* Joe Cahill explains this pension funding gimmick well…
State contributions to pension plans will decline $1.5 billion in fiscal 2018, by far the largest single spending cut in the budget. And some $900 million of that reduction reflects wishful thinking about future investment returns at state employee pension funds.
Last year, overseers of the Teacher’s Retirement System and other large state employee retirement funds joined counterparts at public pension systems around the country in reducing assumed investment returns to around 7 percent from unrealistically high levels that prevailed for several years. It was a prudent step, based on actual long-term investment performance and current economic trends.
But it had the unpleasant effect of revealing that Illinois’ pension gap was even larger than previous estimates. A lower assumed rate of return means the pensions need more money now to generate enough investment earnings to cover future pension payments. And that, in turn, means legislators must allocate more current funds to pension contributions, not less.
Less is what the pension funds will get under the new budget, which delays implementation of the more-realistic investment return assumptions. Rather than impose the new rates of return immediately, as they should, lawmakers are phasing them in over five years. This allows them to contribute less while claiming to meet pension funding obligations.
Ironically, this is a rare area of agreement between arch-foes Madigan and Rauner. The governor excoriated Madigan’s 32 percent income tax hike, but uttered not a peep about his pension legerdemain. Perhaps that’s because he proposed “smoothing” in reduced rate-of-return assumptions in his own budget blueprint earlier this year.
Yep. He did. Remember how the governor railed against TRS for lowering their estimated rate of return?
- Robert the Bruce - Tuesday, Jul 11, 17 @ 4:11 pm:
All true. But some cans needed to be kicked down the road in order to secure enough votes for a budget.
- Ole' Nelson - Tuesday, Jul 11, 17 @ 4:11 pm:
Let the can be kicked once again.
- Whatthewhat - Tuesday, Jul 11, 17 @ 4:17 pm:
The funding gimmicks were also part of the GOP plan.
- Shemp - Tuesday, Jul 11, 17 @ 4:19 pm:
Smoothing is not irrational as it is there to hopefully even out the the years, but it does still require a realistic rate of return. 7% still too high, but no one wants to pay the cost of 6.5%.
- Anonymous - Tuesday, Jul 11, 17 @ 4:24 pm:
Assumption smoothing is an actuarially accepted practice. This should have been public policy a long time ago.
- Sue - Tuesday, Jul 11, 17 @ 4:24 pm:
Essentially a repeat of the Edgar Ramp- pay less now and more later. Why not make if a pay as you go and fund the required pension payroll
- DuPage Bard - Tuesday, Jul 11, 17 @ 4:25 pm:
Well that should go over well. Another “agreed upon pension deal”. Any chance someone will actually take up the pension issue anytime soon?
Rauner doesn’t own this. His budget proposed this but he issued a veto on the budget that actually implemented what could be considered by some a pension “break”. This piece right here is the actual piece that they’ll use against the legislators who voted yes. People know more about the Pension issue in Illinois then anything else.
- Shemp - Tuesday, Jul 11, 17 @ 4:25 pm:
Every year we don’t hit the assumed rate of return, we’re just adding unfunded liabilities. You know, kicking the can down the road. In other words, an unrealistic assumed rate of return is just another way of underfunding pensions that makes it look less so during budgeting. That is unless of course you get high yields in other years to offset the losses on below assumed returns. It’s not complicated, but we sure like to ignore it. One of the many ways we got here.
- Julian's Melange - Tuesday, Jul 11, 17 @ 4:26 pm:
This is the same thinking that got us into this horrible morass. “We had to do this to get the votes”. The sad refrain continues. Please folks, this is not helping. We are junk Illinois and we deserve it.
- Uhh - Tuesday, Jul 11, 17 @ 4:29 pm:
Pretty crude analysis, Rich. This is a common actuarial practice. Protects essential services by ensuring state isn’t on the hook for a massive one-year spike.
- Juice - Tuesday, Jul 11, 17 @ 4:41 pm:
“We had to do this to get the votes”
It was part of the compromise that the Governor was pushing. Personally I would have preferred that the Democrats had the pension systems run the numbers and show how much more this is going to cost the taxpayers over the life of the funding schedule and forcefully push back on the Governor’s proposal, but instead they accepted it because its a reasonably easy reduction to make.
Also, Anonymous at 4:24, do you have a source for that? Serious question, because I’m not aware of any other pension fund that does this. (Smoothing returns, yes. Smoothing assumption changes, no.)
- GA Watcher - Tuesday, Jul 11, 17 @ 4:50 pm:
Let’s not forget the budget bill creates a Tier 3 for newly hired state employees and teachers. It’s a hybrid plan that includes defined benefit and defined contribution elements. The bill analysis I saw said it will save the State $500M.
- Norseman - Tuesday, Jul 11, 17 @ 4:53 pm:
Yep. The budget games continue regardless of party in the governor’s office.
- City Zen - Tuesday, Jul 11, 17 @ 4:54 pm:
==Why not make if a pay as you go and fund the required pension payroll==
That’s what the state did back in the 70’s back when when worker/retiree ratio was good and state payrolls were lower (relatively speaking). But it was still frowned upon back then as it should have been. Without investment returns, employee compensation becomes much more expensive.
- Obamas Puppy - Tuesday, Jul 11, 17 @ 5:01 pm:
Funny how all this smoothing (aka underfunding) ends after the expiration of Bruceys term. hmmm?
- blue dog dem - Tuesday, Jul 11, 17 @ 5:06 pm:
I wonder how the spinners will spin the expected 1.2 year increase in life expectancy in 2020. Which begs the question, “how soon before the next income tax increase?”
- OldIllini - Tuesday, Jul 11, 17 @ 5:08 pm:
7% might not be too high. My run-of-the-mill generic mutual funds have exceeded 8% over the past year, and there could be more GDP growth in the future if the economy warms up, plus inflation.
- Captain Obvious - Tuesday, Jul 11, 17 @ 5:12 pm:
So business as usual now that the state has been “saved.” Can’t say it is all that surprising. I guess we should all brace ourselves for another incoming 2×4.
- Joe Biden Was Here - Tuesday, Jul 11, 17 @ 5:37 pm:
Between tier 2 and tier 3 they have effectively ended the idea of working for the state as your life’s career and retiring with a real pension. All good things come to an end.
- Trains - Tuesday, Jul 11, 17 @ 6:18 pm:
Was Tier 3 part of the budget agreement?
- Anonymous - Tuesday, Jul 11, 17 @ 6:48 pm:
All the pension enviers need to take note of this. No employee or employer is creating this pension crisis.
With the blessings of the legislature, governor and apparently, public as well, this adds to the crisis that they love to blame on workers and retirees. Take strong note—-pay attention on how and why those funds are so woefully low.
Everyone in the funds has a right to claim victimhood. Look what is being done to them.
- Sue - Tuesday, Jul 11, 17 @ 7:17 pm:
Old Illini- you must be forgetting that TRS achieved a point one percent ( not 1 but .1) last FY. Maybe you should become the investment consultant. They seem to need the help
- justacitizen - Tuesday, Jul 11, 17 @ 9:22 pm:
I’ll bet the bond rating agencies don’t miss this underfunding gimmick.
- City Zen - Tuesday, Jul 11, 17 @ 9:48 pm:
==With the blessings of the legislature, governor and apparently, public as well, this adds to the crisis that they love to blame on workers and retirees. Take strong note—-pay attention on how and why those funds are so woefully low.==
Should the state withhold all raises, reduce health benefits, and reduce education funding to school districts and instead re-allocate those funds towards the pension payment? Because that’s your other option.
- Former Merit Comp - Tuesday, Jul 11, 17 @ 11:13 pm:
This is definitely part of the reasoning the credit rating agencies are using to make their decisions
- Anonymous - Wednesday, Jul 12, 17 @ 6:14 am:
City
How does IMRF manage to handle it all? How do other states manage to pay for all of those things as well as fund their pensions? What is Illinois’ proble
- RNUG - Wednesday, Jul 12, 17 @ 6:37 am:
== How does IMRF manage to handle it all? ==
Government units in IMRF have had to keep up their funding, they were not allowed to skip. And sometimes they did get hit with big jumps from year to year. Plus, see next comment.
== How do other states manage to pay for all of those things as well as fund their pensions? What is Illinois’ proble ==
For the most part, other states did not fall way behind on funding their pensions; they made the actuarial payments every year. Illinois didn’t. So other states only have to make their annual contribution. Illinois has to make the annual contribution PLUS try to make up for decades of missed payments and lost investments. Most of the pension fund payments are for “make up”.
It’s like when you run up your credit card, make minimum payments, and still keep charging more than you are paying; the hole just gets deeper. In order for Illinois to make flat actuarial payments to get us out of this hole in 30 years, they would need to pay another $1.5-$1.9B every year, starting this year. That means the current flat income tax would have to be raised another 1% or so beyond the raise that just happened. Nobody wants to bite that bullet, so it’s kick the can once more.
- Midway Gardens - Wednesday, Jul 12, 17 @ 8:21 am:
Even with an additional $5B we fall behind in meeting the pension payment. Incredible. Sold a bill of goods on $3B in cuts since half of that is not making the pension payment.
Crain’s in 2015 published an article by Dave McKinney showing the pension obligation growing from just shy of $7 B in 2015 to $16.3 B in 2045. $9 B per year gap. Back of the envelope calc but we’d need @2 more increases along the lines just enacted. It’s unsustainable. We need economic growth.
Rauner’s ideas on business friendly reforms might have been weak, but look to states that do it right. The Democrats don’t seem to have any answers except tax increases.
Small steps such Chicago casino, Weed legalization and big steps such as taxing pensions are needed.
This political climate is just about who is to blame. Not hopeful.