* The governor’s budget book explains his pension reform plans. Here’s one of them…
Funding Formula Based on Payroll
The funding formula that determines the state’s annual contribution to the pension systems sets the contribution at a level percentage of payroll for the years remaining in the funding schedule to try to provide a level of certainty in annual payments. Over the years, changes to the pension systems have excluded some payroll from the funding formula. Beginning in fiscal year 2017, the proposed plan calls for all payroll to be included in the calculation of contributions in order to provide more level payments. This would include the payroll for “Tier 2” members (those first hired after December 31, 2010).
Phase-In of Assumption Changes
The proposal includes a five-year phase-in of state contribution variations (up or down) caused solely by changes in actuarial assumptions (including revised investment return and discount factor assumptions) as set unilaterally by each pension system board. Changes in assumptions have increased pension liabilities by more than $12.5 billion in the last two years, causing significant deviations from the initially projected State contributions. Increases or decreases in state contributions attributable to assumption changes would be smoothed in over five years, which is the same period used for smoothing the effect of the deviation of actual investment returns from return assumptions. This phase-in will facilitate long-term planning for state pension contributions and will reduce payment volatility.
* From Sen. Daniel Biss, who has worked on pension reform for quite a while now…
Just an FYI:
What BVR calls “Funding Formula Based on Payroll” and “five-year phase-in of state contribution variations” both create “savings” by totally artificially and unjustifiably backloading the payment schedule.
* I asked him to explain…
“Funding formula based on payroll” means this:
We’re supposed to fund our pensions based on a “level percentage of payroll”. So the actuaries project how much payroll will grow over the years and that determines how steep the ramp is. If they assume payroll will grow fast, that results in a more backloaded funding schedule; if they assume it will grow slow, that’s a more frontloaded schedule.
This proposal says that instead of basing it on payroll which counts toward the pensions, it’s based on total payroll. What’s the difference? Total payroll includes salary that’s above the pensionable salary cap. But because the salary cap grows more slowly than the top salaries (ESPECIALLY for Tier 2 but likely also for Tier 1), that means they’re replacing the correct definition of payroll with a totally irrelevant one that happens to grow more quickly and therefore backloads the payments.
“Five-year phase-in of state contribution variations” means that when the pension board drops the investment return assumption, instead of making the proper (larger) payments based on the new assumption, they’re phasing that change in over 5 years. So the pension board says “we expect 7.5% investment returns” and the state says “OK, well we’ll start paying attention gradually, but only completely do what you tell us is required in 5 years.” In other words, during the course of those 5 years the state is deliberately putting in less money than the pension board expects to be necessary to meet the funding target.
What’s frustrating is that you can play these games forever. This stuff is complicated enough that if your goal is to find some confusing but ultimately bogus justification to pay less you have a very target-rich environment. I thought we weren’t supposed to do that any more though!
Biss is such a poindexter.
- Omega Man - Thursday, Feb 18, 16 @ 9:07 am:
How is this any different than the Edger administration using the “ramp” to pay less in the beginning and more in the future?
- Anonymous - Thursday, Feb 18, 16 @ 9:08 am:
These savings are just as real as the savings from the state’s extreme prior attempt at pension “reform”.
That is to say, the savings are none. They were both imaginary from the get-go, as most people with sense could see.
- burbanite - Thursday, Feb 18, 16 @ 9:08 am:
Deja Vu
- RNUG - Thursday, Feb 18, 16 @ 9:09 am:
That is better explanation of the total salary line that -AA- and I were not sure about yesterday. Ends up with the result I assumed but now we know how it gets there.
The 5 year phase in is exactly what I thought it was / did.
Rich, I think I noted yesterday that the net result would be lower payments into the pension funds.
- Very Old Soil - Thursday, Feb 18, 16 @ 9:09 am:
Just looked up poindexter. In the old French it means “right fist”
- PublicServant - Thursday, Feb 18, 16 @ 9:11 am:
Sounds like Mr. Turnaround agenda is joining the “Failed Policies of the past” crowd and kicking the proper funding can down the road.
- RNUG - Thursday, Feb 18, 16 @ 9:11 am:
== These savings are just as real as the savings from the state’s extreme prior attempt at pension “reform”. ==
The savings are just as “real” as any changes in assumptions that result in ESTIMATED future savings.
- VanillaMan - Thursday, Feb 18, 16 @ 9:13 am:
Then the Old French would understand it if I said that Rauner is “poindextering” us, am I right?
- Anonymous - Thursday, Feb 18, 16 @ 9:13 am:
Omega Man asks a very good question. The ramp put off the difficult challenges to future generations, under the guise of finally being “responsible” and making (some) pension payments at the time. It’s a different version of the same shell game. Edgar could have drafted this himself. It looks like progress on paper, but doesn’t do much more than paper over the problem.
- wordslinger - Thursday, Feb 18, 16 @ 9:15 am:
“Confusing, but ulitimately bogus.”
Actually, for me, those four words sum up the governor’s public positions (not the real, sub rosa ones) for the entire last year.
- JS Mill - Thursday, Feb 18, 16 @ 9:15 am:
@RNUG- If I understand this correctly those are current cost payments, correct? Still does not address long-term debt, right? Or am I misunderstanding?
If it does not address long-term debt then it does almost nothing (unless it is actually increasing long-term debt) to address our real issue.
The annual pension costs have been in steady decline since Tier 2 was enacted providing $300-$500 million in “relief”. It give less credence to his bogus numbers.
- Juvenal - Thursday, Feb 18, 16 @ 9:18 am:
We would be better of just lowering our targeted funding goal to 90 percent. At least it is transparent.
Obfuscation is the most dangerous thing. Pretending you have solved the problem when you have actually made it worse.
- Truthteller - Thursday, Feb 18, 16 @ 9:18 am:
Unbalanced budgets are not new, nor is pension chicanery. Only thing new Rauner has brought to the table is his union busting agenda.
- Facts are Stubborn Things - Thursday, Feb 18, 16 @ 9:19 am:
Pay no attention to the man behind the curtain. Rauner needs to give Ralph Martire a call….whoops that would be a little to much reality. snark
- Juvenal - Thursday, Feb 18, 16 @ 9:19 am:
I think the technical term for Rauner’s pension reforms is “Kick the Can Down the Road”, Senator Biss.
- The Dude Abides - Thursday, Feb 18, 16 @ 9:19 am:
Rauner is fond of saying that previous administrations have kicked the can down the road when it comes to pensions. In fact he used that phrase yesterday. Now their pension plan does just that. If there’s one guy in the Legislature who knows what he’s talking about on number crunching it would be Biss.
- JS Mill - Thursday, Feb 18, 16 @ 9:20 am:
=targeted funding goal to 90 percent+
You are on the right track for sure , but Really 80% funding is more consistent with industry funding standards as I understand them for an adequately funded pension.
- Facts are Stubborn Things - Thursday, Feb 18, 16 @ 9:23 am:
MJM is doing what he always does, he forces the other side to negotiate with themselves.
- VanillaMan - Thursday, Feb 18, 16 @ 9:27 am:
Expecting Rauner to fund pensions is like expecting a tape worm to be a vegetarian.
- RNUG - Thursday, Feb 18, 16 @ 9:30 am:
== If I understand this correctly those are current cost payments, correct? Still does not address long-term debt, right? ==
Yes and no.
Yes. The change to full payroll, and the TRS / SURS minor cost shifts directly affect the “normal” (currect payroll) pension cost.
No. The change to 5 year leveling affects the pension debt because it is about the assumed investment return. Assume a higher return, the “make-up” portion of the payment can be lower. When they assumed a lower return a couple of years ago, it increased the “required” payment. For now, this would average 2 low assumed years with 3 high assumed years, and lower the payment a bit. The effect of JUST this change will lessen to zero after 2 more years … but, hey, that’s after the next election and may be someone else’s problem.
The current long term solution is to continuing to follow the Edgar Ramp, which this more or less does with some tweaks to make it cheaper now (and possibly back-end load it with higher payments required later).
- VanillaMan - Thursday, Feb 18, 16 @ 9:32 am:
he forces the other side to negotiate with themselves.
We see no signs of that happening with these proposals, when there obviously should be.
Imagine that your party leader presents this kind of stuff as legit - and you have to defend it? It is like having to defend policies written by Hans Christian Andersen.
- Team Sleep - Thursday, Feb 18, 16 @ 9:33 am:
I would say that amortization sounds better than most other options, but what rate would we get? After watching the CPS bond debacle, borrowing anything of consequence worries me.
- Jack Stephens - Thursday, Feb 18, 16 @ 9:35 am:
Not sure whats so hard to understand here. Bruce only made…what…$50,000,000.00 last year….ok!
There is no reason on God’s Green Earth for you to even make a tenth of that.
Please leave him and Diana alone.
- RNUG - Thursday, Feb 18, 16 @ 9:35 am:
== he forces the other side to negotiate with themselves.
We see no signs of that happening with these proposals, when there obviously should be. ==
The facts Rauner put two different proposals on the table is such a sign.
- Lil Squeezy - Thursday, Feb 18, 16 @ 9:37 am:
“We got into this situation by back loading pension funding, we will get out of this situation by back loading pension funding.”
-every il governor at sometime during their administration.
Before Quinn people try to defend their guy they should look up Quinn’s first funding proposal. It made the Edgar ramp look reasonable.
- Facts are Stubborn Things - Thursday, Feb 18, 16 @ 9:37 am:
@- VanillaMan - Thursday, Feb 18, 16 @ 9:32 am:
=We see no signs of that happening with these proposals, when there obviously should be.
I think we are seeing signs of Rauner negotiate against himself. His “turn around agenda” is changing and he said yesterday that he does not need all of his items. MJM has said almost everyday that the number one problem facing the state of Illinois is the budget deficit.
- Austin Blvd - Thursday, Feb 18, 16 @ 9:38 am:
Sort of a Joe Isuzu approach.
“Trust me.”
- Facts are Stubborn Things - Thursday, Feb 18, 16 @ 9:40 am:
The only math Rauner needs to understand is the D&R ratio in the house and Senate. He needs to understand that D/R = reality index. If the result of dividing the amount of democrats by the amount of republicans is to the left of the decimal then he needs adjust his expectations down and nudge the needle to the right. If the result is to the right of the decimal, then he can push the needle a little further to the right. The larger the number to the left of the decimal the less he can do and the smaller the number to the right of the decimal the more he can do.
- VanillaMan - Thursday, Feb 18, 16 @ 9:46 am:
Back loading belongs in the 20th century when the Boomers were working. Now that they are retiring, we have to depend upon the old Grim Reaper to right the balance, and this will take another 20 years.
If we keep back loading our pension obligations, the last of them will be paid in digital Yuans, not Dollars.
We are at the worst point right now. We’re already seeing a plateauing of the pension burden. It will gradually decrease as Boomers meet their heavenly Woodstock.
There is absolutely no reason to destroy our contract laws and our state constitution because of this. It will fix itself, thanks to cemeteries.
Stop the Rauner havoc and stop the panicking. Get back to governing and budgeting and stop the Armageddon talk.
- Person 8 - Thursday, Feb 18, 16 @ 9:48 am:
I noticed that the governor proposed $0 for retiree heath care contributions for TRS and SURS. Is this part of his “pension fix”?
- Person 8 - Thursday, Feb 18, 16 @ 9:50 am:
health*
- VanillaMan - Thursday, Feb 18, 16 @ 9:53 am:
I think we are seeing signs of Rauner negotiate against himself. His “turn around agenda” is changing and he said yesterday that he does not need all of his items.
Persistent Rascal has shown us that he is a persistent liar as well. He spent the entire General Election giving us a string of whoppers quicker than any Burger King during a lunch rush.
Rauner has lost the trust of nearly everyone in government. Look at his polls. His support is now only coming from naïve true believers and those he has bought and put into his back pocket.
- Sir Reel - Thursday, Feb 18, 16 @ 9:58 am:
This is the modus operandi of a vulture capitalist. Buy a troubled company, pile up its debt, juice the numbers and unload it.
Bruce and his superstars will be long gone when it crashes.
- Fusion - Thursday, Feb 18, 16 @ 10:03 am:
==So the pension board says “we expect 7.5% investment returns” and the state says “OK, well we’ll start paying attention gradually, but only completely do what you tell us is required in 5 years.” In other words, during the course of those 5 years the state is deliberately putting in less money than the pension board expects to be necessary to meet the funding target.==
So, it’s a mini-ramp within a larger ramp? Right?
- RNUG - Thursday, Feb 18, 16 @ 10:06 am:
==I would say that amortization sounds better than most other options, but what rate would we get? ==
The rate doesn’t matter; you won’t be going to the market.
This buys into the misconception that the debt is currently bonded out. It is just a set of 5 IOU’s the State owes the 5 pension funds. (Kind of like you owing your savings account some money you borrowed out of it.) Yes, it is more or less actuarially valued as if it were owed to the market for reporting purposes. (You intend to pay your savings account back with some interest.)
Because it is just the State owing itself, the payments can be skipped or changed almost at will if you can get the GA to agree. (You didn’t have enough money this paycheck to pay yourself.)
The $111B will never be bonded out into the market because, the minute you do, you have lost that ability to change the repayment on a whim. (You borrowed money at the bank or on a credit card to make your savings “whole” but now you have a monthly payment you can’t skip.)
It could be restructured internally; that would be reworking the “Edgar” ramp to, basically, a longer time or a low goal. (You decide to put less back in your savings and to only do it every other month).
To deal with the pension debt, the choices are pretty limited and pretty simple:
1) change the ramp target date (later)
2) change the ramp target funding level (less)
3) find a new / dedicated revenue source to increase the current payments
4) some combination of the above 3 items
- RNUG - Thursday, Feb 18, 16 @ 10:20 am:
== I noticed that the governor proposed $0 for retiree health care contributions for TRS and SURS. ==
For TRS and some SURS, the State only extends the option to retirees to pay for whatever health insurance AFSCME gets for the SERS employees, so the State support was fairly minimal, basically partially subsidizing dependent coverage.
He wants the employee / retiree to cover more of the cost, including the full dependent cost. I suspect that is most of what the zero represents and he has assumed that contract proposal to AFSCME as a done deal.
But I am puzzled it is completely zero because there are some SURS retirees who get “20 year / Kanerva” premium free health insurance. Yes, he has forced the 65+ retirees to MA plans where it costs the State nothing or almost nothing, but there is still the under 65 contingent of retirees whose health insurance must be funded.
Guess that lower level he wants to force all the employees on to is paid for totally by the employee through the higher deductibles and co-pays (/s?).
- wordslinger - Thursday, Feb 18, 16 @ 10:24 am:
What RNUG said.
It’s crazy to go out into the bond market and pay juice for money that you owe yourself.
Even crazier is to take that bond money and give it to private equity sharpies to skim off the top and risk in the stock market.
Pay yourself on a sober, regular basis and no worries.
- Facts are Stubborn Things - Thursday, Feb 18, 16 @ 10:28 am:
@ RNUG - Thursday, Feb 18, 16 @ 10:06 am:
Exactly! I actually thought that the ISC ruling would finally force the legislature and the Gov. to seriously deal with the pension in the way/steps that you have provided. Seems we may not quite be there yet. This idea of choosing between two “diminished options” on salaries and AAI has virtually no chance of passing the court. The salary and its roll in determining ones pension is a part of the pension benefit. I understand that raises are not constitutional protected, however, once you receive a raise it becomes part of the pension calculation.
- illinifan - Thursday, Feb 18, 16 @ 10:30 am:
Quick question/thought bubble. If payment to the pension system is tied to current payroll, if Rauner decides to privatize more state services, wouldn’t state payroll significantly decline thus making the pension payment lower yet?
- Anonymous - Thursday, Feb 18, 16 @ 10:50 am:
1) Messing with % of payroll is chicanery. btw, % of payroll itself is not the optimal actuarial funding method to chose. EAN is.
2) On smoothing assumptions relative to changes in the discount rate, this is perfectly reasonable and ultimately more conservative (assuming the discount rates move LOWER). California is an example here.
- Anonymous - Thursday, Feb 18, 16 @ 10:50 am:
Yes, it’s called starving the beast, remember?
- RNUG - Thursday, Feb 18, 16 @ 10:56 am:
== If payment to the pension system is tied to current payroll, if Rauner decides to privatize more state services, wouldn’t state payroll significantly decline thus making the pension payment lower yet? ==
That refers to the “normal” portion of the pension fund(s) payment … and, yes, it will go down if tghere are less employees … unless the salaries of the remaining employees go up more than the GRF Personnel line item “savings” from having less employees.
Less employees would (mostly) not affect the debt / make-up portion of the pension fund(s) payment. But (there is always a but), if there are less Tier 2 employees, then there is less savings to the Tier 1 side and that might actually require this portion of the pension fund(s) payment to go up.
Pension funding is complicated with the different tiers … but it’s easier than school funding.
- Arthur Andersen - Thursday, Feb 18, 16 @ 11:09 am:
Biss is a Poindexter.
Comment of the year.
On the insurance matter, TRS members who are State employees (like ISBE) get “State insurance.” The teacher members of TRS (and some Community College SURS members) make a payroll contribution toward retiree insurance. I think this program is similar to, but not “State Insurance.” My recollection is that University SURS members as State employees all receive “State insurance” in retirement.
Rauner zeroes out this account for the downstate teachers, who are an integral part of his “#1 priority” (and lifts $285 million outta the pension contributions for these bogus reforms) but leaves in $12 million for….Chicago Teachers’ Pension Fund. That is a decrease from the $62.5 million they received in FY15.
- Anotheretiree - Thursday, Feb 18, 16 @ 11:09 am:
I’d like to know where they expect to get 7.5% returns in the decades ahead…so I can Invest there to! Those are Trump level HUGE returns.
- RNUG - Thursday, Feb 18, 16 @ 11:27 am:
-AA-
You are thinking of the TRIPS program, which is separate “trust fund” paid into by teachers. TRS retirees don’t get state insurance, they have to buy it but their former contributions to TRIPS are used to significantly / mostly offset the retiree cost; they are paying full freight (or close to it) for dependents.
- Arthur Andersen - Thursday, Feb 18, 16 @ 11:34 am:
RNUG, yes, it’s TRIP. I should have named it in my post. The similar program for Community Colleges is called CCIP.
Sometime I’ll tell you a funny story about those programs.
- RNUG - Thursday, Feb 18, 16 @ 11:44 am:
-AA-
Thought it was TRIP you meant. We’ve got relatives who were teachers and the wife also worked for District 186 for a couple of years.
- Team Sleep - Thursday, Feb 18, 16 @ 12:03 pm:
RNUG - thanks, and awesome response and analysis. Are you sure education funding is more complex than this stuff?!
- Anonymous - Thursday, Feb 18, 16 @ 12:06 pm:
I’d like to know where they expect to get 7.5% returns in the decades ahead…so I can Invest there to! Those are Trump level HUGE returns.
Not really. AAMOF, at least one of the state investment funds has out-performed it.
State Employees Retirement System
Current Actuarial Assumption* 7.75%
31-Year Annualized Return 9.18%
31-Year Annualized Benchmark 9.06%
Source: https://www.ohsers.org/investments-4, “Investment Performance Chart”
- wordslinger - Thursday, Feb 18, 16 @ 12:13 pm:
–I’d like to know where they expect to get 7.5% returns in the decades ahead…so I can Invest there to! Those are Trump level HUGE returns.–
That’s a standard and universally accepted projection for long-term investments. It holds up to scrutiny.
Year-to-year, you’re up, you’re down, but if you go long, 7.5% is conservative, even if you just go in a stock index.
- Anonymous - Thursday, Feb 18, 16 @ 12:14 pm:
“TRS members who are state employees”
Who are those? Not any teacher.
- Angry Republican - Thursday, Feb 18, 16 @ 12:19 pm:
A 5 year salary freeze for Tier 1 and increased contributions would lower the debt and liability. Every year pensions are underfunded only compounds the problem, so redoing the Edgar ramp or changing the target still leaves the financial burden on a future generation.
- Austin Blvd - Thursday, Feb 18, 16 @ 12:31 pm:
Make I mistake. Rauner’s pension reform objective is to starve the system further…to the point that it becomes totally unsustainable and must be modified.
Underfunding the pensions is the only way for Rauner to get around the Supreme Court mandate.
- Austin Blvd - Thursday, Feb 18, 16 @ 12:32 pm:
*Make No mistake…
- JS Mill - Thursday, Feb 18, 16 @ 12:40 pm:
RNUG- excellent as always, thanks for your response.
TRIP is interesting because that should be a plus program- I will never recover what I am paying in due to my retirement age- they get premium funds decades ion advance and should be able to reap investment benefits of that funding.
- chi - Thursday, Feb 18, 16 @ 12:42 pm:
Haha- great comment Austin Blvd-
Rauner is Joe Isuzu.
- Anonymous - Thursday, Feb 18, 16 @ 1:13 pm:
Underfunding the pensions is one part of getting to the point where they have to be modified but the other part is to squelch the contributions from active members. Voila—privatization with it’s glorious miracle the 401K (which everyone–haha surely believes is better for the average Joe).
- AnonymousOne - Thursday, Feb 18, 16 @ 1:22 pm:
Austin Blvd makes a great point that I’ve thought for a long time. I believe this governor and maybe legislature? has no intent to pay back the unfunded liability or heal the funds. Starving the funds to the point of very real catastrophe will create the famous leverage to change them.
- Arthur Andersen - Thursday, Feb 18, 16 @ 2:03 pm:
JS Mill, unfortunately TRIP doesn’t work that way. Your current contributions and your employer’s matching contributions are paying for today’s retirees.
I don’t know, but I don’t think the program is viable without the 1 percent of pay State contribution that Rauner proposes to zero out. Alternatively, the active teacher/district contributions would have to be roughly doubled to raise the equivalent amount of revenue.
- Qui Tam - Thursday, Feb 18, 16 @ 2:21 pm:
Biss and Rauner share something significant. They both have a history of abusing and misusing the term “reform”.
- RNUG - Thursday, Feb 18, 16 @ 2:29 pm:
== A 5 year salary freeze for Tier 1 and increased contributions would lower the debt and liability. ==
You can freeze the salary but you can not legally increase the employee contribution for the current benefit level.
- RNUG - Thursday, Feb 18, 16 @ 2:32 pm:
== Make No mistake. Rauner’s pension reform objective is to starve the system further…to the point that it becomes totally unsustainable and must be modified.
Underfunding the pensions is the only way for Rauner to get around the Supreme Court mandate. ==
The IL SC has already made it clear they won’t buy “police powers” for a self-created disaster.
- RNUG - Thursday, Feb 18, 16 @ 3:02 pm:
== Are you sure education funding is more complex than this stuff?! ==
Yes, between the 5 systems, Tier 1 and Tier 2, and SS coordinated or not, State pensions only have a total of 20 combinations.
From what I can tell, the school district funding permutations approach infinity.
- Beaner - Thursday, Feb 18, 16 @ 4:03 pm:
- Anonymous - Thursday, Feb 18, 16 @ 12:14 pm:
“TRS members who are state employees”
Who are those? Not any teacher.
The prisons, juvenile detention and mental health facilities use teachers.
- Harry - Thursday, Feb 18, 16 @ 4:03 pm:
In descending order of complexity:
1. Cook County property taxes
2. K-12 Funding
3. Pensions
- Angry Republican - Thursday, Feb 18, 16 @ 6:07 pm:
==You can freeze the salary but you can not legally increase the employee contribution for the current benefit level.==
But the state could contribute more. The growth rate in unfunded liability needs to go from a positive number to a negative number.
- RNUG - Thursday, Feb 18, 16 @ 6:13 pm:
== But the state could contribute more. ==
Yes, the State could but that requires extra money. The State wants to pay less, not more.
- RNUG - Thursday, Feb 18, 16 @ 6:15 pm:
==The growth rate in unfunded liability needs to go from a positive number to a negative number. ==
For now, that is a feature of the “Edgar” ramp, not a mistake or bug.