prefer to ignore the reality. What they want to see as a savings of over $530 million, according to TRS Director Dick Ingram, “puts off the inevitable and will create a payment of $1.6 billion in the future.” Of the now just over $4 billion state contribution, only $974 million is needed to pay the anticipated cost of TRS pensions this year, and that is all the state would need to pay if our pension fund was fully funded. If you hear a legislator or a neighbor complain about the percentage of state revenue going into pensions, tell them over 75% of the money is for what Illinois owes us. In Illinois, reality bites.

John Dillon. When do you break even on your pension? Man. You are SO wrong.

Urban_Pension Versus Employee Contributions-2

– John Dillon. John blogs at Pension Vocabulary and will be joining us as a guest on Hitting Left with the Klonsky Brothers, episode #27, airing live August 11th at 11am on 105.5fm in Chicago and streaming http://www.lumpenradio.com. Podcast hittingleft.libsyn.com

Have you ever wondered just how many contributions to your retirement plan it would take before you broke even?  Breaking even would be that point in a teacher’s career where her contributions would match the value of her benefits in retirement?

If you read the Chicago Tribune, listen to the administrative support team of Governor Rauner (Illinois Policy Institute), or have a family member or neighbor who works in the private sector and abhors taxes of any kind – well, you’d think you would get a sweet return which would always wash over what you put in, wouldn’t you?

But you’d be wrong.

Nearly 3 out of 10 teachers leave the profession within the first five years, and we can expect their contributions to the pension systems will never match any real return. In fact, they’d be wise to take it with them.

Pension contributions are back-loaded.  That means that teachers put in increasing amounts as they gain experience and value (salary) in the classroom.  In Illinois, 9% of $25,000 starting salary is much less than the later multiple-degree salary of $60,000.  In fact, only about half as much.

Somewhere out there in the future, the meeting between what teachers have given and what they will earn crosses.

According to a recent research paper looking at all states, that moment of equivalence may be longer away than any teacher thought, and it will be VERY dependent upon the specific state’s retirement program.

Read the entire blog post here.

John Dillon explains pension “smoothing”. Gained a lot of weight this year? Not so bad if you average it as part of the gains and losses over the past ten years.

Man-on-scale

-John Dillon. John blogs at Pension Vocabulary

One of the elements of the addition of a Tier III in the new law for latest hires in Illinois is a change in how state government calculates the amount of money TRS and other programs will receive from the state government in Illinois for the years going forward: 2018, etc.

Making common sense of how one might determine what would constitute a required annual contribution is a bit complicated, because that contribution by the State of Illinois to TRS is dependent upon the fluctuating rates of investment returns in the reserves into which we (teachers) all pay.

Confused?  Believe me, as a retired Language Arts teacher, me too.   But think of it this way:

If the investments in TRS do better than the funds assume (predict) in a current year, the state and local governments can fund pensions with much less tax money, which could be in turn used for services, infrastructure, or citizen benefits.

However, if the investment returns do poorly, the required annual contributions  by the state will need to increase to meet the needs; and that will crowd out the same programs – the services, infrastructure programs, and citizen benefits mentioned above.

With me so far?

So…if TRS is down 5% this year in investment returns, the state picks up the additional 5% of contribution.  Or if the investment returns are up 3% this year, then the state is able to lessen its payment by the corresponding amount.  Right?

Yes, that is, until a little actuarial gimmick called smoothing is applied to the mathematical reality.

According to one economist, smoothing is a “actuarial camouflage,” a method to dampen on-book asset volatility.”  The practice is meant to protect the payer from the shocks of sudden changes in market returns (or volatility) in gains and losses during a single year.  So, why not spread the damages or gains over five, or ten, or twenty years to artificially reduce asset volatility?

Analogy:  I’ll meet with my Doctor later next month.  He’ll be checking my weight carefully again as he does every six months.  Let’s just say that I have a deep and abiding love for good food and paired wines.  And my weight has fluctuated during those times we have met.

Doctor:  Well, I must tell you that I see you have gained about five pounds despite the last serious talk we had in April.  And you had done so well the time before with a drop of nearly eight pounds.

Me: Yes, you know, Doctor, I think we should smooth the last five years of our appointments.  I calculate an overall average loss of a single pound over our ten meetings.  That’s a hopeful indicator, don’t you think?

Doctor: Does that make you feel better?

When the smoothing is done, it is more likely that the underfunding of pensions will continue as it artificially reduces asset volatility and reduces funding pressures in the short run.  In my case, my assets may look better than they are (pun intended), and the same is true of this engineered value of pension assets and returns.

According to the Rockefeller Institute study on Public Pension Funding Practices, “Funding policies and practices that take a long time to repay shortfalls protect current taxpayers and beneficiaries of government services from sharp and possibly unaffordable changes.  But they create risk that the pension plan will become deeply underfunded and that future taxpayers who never benefitted from past services will have to pay for them.  This is particularly true of the plan suffers a series of shortfalls over several years.”

Welcome to Illinois.

According to TRS, the original state contribution for TRS expected in fiscal year 2018 – $4.65 billion – will be recalculated.

“TRS must retroactively “smooth” the fiscal effect of any changes made in the TRS assumed rate of investment return over a period of five years.  The “smoothing” applies to assumption changes from 2012 on.  Up until now, the fiscal impact change in the assumed was totally absorbed at one time.  For example, in 2016 TRS reduced its rate of investment return from 7.5% and the result was a $402 million increase in the fiscal year 2018 state contribution to TRS.  Under this new law, that $402 million increase would be phased in over a five-year period.“

The only way it could get any more slippery or worse is if Illinois found a way to short the funding even more.

They did:

According to Mr. Richard Ingram, the executive director of Illinois’ TRS,  “Over the last several years state government has taken its responsibilities to TRS very seriously and has paid its legal obligation in full. Still, the legal state contribution for the last several years has been insufficient to improve the System’s long–term finances. State government’s annual contribution is set artificially by law. It is not an actuarial calculation.

As it does every year, for FY 2017 the TRS Board asked its actuaries to calculate two state contributions — the payment calculated under state law and the payment calculated under actuarial practices. Under standard actuarial practices, the state’s annual contribution for FY 2017 should be $6.07 billion.

The calculations set in state law artificially lower the state’s annual funding level. For instance, state law:

  • Requires pension costs to be calculated on a 50–year timetable instead of the standard 30 years
  • Establishes a 90 percent funding target instead of the standard 100 percent goal
  • Requires the debt payments on state pension bonds to be deducted from the total contribution.

Illinois teachers have always paid their required share and are counting on their pensions to sustain them in retirement. The state has never paid its full share.

The annual contribution is the amount of money required by state law to fund TRS pensions during the coming year, as well as a payment on the System’s unfunded liability, which currently stands at $71.4 billion.”

The inclusion of another Tier by the General Assembly as a laurel to Republicans and Rauner does not fix the hole nearly 80 years of underfunding has excavated.  It provides some relief (like SB7 did) to borrow to pay off debts, once again on the backs of those who paid into their pensions as demanded each and every paycheck.

Does that make you feel better?

Nope.

When it comes to pensions, it’s not always sunny in Philadelphia. Or West Virginia. Or Alaska. Now Illinois.

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The Tier III option is a Hobson’s Choice.

When the Illinois legislature voted to pass a budget and then to override the governor’s veto they quietly included some bad medicine for public employees. They added a Tier III to the state’s Teacher Retirement System.

The new tier III offers a hybrid pension plan of a defined benefit and a defined contribution option. The current situation for Tier II teachers is terrible. They pay more then they will ever receive back in retirement and basically prop up with their overpayment a system only 40% funded. The underfunding is due to the failure of the state to raise adequate revenue and pay what they owe.

With the new Tier III they can move some of their payment to risky Wall Street investments, putting into constant jeopardy their retirement savings.

They have a choice. It is a Hobson’s Choice.

The industry publication, Pensions and Investments reports on how these hybrid plans are working in other states.

Pennsylvania:

“While it’s important to note that Pennsylvania preserved a good portion of its defined benefit plan, I think this (new) plan is not saving all that much money and is just forcing employees to take a benefit cut,” said Bailey Childers, executive director of the National Public Pension Coalition in Washington.Ms. Childers said Pennsylvania is an outlier in that, while most states’ pension plans are well-funded, politicians in the Keystone State didn’t make full payments to the state pension plans for years, so Mr. Wolf “was stuck fixing a big problem.”

“The employees didn’t do anything wrong; they’ve been making their contributions through every paycheck, so states like Pennsylvania should take a step back and push for changes,” she added.

West Virginia:

In 1991, West Virginia closed its teacher retirement system to new employees to address its underfunding issue, according to a 2016 NIRS survey shared by Ms. Oakley. After 10 years, the replacement DC plan was costing the state twice as much, so it went back to a pension.

“Switching to the DC plan did not help with the funding or legacy costs. When (West Virginia) realized most teachers couldn’t retire, they switched back to a DB plan,” said Ms. Oakley.

Alaska:

In 2005, Alaska moved all employees hired after July 1, 2006, into a DC plan from its two DB plans. At the time, the state faced a combined unfunded liability of $5.7 billion for its two plans and retiree health-care trust, Ms. Childers said.

Although the switch to DC was made to slow the increasing unfunded liability, the total unfunded liability more than doubled, ballooning to $12.4 billion by 2014. Legislation has been introduced to move back to a DB pension plan, according to an NIRS case study.

Shamefully, the state’s public employee unions did nothing to oppose the enactment of Tier III and the move to defined contributions.

None of those running to oppose governor Rauner have offered up detailed solutions as to how the $130 billion pension liability will be paid.

 

 

 

Pensions Tier III: Your future 401K will likely not be protected under Article XIII, Section 5, the pension protection clause of the Illinois Constitution.

Madigan-Michael-Ill-House-Speaker
Democratic Party Speaker Michael Madigan.

-John Dillon. John Dillon blogs at Pension Vocabulary.

“We can overturn any law we pass within an hour.”

The most significant and everlasting words I received from a legislator concerning pension reform bills and future promises came back in 2011, when my good friend Glen Brown and I met with Representative Elaine Nekritz in Buffalo Grove area to discuss our concerns about the “pension reform” being pressed by Governor Pat Quinn.

Representative Nekritz was thought to be the probable successor to Michael Madigan before her announcement to retire from Illinois politics this year.

Back then, as Tier One retirees, we realized the General Assembly – facing an underfunded pension liability after decades of shirking their payments – was about to move to some draconian diminishment of promises made and benefits constitutionally protected.   The bill – SB1 – was not yet fully baked, but it was on it’s way.

We had an emotional discussion.  One of many more…

We were such idealists.  She smiled when she replied to our question –

“We can overturn any law we pass within an hour.”

On May 8, 2015, the Illinois Supreme Court echoed our hope unanimously.  Article XIII, section 5, stands.  There shall be no diminishment of benefits earned upon the contractual entering of employment as a state employee.

Earlier Tier Two passed quickly by the General Assembly for those hired after January 1, 2011, and without any real objection by the unions, requiring new hires to work toward a defined pension that is capped at a CPI of about $110,000 and without a compounded cost of living adjustment.  With the caps and the lesser benefits, Tier II workers started paying down much of the debt created by the General Assembly and surrendered nearly 9.5% of their salaries for less than 6% of a return in a defined benefit.

Glen Brown wrote in January of 2015:

“If Tier II is left alone, it will accomplish its mission. The $61.6 billon TRS unfunded liability will shrink over several decades and eventually be eliminated because the state will pay less to the ever-growing number of Tier II members. In fact, at some point in the future, we estimate that Tier II members actually will help create a surplus of funds for TRS that effectively could eliminate the need for any state government contribution to the System.

“But the core of Tier II – the reduced benefits structure – is a problem the Teacher Recruiting and Retention Task Force will review. The benefit structure is unfair to all Tier II members. Right now, a 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, like me, 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” (https://teacherpoetmusicianglenbrown.blogspot.com/search?q=tier+II)

And now, Tier II pension reserves are calculated to be at 151% funding.

But now, suddenly,  we have Tier Three.

Remember: “We can overturn any law we pass within an hour.”

According to the IEA, Tier III offers a positive opportunity to “fix” some of the problems with the Tier II design.

Among those problems was an unscored bill Tier II passed which did not meet the Federal requirements for a qualified retirement plan or “safe harbor” limit.

According to IEA’s website, “ SURS and TRS members who first become participants of the pension systems on or after a to-be-determined implementation date (likely no earlier than July 1, 2018) will have the option to:

1) Be in a new hybrid benefit, known as Tier III, or

2) Elect to be part of the current Tier II.”

Elect.  Choose.  Decide to leave the benefits of a promised contractual agreement. This is a form of long-sought-after consideration, wrapped in promises of personal ownership has been part of Cullerton’s olive branch to Rauner and an earlier acceptance by a collective of state workers’ unions.

“Tier III offers a hybrid plan of a partial defined benefit (pension) and a defined contribution plan (401k or etc.).  While none of this is fully formed yet, those Tier II people choosing to go with the irrevocable defined contribution (401K, etc.) will pay minimally 4% of their salary, but see their pension contributions drop from 9 percent to no more than 6.2 percent.

“Also, existing Tier II members will have the option of joining Tier III. The retirement systems shall establish procedures for making these elections which, once made, will be irrevocable. The Tier III plan is a combined defined benefit (DB), often referred to as a pension plan, and defined contribution (DC) plan. Under the DB part, the member’s contribution will be no more than 6.2 percent of salary, but may be less depending upon a system’s determination of the annual normal cost of benefits. The member’s contribution drops from the 9 percent of salary required under Tiers I and II.

Entering finally stage right: the 401K style retirement plan.

In 2011, the Civic Committee of the Commercial Club of Chicago urged the adoption of a 401K program for teachers to replace the pension structure currently in place – SB512.  But 401k’s had their birth in the Reagan era: Congress acted in 1986 (during the Reagan presidency) to replace defined benefit plans for federal workers (CSRS) with a less generous defined benefit plan (FERS) and a generous 401 (k) plan called a TSP.  This explicit endorsement by the government from a single type defined-benefit plan to a possible combination of defined-benefit/contribution plan to which employees could elect to contribute amounts of their own choice became the starting point for a fast growing industry in financial investing and personal portfolios for retirement (Employee Benefit Research Institute, 2005).

Makes you wonder who will be managing these teacher investments, doesn’t it?  Maybe Ken Griffin at Citadel?

Sorry.  Couldn’t resist.

“We can overturn any law we pass within an hour.”

Beginning with the 2020-21 year, all employer costs (normal and any unfunded liability) for a Tier III member will be picked up by the member’s employer and not the state (prior to that date, the state will contribute 2 percent of each Tier III member’s salary to each system with the Tier III member’s employer picking up the rest, if any exists). Under the DC part, the member must minimally contribute 4 percent of salary, while his/her employer must contribute at least 2 percent and could contribute up to 6 percent of salary.

Your future 401K will likely not be protected under Article XIII, Section 5.

 By 2020, the local districts pick up the cost of your 401K savings plan.  The state has no responsibility to engage in any promised compensation for your investments..

I repeat what I warned in 2014:

Note: Always remember this.  Were the State or Rauner ever able to move public workers to a 401k retirement system, it would not be protected under the Pension Clause.  If the State found that matching contributions to a 401k plus the need for Social Security were too much, the General Assembly could do away with 401k plans altogether. 

I have questions for Senator Daniel Biss.

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Senator Daniel Biss with IEA Retired’s Jack Tucker.

Skokie Senator Daniel Biss is running for the Democratic nomination for Illinois Governor. He wants to run against Bruce Rauner.

Like just about all the candidates, Senator Biss is running as a progressive alternative to the Trumpian current occupant of the Springfield mansion.

Senator Biss has two big problems.

He doesn’t have nearly the cash of the front runners, Chris Kennedy and JB Pritzker.

And he was the most outspoken legislator in promoting the pension reform bill that the Illinois Supreme Court ruled as unconstitutional.

State Representative Elaine Nekritz, who recently announced her retirement, was the pension theft leader on the House side of the Capitol. Someone wrote to tell me that Elaine was on TV this weekend saying the pension problem would be solved by attrition. I didn’t hear her say that on TV this weekend and couldn’t find it on Google. But that’s been her view over the years, so I don’t doubt the report.

Attrition.

Meaning we retirees will be dead soon enough and if we can move everybody that is new to a defined contribution plan and shift the cost to local school districts, the pension problem will be solved.

Elaine can say stuff like that. She’s leaving the General Assembly.

Daniel Biss is running for governor.

“I see dead people,” is not a good campaign slogan for the governor’s race.

And besides, Bruce Rauner has trademarked it.

Moving new public employees to a defined contribution system is clearly the plan, as is moving pension costs to underfunded local school districts.

That is what was done quite secretly in the budget bills that were passed with legislative votes overriding Governor Rauner’s veto.

I supported the override, but was pissed to discover the secret pension changes.

Here is my exchange with Senator Biss:

June 26th.  Daniel,

Does this article say that you favor moving pension costs to the local school district and does that represent your current view?

Fred

 

June 27th. Fred,

It does not. I don’t think the article says I favor any particular solution it all — I read it (and I recall the interview) as just me whining about what’s wrong with the current situation.

The challenge is that the complete school aid solution involves many steps, including progressive tax reform, way more state revenue in the school aid formula, a better school aid formula, less property tax reliance, and then pension parity between Chicago and TRS. Pension parity could be achieved in any number of ways, but if it were to be done by moving pension costs to the local school district then the “way more state revenue in the school aid formula” part of all this needs to be adequate to stop that transition from harming the non-Chicago schools.

On the other hand, if we were to just move pension costs to the local school district without doing the rest of this, that would certainly harm the non-Chicago schools.

Daniel

 

July 11. Daniel,

While we wait to find a date for you to join us on our radio show/podcast I would like to ask you what your views are regarding the changes to the Teacher Retirement System, the creation of a Tier III, that was part of the budget passed over the Governor’s veto.

– Fred

 

July 12. Fred,

The creation of the Tier III plan is a bad idea that I oppose. Its voluntary nature made it fairly easy for me to decide to support the package notwithstanding that, but I was frustrated to see this proposal in the final package.

Daniel

 

July 12. Daniel,

Thanks for your brief response.

I think that Tier III – along with the change to the estimated return on TRS investments – are terrible ideas which are not mitigated by the voluntary component of Tier III. I look forward to talking about this when we schedule a date for you on our radio show/podcast.

-Fred

 

July 12. Fred,

Thanks — likewise looking forward to it. So just to make sure I understand, you think the assumed rate of return on TRS investments should be higher than it is now?

-Daniel

 

July 12. Daniel,

The change by the legislature reduces the amount the state pays into the system. It will increase the liability. Where does the so-called $1.5 billion in savings come from? Shifting costs to the local school districts and reducing the amount paid into the system by rolling back the change to the assumed rate of return on investments. The action of the legislature increases the assumed rate. Just to make sure I understand, you voted to return to the old assumed rate which is higher.

Fred

 

July 12. Fred,

Oh I see, sorry. You’re talking about the so-called “smoothing”? Yeah I hate that.

-Daniel

To be clear, Senator Biss assured me in an earlier email that he would never vote for an unconstitutional pension bill again.

But for many retirees, his role in passing the unconstitutional previous attempt at pension theft has left a bitter taste that won’t go away.

And without notifying voters, Biss and others voted for these pension changes as part of the budget bill and override of the Rauner veto.

His response to me that the Tier III defined contribution plan is voluntary is problematic in that Tier II is so bad that it literally forces employees to switch to a defined contribution plan. It is like putting a gun to their heads and saying they have a right to choose to live or die.

Senator Biss is scheduled for our radio show, Hitting Left with the Klonsky Brothers, on Friday August 4th at 11AM on Lumpen Radio, 105.5fm.

I’m looking forward to the conversation.

This week’s Hitting Left podcast.

Bob Lyons’ first report as retired TRS board member. The recent actions in Springfield.

bob lyons

-By Bob Lyons

I have retired from the TRS Board and I write this today as a fellow annuitant, not as a TRS trustee. This past fiscal year ended on June 30 2017 and  it is my understanding that TRS investments made something above 10% for the year As additional information comes  from TRS holdings in private equity and real estate, it is expected that the gains will only grow. And with TRS funding level firmly above 40%, Illinois is no longer the worst-funded pension state. Illinois has moved up and is now in 48th place, Kentucky 49th at 37.8%, and New Jersey is last with 37.5%. And that is not the only reason to celebrate; Illinois finally has a budget. 

According to the editorial writers and columnists across the state, Governor Rauner was the clear winner except for those that gave the victory to Speaker Madigan. For more than two years Governor Rauner tried to hold the budget hostage: first, for a set of union-busting demands, but in the end for several  measures, such as term-limits, a property-tax freeze, and workmen’s compensation changes that were more popular. In the end while Governor Rauner got nothing for his efforts, he can and will use the tax increase as a hammer against Madigan and company in the 2018 election. One thing is certain: the two years without a budget was a loss for the state. Even with the increased income tax, the state bond rating hovers just above junk. Illinois owes a total of over fifteen billion dollars to everyone it does business with. And the many candidates for governor and the legislature are all in full campaign-mode a year and four months before the election.  The political pundits have already given Illinois claim to be the most expensive campaign in the nation for who will be our governor.

Even without a budget, a combination of courts orders and continuing resolutions had the state of Illinois paying out $39 billion a year, or more accurately a combination of paying, or promising to pay a total of $39 billion. Now the increase in the state income tax from 3.75% to 4.95%, which is an increase of 1.2%, according  to Mike Madigan, or 32%, according to Bruce Rauner, is expected to bring in an additional $4.3 billion in revenue. The rise in the corporate tax from 5.25% to 7% should grow the state’s revenue by an additional $460 million. The bill that gave us the tax increase also allows the state to borrow $8 billion to pay down debt. Normally borrowing to deal with debt is not a good plan, but with some debts paying interest as high as 12% the state can borrow for far less and come out ahead.  In addition, paying off some debts will free up matching grants from the Federal government.

Illinois  needed the tax increases in order to fund TRS pensions. June 28, as the state headed into a third year without a budget, a federal judge ruled that Illinois was out of compliance with previous court orders to pay health care bills for low-income and other vulnerable groups  Judge Joan Lefkow ordered the state to come up with $586 million per month to make immediate payments and to start reducing the $2 billion debt which is owed to health care providers. Without additional revenue, State Comptroller Susana Mendoza would have obviously needed to take the money from somewhere else. The monthly payments from the state going into the pension funds could likely have been taken by Mendoza to help satisfy the judge’s demand.

Over the last several years, following the advice of its own investment people and its outside consultants the TRS Board has lowered its assumed rate of investment return in three steps from 8.5% down to 7%. Each decrease in assumed returns meant that the state of Illinois would need to increase its contributions to the pension fund. The last decrease in assumed returns caused the needed increased contribution from the state to TRS to grow by $402 million. The necessity of these increased payments was not well received by the Governor and the General Assembly and as part of the legislation recently passed TRS must now retroactively “smooth” the final effect of any changes made in the TRS assumed rate of investment in the last five years with 20% being phased in each year over the next five years.  Though the results of this calculation have yet to be announced by TRS,  the estimate is that it could significantly lower the state’s FY 18 contribution  and it may mean that the annual payment from the state of Illinois would remain approximately $4 billion, or even less than it was for last year

The FY 2018 budget included changes to the Illinois Pension Code with the creation of a new Tier III.  None of the Pension Code changes enacted on July 6, 2017 affect Tier I members or retired members in any way. There will be no changes to benefits, active Tier I member contributions, or health insurance. Tier III will only affect Tier II members and those teachers yet to be hired only if they want to be a part of it. The optional Tier III calls for a “hybrid” retirement plan of two parts – a life-long-defined benefit pension and a defined contribution plan similar to a 401(K). Details on Tier III still need to be worked out and then the plans will be submitted to the Internal Revenue Service for their approval. It is a shame that that stipulation was not part of the creation of Tier II. Tier II members are paying 9% for a plan that is worth only 6% at best.   Tier I is funded at just over 40%, Tier II is currently funded 151%.

One other change to the Pension Code should be noted. Local school districts will pay for the cost of a member’s pension if the member’s salary is equal to or greater that the governor’s statutory salary of $177,412 – only the portion that is equal or over. Also local school districts will be responsible for the “employer contributions” for both the DB and DC plans that will be part of Tier III. For those of you who look ahead and fear the state wants to get out of the pension business, you should know that the billions that Illinois owes to TRS are binds that will not break. They owe it and they have to pay it.

Trump-watching is a spectator sport.

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I remember right after Trump got elected when there was a period I couldn’t watch the news or read a newspaper.

You too, right?

It wasn’t that I became paralyzed with grief or anything. Although I have some friends who didn’t want to get out of bed in the morning. I get it. But that isn’t me.

As Trump and the Republican’s troubles worsened, the cloud began to lift.

To be sure, he and the Republicans are causing plenty of trouble. And it will take years to repair the damage.

But I’m back watching the nightly news, reading the New York Times and in moments of quiet desperation I will even turn on the Situation Room with Wolf Blitzer.

Some complain on Facebook that Trump’s Russian troubles are a distraction.

I think that misses the point.

His Russian troubles are a reality. It is like complaining that the rain is a distraction.

The problem is that Trump’s Russian troubles have become a spectator sport. Like watching the Cubs. Or roller derby.

And they involve forces and cliques we have no entry in to.

It’s fun. But we’re not players in all that.

Which is why I’m so annoyed with even the most progressive of Illinois legislators who voted for a budget bill that included what the Teacher Retirement System called “significant changes” to our pension system.

I’ve posted about it. John Dillon has posted about it. Glen Brown has too.

But since last Friday when I first received notice from the Teacher Retirement System of Illinois that the legislature had done something to our pension system, it has taken a determined effort just to find out what exactly they did.

There has been no follow up explanation from the teachers unions or We Are One Illinois, which represents other state public employees.

And the only information I have received from even the most progressive of state legislators is when I contacted them to ask.

That’s not movement politics.

That’s not participatory democracy.

I understood the need to pass a state budget and fund social services. I understood the need to override the Governor’s veto. I support raising revenue. I know that to get that done Republican votes were necessary and compromises had to be made.

I’m not quite sure why these things seem to always end up involving cuts to our pensions or underfunding, however.

Look. I follow these things. I knew there were bills floating around Springfield for years to convert our defined benefit pensions systems into defined contribution systems. I knew there were bills to shift pension costs to local school districts.

I have written about them and organized against them.

But we didn’t know that they was part of the budget deal. Nobody we sent to Springfield thought it was something we should know was happening.

Even after it happened.

Nobody said to us that deals are being made. They involve pensions. Get your people on the phone.

We would have done that. Believe me.

Trump’s Russian troubles may be a spectator sport.

I’m for participatory politics.

Two more days of Springfield will keep your head spinning. Will Democrats vote to cut dedicated funding for special education teachers and cut pension benefits?

I have been reporting the last few days about HB 2808. It was to be the House version of SB 1, an education de-funding bill that would cut dedicated and direct funding to Illinois special education teachers.

It was sponsored in the House by Rep. William Davis, Robert W. Pritchard , Linda Chapa LaVia, Al Riley, Emanuel Chris Welch, Sue Scherer, Camille Y. Lilly and Will Guzzardi.

It now seems that with the legislature adjourning tomorrow there is no time to vote on the House measure and reconcile it with the Senate’s SB1, which does essentially the same thing – end dedicated and direct funding for special education teachers.

So, the House will vote on the Senate’s SB1, with an amendment.

Amendment 1 to Senate Bill 1 now bluntly states that direct and dedicated funding for special education teachers and for all others providing direct services to students with disabilities including one special ed director for each school district will be eliminated.

“No funding shall be provided to school districts under this Section after fiscal year 2017.”

Meanwhile public employee pensions remain under attack.

The Illinois Education Association has a good summary of HB 4027, HB 4045, and Senate Bill SB 16 here.

While the pensions of current retirees are protected by the decision of the Illinois Supreme Court, these bills – or any version of them that may emerge – target current and future employees and their pensions.

They are attempts by legislative Democrats primarily to skirt the pension protection clause of the Illinois Constitution.

It is two more days folks.

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You know what to do. 888 412 6570.