Happy anniversary! (Reposted)
Tuesday, May 8, 2018 - Posted by Rich Miller
[I accidentally hit the “publish” button on an earlier version of this story before I was finished. That post has been deleted, but then I accidentally lost all my work, so I had to start all over again. Oops! Been one of those days, I guess.]
* Elizabeth Campbell at Bloomberg…
Three years ago today, the Illinois Supreme Court struck down the state’s attempt to cut its employees’ pension benefits to chip away at a retirement-system debt that’s swelled to almost $11,000 for every man, woman and child.
Since then, Illinois’s credit rating was downgraded to the verge of junk, its bonds have tumbled and its largest city — Chicago — was stripped of its investment-grade status by Moody’s Investors Service. And Republican Governor Bruce Rauner and the Democrat-led legislature have made no real progress toward a new plan that doesn’t violate the state constitution’s ban on reducing benefits. […]
The funding shortfall across Illinois’s five retirement systems climbed to $137 billion by last June, a jump of about $17.8 billion since 2015, after the government for years failed to made adequate contributions. That pension deficit — more than four times larger that its debt to general-obligation bondholders — is adding hundreds of millions of dollars in costs to Illinois’s budget each year as the government plows more money in to catch up. […]
Even as the state is set to pay $8.5 billion to the five retirement systems in 2019, it’s still not enough. Unfunded liabilities keep growing. And the 2019 contribution is more than three times the state’s payment a decade earlier: Illinois paid $2.8 billion to pensions in 2009. By 2045, the projected contribution will be $19.6 billion, according to a March report, based on actuarial valuations.
Yes, the projected annual state contribution will be $19.6 billion by 2045, but the state’s Unfunded Accrued Actuarial Liabilities will be just $32.7 billion by then, so I’m thinking the state will likely avoid the full payment for that year and probably a few years before as well. That ramp is so darned back-loaded.
* According to COGFA, Tier 2 is working. Tier 1’s annual “normal costs” (the benefits paid out in a given year) are 17.4 percent of payroll this fiscal year, while Tier 2’s are 1.6 percent. By 2032, Tier 1 costs drop below Tier 2, at 6.7 and 6.8 percent respectively. By 2045, Tier 1 will cost 0.5 percent of payroll, while Tier 2 will be at 10.4 percent.
The question becomes whether Tier 2 can survive federal regulations because the benefits are so low. That could very well be a huge ticking time bomb.
The real problem, as always, is the unfunded liabilities.
- Anonymous - Tuesday, May 8, 18 @ 2:39 pm:
When do we find out if Tier 2 passes muster with the federal government? When the first pension benefits are paid out under Tier 2?
- wondering - Tuesday, May 8, 18 @ 2:46 pm:
System debt translates to an additional $500 a year for 20 years. Pretty good deal for a state that refused the pay as you go plan.
- Yep - Tuesday, May 8, 18 @ 2:47 pm:
Pension payments or more social services programs I think it’s clear where the money went rich .
- Anonymous - Tuesday, May 8, 18 @ 2:47 pm:
=whether Tier 2 can survive federal regulations because the benefits are so low==
I sure do hope anyone considering employment involving state pension plans is considering with eyes wide open. I’d pass.
- RNUG - Tuesday, May 8, 18 @ 2:47 pm:
== When do we find out if Tier 2 passes muster with the federal government? ==
Short version without the technicalities … If and when Tier 2 is projected to pay less than the equivalent Social Security benefit. Could be years. And fixing it could be as simple as raising the earnings cap, although the State may also have to start contributing a bit into the funds.
- Anonymous - Tuesday, May 8, 18 @ 2:53 pm:
It seems to me the real problem is that these folks aren’t getting Social Security.
- RNUG - Tuesday, May 8, 18 @ 2:53 pm:
Some of the reason for the downgrades can be blamed on the GA’d refusal to extend the expiring temperary income tax increase. Note: the extension probably wasn’t going to pass anyway but Rauner specifically asked the GA to let it expire.
But the majority of it can be blamed on Rauner’s refusal to sign a budget for two years while continuing to spend money as if (a) there was a budget, (b) the temp income tax was still in place and (c) the additional unauthorized spending on things like computer systems was legal.
- thoughts matter - Tuesday, May 8, 18 @ 3:06 pm:
Ever notice that we go round and round every week or so on the pension liability, why that is and what we can do about it? Then we go round and round on trying to explain 5 pension systems and why most of the state workers do not get obscene pension payouts. We never get beyond that point because as RNUG keeps telling us:
It’s really very simple. Pensions will be paid because the court has said so several times. We can’t force the state to pay into the pension funds, as the court has also said several times.
Tier 2 is supposed to correct some of the imbalance, but will take decades.
We can create a tier 3 - defined contribution - if we want, but that means social security and the contributions must be paid upfront, which costs money. It also means since new employees wouldn’t be paying into the pension fund, the state will be further underwater because == the pensions have to be paid==.
- walker - Tuesday, May 8, 18 @ 3:16 pm:
What RNUG said. The potential Tier 2 problem v. Soc Sec should be fairly easy to manage. We have much bigger problems.
- Grandson of Man - Tuesday, May 8, 18 @ 3:17 pm:
“Unfunded liabilities keep growing.”
That’s the argument the CTBA uses to support debt reamortization. That’s what is argued will stabilize the debt and make it manageable. From what I read, it will cost money. But isn’t it worth it to have a manageable structure to make payments and reduce our debt?
We just gave multibillion-billion dollar corporations a massive federal tax cut, no strings attached, that is projected to add a trillion or more dollars to the deficit. In my opinion the money would be better used to help states pay bills and not give those who’ve had an economic boom time after the Great Recession much more money.
- Anonymous - Tuesday, May 8, 18 @ 3:18 pm:
== It seems to me the real problem is that these folks aren’t getting Social Security. ==
If they (teachers) were in SS, it would cost the State another +7.65% (SS plus Medicare) for the employer contribution.
- RNUG - Tuesday, May 8, 18 @ 3:26 pm:
== support debt reamortization. That’s what is argued will stabilize the debt and make it manageable. ==
And that can be as simple as adjusting the ramp.
If you do an actuatial payment schedule, you will have short term pain with some pretty good relief about 5-6 years down the road.
Or you stay on the current ramp, with s bit less pain for the next 5-6 years, and experience more pain after that … and (as Rich kind of noted) you will still most likely end up adjusting the last 5 to 10 years of the ramp, although that bsck-rnd adjustment may be fairly painless.
- Honeybear - Tuesday, May 8, 18 @ 3:31 pm:
I’m tier II and as it stands I will retire to just above the current poverty level. I will get social security btw but still. Tier II is no Cadillac plan.
- Anonymous - Tuesday, May 8, 18 @ 3:42 pm:
I can’t believe we are all still debating this issue. Supremes voted 7-0, Tier I can’t be cut. So there is a debt. People, it’s cheaper to pay it off faster. Less interest. The public policy here is really simple. It’s all politics. Politicians not willing to level with the taxpayers. Like the old Fram Oil filter TV commercial, you can pay me now (a little, with the grease-covered mechanic holding a new oil filter) or pay me later (same mechanic guiding a new engine down, past the front hood….).
- Anonymous - Tuesday, May 8, 18 @ 3:46 pm:
If Tier 2 is paying just above poverty level (but then you add social security), just imagine a teacher who cannot get social security but is Tier 2. Way to attract the finest/s (naive/math challenged teacher/dreamland denier of future reality)
- wondering - Tuesday, May 8, 18 @ 3:54 pm:
Why the new anguish and anxiety about pension plans? Should be obvious, the wealthy are squirming oner the impending progressive income tax. Signals being on the right path.
- Anonymous - Tuesday, May 8, 18 @ 3:55 pm:
Anonymous brethren - A significant reason for not offering social security is that it is a mandatory payment to the feds, unlike the pension set aside. At my local gov’t, about 3 dozen solid job (read professional position) openings, qualified candidates are going elsewhere. The strong economy, crummy starting pay, stagnant pay adjustments and tier 2 are all factors.
- Anonymous - Tuesday, May 8, 18 @ 3:55 pm:
I think they already pay into Medicare so it would be 6.2% and not 7.65%
- Arthur Andersen - Tuesday, May 8, 18 @ 5:12 pm:
I’ve always thought there would be some tinkering with the last 5-10 years of the funding program for precisely the reason points out. Didn’t expect so many on the front end, at least until I met Team Blago.
- City Zen - Tuesday, May 8, 18 @ 5:42 pm:
==If they (teachers) were in SS, it would cost the State another +7.65% (SS plus Medicare) for the employer contribution.==
If teachers were in SS, the entire pension system would look different. In Minnesota, where teachers get both a pension and SS, the service multiplier is smaller, which means teachers have to work longer to reach full vesting. Their average salary calc is less generous too.
A teacher in Minnesota pays 7.5% into their pension plus 6.2% into SS. Are teachers here willing to withhold an extra 4.7% of their wages towards retirement for a similar plan? Plus the employer portion of SS is considered compensation, so subtract another 6.2% from today’s gross wages. Any takers?
- Anonymous - Tuesday, May 8, 18 @ 6:23 pm:
There are logical solutions. Martire talked about adjusting the ramp, oh, say, 5 years ago? No one wanted to hear about any solution then and there still is no interest in a solution. Here we are, years later, and still no one wants to confront this issue with any approach, no matter what it might be.
Why? Do nothing. That seems to be the plan deliberately.
- Andy S. - Tuesday, May 8, 18 @ 9:51 pm:
If the state’s required contribution increases from $8.5 billion in 2019 to $19.6 billion in 2045, that represents a compound annual growth rate of only 3.27%. Why is this a big deal, when nominal gdp is expected to increase 4% annually (2% inflation plus 2% real gdp growth)? If only the federal government’s debt were growing so slowly….
- Ron - Wednesday, May 9, 18 @ 8:31 am:
High inflation is the debtors best friend.