The inbox. Ralph Martire in Crain’s. A pension fix.

By: Ralph Martire
January 16, 2013

There was much wailing and gnashing of teeth when the recent lame-duck session in Springfield ended.

Why? No action was taken to address the $95 billion in debt owed to the state’s five pension systems.

This leaves the systems with just 40 percent of the funding they should have currently, which is well below the 80 percent generally deemed healthy for public systems. Good government groups and editorial boards alikelamented the Legislature’s failure to pass yet another proposal to reduce that ginormous obligation — this time by cutting almost $30 billion in benefits earned by current workers and retirees.

But rather than being dismayed, folks should be relieved. Here’s why.

A problem really can’t be solved unless the proposed solution addresses its true cause. And the proposal that failed to pass during the lame-duck session — like every other proposal introduced to date on this subject — focused its solution on benefit cuts and thereby failed to deal with this particular problem’s true cause.

See, three factors have contributed to the creation of this unfunded liability. The first two are items inherent to the pension systems themselves, like benefit levels, salary increases and actuarial assumptions; and investment losses suffered during the Great Recession. But if those were the only factors creating the unfunded liability, the systems would be around 70 percent funded today, meaning no crisis.

The vast majority of the unfunded liability is made up of the third contributing factor: debt. Indeed, for more than 40 years. the state used the pension systems like a credit card, borrowing against what it owed them to cover the cost of providing current services, which effectively allowed constituents to consume public services without having to pay the full cost thereof in taxes.

This irresponsible fiscal practice became such a crutch that it was codified into law in 1994 (P.A. 88-0593). That act implemented such aggressive borrowing against pension contributions to fund services that it grew the unfunded liability by more than 350 percent from 1995 to 2010 — by design. Worse, the repayment schedule it created was so back-loaded that it resembles a ski slope, with payments jumping at annual rates no fiscal system could accommodate. Want proof? This year the total pension payment under the ramp is $5.1 billion — more than $3.5 billion of which is debt service. By 2045, that annual payment is scheduled to exceed $17 billion, with all growth being debt service.

It is this unattainable, unaffordable repayment schedule that is straining the state’s fiscal system — not pension benefits and not losses from the Great Recession. And no matter how much benefits are cut, that debt service will grow at unaffordable rates. Which means decision-makers can’t solve this problem without re-amortizing the debt.

Given that the current repayment schedule is a complete legal fiction — a creature of statute that doesn’t have any actuarial basis — making this change is relatively easy. Simply re-amortizing $85 billion of the unfunded liability into flat, annual debt payments of around $6.9 billion each through 2057 does the trick. After inflation, this new, flat, annual payment structure creates a financial obligation for the state that decreases in real terms over time, in place of the dramatically increasing structure under current law. Moreover, because some principal would be front- rather than back-loaded, this re-amortization would cost taxpayers $35 billion less than current law.

One last thing — it actually solves the problem by dealing with its cause.

 

 

Tuesday is Virtual Lobby Day. The Illinois General Assembly is back. The Civic Committee is back. So are we.

TRS Trustee Bob Lyons’ report, published here yesterday, pretty much lays out what is going to happen this year.

Another assault on teacher pensions in Illinois.

The IEA leadership has decided not to have teachers go to Springfield this May for Lobby Day. It’s not a decision is think is smart. But it’s not the first time.

So it is Pension Call Tuesday once again.

Here is the IEA direct email site for contacting your legislators.

Here is the IEA direct email site for contacting the state’s political leadership.

Start today and make a contact every Tuesday.

“Don’t mess with our TRS.” 

Boss Madigan eyeing public employee pensions. A disaster.

Do I really need to go into why there is a problem with Illinois public employee pensions again?

Is it something the employees did? Is the average teacher pension of roughly $40,000 a year too greedy? Do teachers also get to draw on their social security and their pension like those in the private sector? Did we fail to meet our payment obligations as TRS members?

No, no, no and no.

Did the state’s leaders fail to meet their obligations over the past decades ending up with a debt to the system now in excess of $85 billion?

Oh, yes.

There are now several bills in the Illinois legislature all aimed at punishing state employees, including teachers, with radical changes to the our retirement systems.

I’m constantly stopped by colleagues who are literally terrified of what will happen to them in retirement. What will happen to the retirement dollars they were promised when they chose a teaching career over something that would have paid them more in the private sector.

Illinois Democratic Speaker of the House Mike Madigan hinted at what the answer to that question was yesterday.

“I think we will take some action on the benefit level for state workers midstream,” Madigan said during an impromptu meeting with reporters on the House floor after his legislative chamber adjourned.

The Illinois Education Association’s Capitol Report describes the legislation that Madigan is looking to enact.

Two pieces of legislation have been introduced.

Identical pieces of legislation, HB 149, sponsored by Rep. Tom Cross (R-Oswego) and SB 105, sponsored by Sen. Chris Lauzen (R-Aurora), allow current TRS and SURS members to make an irrevocable election to do one of the following:

To remain in the current pension plan an active TRS member must pay a minimum of 19.5% of their salary.  Currently, active TRS members pay 9.4% of their salary and the total cost of the current TRS benefit equals an estimated 18.4% of salary.  The legislation also requires an additional percentage of salary that is currently undeterminable.

To choose participation in the 2-tier pension benefit plan that passed last year (retirement at age 67, reduced COLA, reduced final average salary). The member would be required to pay 6% of salary (currently, 9.4% of salary in TRS). TRS has determined that the actual cost of the 2-tier benefit is an estimated 5-6% of salary. In essence, there is no employer contribution required and the members fund their own pension.

The option to participate in a defined contribution plan (401-K style plan).  The member would pay 6% of salary and so would the state.  Members would be required to direct their own investments.

For current teachers hired before the two tier system was enacted January 1st, these bills would be a disaster to themselves and their families.

Emails must be sent.

Teacher pensions under attack. Torturer Burge get his, no problem.

As of January 1st, anyone becoming a teacher in Illinois will have a different pension plan than previously hired teachers thanks to Governor Quinn and the state legislature. It will take a decade longer to max out and the benefits will be sharply reduced.

But there are those, like leaders of the Chicago Civic Committee, for whom this is not enough. They want to move public employee pensions from a defined benefit system, making it look more like a private annuity.

Then there is GOP Illinois Senator Mark Kirk, who wants the state to declare bankruptcy so that it can renege on its pension obligations altogether.

But the CPD Commander John Burge, convicted of perjury and torture, gets to keep his pension. No problem.

Despite his federal conviction, former Chicago Police Cmdr. Jon Burge will be able to keep his pension, according to a vote by a police pension board Thursday. 

Board member Mike Shields said the board voted 4 to 4 on a motion to terminate Burge’s pension.

A tie vote means the motion failed and Burge will continue receiving the $3,039 monthly pension.

What did Obama say?

“Become a teacher. Your country needs you.

Is a new IEA sell-out in the works? What stand will the leadership take on pension taxation?

Rumors are circulating in the IEA that the state leadership is willing to support a bill that would tax teacher retiree pensions.

From those I have talked to, this is another Swanson/Soglin “at least we’re sitting at the table” strategy, justified by the argument that at least we would be keeping a defined benefit plan.

But if the rumors are true, this will be a very hard sell to the membership which is seeing large numbers of teachers entering the TRS system. It would amount to a huge reduction in their retirement benefits.

I’ll try and find out more.

And if you hear something, let me know.

Has Illinois committed securities fraud with teacher pensions?

The Security and Exchange Commission has accused the state of New Jersey of committing securities fraud in the way it funds state pensions, including teacher pensions.

Today’s NY Times reports:

The Securities and Exchange Commission said the action was its first ever against a state, and only its second against any government over the handling of a public pension fund.

But it may not be the last. The Times reports that the SEC is now looking at the way Illinois funds (or doesn’t fund) its pension system. The report suggests Illinois may face the same fraud charges as New Jersey.

NY and Illinois are being accused of running a pension ponzi scheme.

The S.E.C. said its action was meant to dissuade other governments and their advisers from hiding bad fiscal news in a fog of pension numbers. Actuaries, for instance, have been raising questions about the framework Illinois has laid out for bolstering its pension funds. In New York, California and other places, financial advisers have told lawmakers that benefits could be sweetened at virtually no cost, only to be proved wrong once those benefits were adopted.

Of course, there are those who are on a crusade against fair and promised pension plans who will use this news to call for doing away with the pensions that teachers have dutifully contributed to, some for 35 years.

But the real news from the SEC is what we have said all along. While teachers have paid their share, states have played fast and loose with our pensions, promising to fund them, telling bond holders that they have funded them, and lying all the while.

IL General Assembly is still in session. Hide your children. Lock your doors. Call 1 800 719 3020.

It is 5:30 in Chicago. If you live in Illinois, stop what you are doing right now. Dinner can wait.

The General Assembly is still in session and at any moment can do some really stupid stuff.

For example:

Call 1-800-719-3020 and follow the prompts and tell them to vote no on the Emergency Budget Act, House Amendment 3 to Senate Bill 3660. The amendment would give Gov. Quinn the power to skip payment obligations to the state teacher and university retirement systems and stop any state appropriation—in effect forcing cuts to the School Fund, funding for state universities, or any state agency or program. No shit. This is serious. Call now.

SB 1946: Did Swanson signal Madigan that it was okay?

Did IEA President Ken Swanson telegraph powerful Democrat and Speaker of the House, Michael Madigan, that there would be no consequences resulting from the General Assembly passing a two-tier pension system?

While some in the IEA will suggest I’m being disrespectful or that we should put the past behind us and move on, I still have questions about what just happened. And from what I’m hearing, lots of IEA members have tough questions too.

Let’s look at the facts.

For weeks we had been told by IEA leaders that we should amend our long-standing position of “just say no” to pension change.

“It’s going to happen anyway,” Swanson, his underlings, Cinda Klickna and Bob Blade, his Executive Director, Audrey Soglin and Government Relations people told the membership. “At least we should be at the table.”

Many at the RA saw this as an opportunity for the IEA to be seen in a positive PR light.

But the translation to the Machiavellian Madigan: The IEA understands  and accepts that you will go after the pension rights of teachers. Just talk to us first.

Of course, hearing that, Madigan saw no need to talk to the IEA or any unions first. He got the green light that he wanted.

Less than a week after the RA adopted Swanson’s policy change, Madigan moved quickly and in 24 hours destroyed the pensions of any teacher hired after January 1, 2011.

The rest of the General Assembly realized that they were now free of any political consequences. Swanson essentially told them so.

The last few days my phone has been ringing, e-mails flying and Facebook friends messaging with the same suggestion: Pull our IPACE money and endorsements from those who sold us out. But Swanson AND Madigan know that this is silly. The vote in Madigan’s House was 97 to 17. In Cullerton’s Senate the vote was 48 to 6. Is IPACE really going to pull support from over 80% of the sitting members of the General Assembly?

In the history of IEA legislative bungling, collaboration (and I mean this in the old, negative meaning of the word collaboration) and miscalculation, this must rank among the worst examples. And I’m giving the leadership the benefit of the doubt that it was stupid and not purposeful.

Even now there is little anger coming from the IEA’s leadership. Swanson was quoted yesterday on our own IEA website as saying that sacrificing the pensions of new teachers should be seen by the General Assembly as evidence that the governor is serious about cutting spending.

Nothing will stop us from heading for Springfield on April 21 to fight for HB 174. But the wreckage of the battle for our pensions will be visible all the way down I-55. Working and future teachers have paid an awful price for weak and feeble leadership.

From a retired IEA leader.

Note: I’m receiving lots of comments, particularly from retired IEA folks. Rather than leaving them in the comment section, which many readers skip over, I’m publishing exerpts as posts. I look forward to hearing from you.

Fred,

We were not blindsided by this quick action on the bill.  They have been threatening this for weeks, even months, on TV and in the news media.  The IEA has been remiss, living in the past thinking that sitting at the table was a “real” option.  They have avoided confrontation in an effort to once again “be nice”.  The union has forgotten to stand up for themselves.  Where was Swanson in the media?  Where was the call to action when this first started to make news headlines?  I am not so sure the IEA is even an important organization anymore. Where is their credibility….and why in God’s name, aren’t they collaborating with the other groups like AFT and the IRTA?  This stupid competition between organizations has gone on long enough. The IEA-R refuses to incorporate term limits into their bylaws so the same people end up running again and again to go to the summer and Spring conferences for a free vacation.  The last time I looked
there were less than 15 IEA-R positions statewide and the same people have been on the Council for years.  They are promoting stagnancy.

In addition, the IEA has  helped plan retirement conferences that train people on gardening and yoga.  It’s ridiculous.  The active teachers need to wake up and utilize this talent.  Retirees know that their pensions also rely on funding pensions for active teachers.

The days of “being nice” are over.  As a former union leader, I often put myself in a position of criticism.  It was difficult, but anyone who has been in a position of advocacy knows that is what we had to do.  In the 90’s after most of the tough stuff was negotiated, things got complacent and people got lazy.  It’s time teachers decided whether they want to be liked or do they want to stand up for themselves and be strong.

-Chris