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This problem is decades old

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* From Fiscal Year 1950…

“The present valuation indicates that state contributions are far from adequate to meet the current requirements of the system… On the basis of the present rate of state contributions, the retirement system is actuarially unsound,” Teachers’ Retirement System of the State of Illinois (TRS) Actuary Arthur Stedry Hansen, Fiscal Year 1950 Valuation Report. TRS had a funded ratio of 23 percent in FY 1950.

It was 77 percent unfunded? And the world didn’t end?

* And despite attempts at fixing the problem, there was setback after setback…

* Percent of benefit payout was the method used to calculate state contributions to the Illinois pension systems for many years. From FY73 through FY81, state contributions to the five state retirement systems were based on 100 percent of each system’s expected benefit payout. However, funding based on percent of benefit payout bears no relation to the cost of benefits being earned, and this has added to the unfunded liability of the system. In FY82 through FY88, state contributions dropped to an average of 60 percent of benefit pay outs. Eventually, payout was no longer used as the basis of appropriations and the prior year’s funding level (level funding) became the standard of determining state contributions.

* Public Act 86-0273 was enacted in 1989 and called for all state pension systems to be fully funded over 40 years, following a seven-year phase-in period. However, there was no continuing appropriation in the law and the state never complied with the funding requirements. […]

* Public Act 94-0004 became law June 1, 2005. The act specified fixed amounts to be paid by the state in FY06 and FY07, which represented a $2.3 billion cut over two years to the five pension systems.

Yes, the numbers are scary. No, this isn’t new.

* Meanwhile, the Peoria newspaper editorialized on behalf of the General Assembly using itself as a test case for cutting pension benefits to current state employees…

Lawmakers also pay into a pension plan, administered by the General Assembly Retirement System; reduce legislator pensions first and make that your test case in the courts. It’s a narrow sample group, so the cost to catch up is smaller if it’s ruled unconstitutional. Beyond that, what better way to show leadership in a budget crisis than to prove you get it by sharing in the pain personally? Just imagine the vote-getting potential for the politician able to brag that he voted to cut his own pension first.

Thoughts?

posted by Rich Miller
Tuesday, Apr 26, 11 @ 11:32 am

Comments

Thanks for the perspective, Rich. Newspapers and employee alarmist do not seem to understand the signficance of “fully funded.” 100% funded sounds nice, but is complete overkill because that amount is what would be needed to cover EVERYBODY currently in the system if they suddenly all began collecting benefits. Never gonna happen. It would be nice of the media would take notice that fiscally prudent stewardship of pensions shows that even 60% funded is adequate. Do we really want social services to be killed off, or bridges to collapse, so that pensions can be funded at levels that are wholly unnecessary?

Comment by phocion Tuesday, Apr 26, 11 @ 11:38 am
===cover EVERYBODY currently in the system if they suddenly all began collecting benefits. ===

Actually, it would be the price of covering all benefits paid out at once.

Comment by Rich Miller Tuesday, Apr 26, 11 @ 11:39 am
wow! 77% unfunded? I wonder what the legislature did in 1951.

Comment by Robert Tuesday, Apr 26, 11 @ 11:40 am
If 100% funding is “complete overkill” because everyone in the system is never going to retire all at once; if 60% is sufficient for stability; and if TRS was only 23% funded in 1950 and still survived, why the panic now?

Comment by Secret Square Tuesday, Apr 26, 11 @ 11:42 am
===Actually, it would be the price of covering all benefits paid out at once.===

Correct - that’s what I meant. Thanks for clarifying for your loyal readers.

Comment by phocion Tuesday, Apr 26, 11 @ 11:46 am
Rich said,

“Yes, the numbers are scary. No, this isn’t new.”

Absolutely correct, Rich. However, are not people also saying that we need to raise taxes, and also complaining that the state is not meeting its obligations to its vendors?

We also face a changing economy, with less reliance on manufacturing and more in services. We might also see a significant change in agricultural (and ethanol) subsidies which will affect state revenues. Illinois is not uniquely positioned to adapt to this shift.

Eventually, new and increased taxes reach the point of diminishing returns. Some would argue that we are at (or past) that point already. There may not be as much more money as people expect.

The budget includes more than just pensions, it also includes rising healthcare costs, new programs and initiatives, general maintenance of the hard infrastructure and changing revenue streams.

The entire status quo must be changed. The current path is unsustainable. Period. We can look at each element separately, as you and Wordslinger are doing, and say that the problems are manageable. I refuse to fall into that trap.

Comment by Cincinnatus Tuesday, Apr 26, 11 @ 11:46 am
So, where lies the truth? What is a reasonable funding level? Does if fluctuate w/anticipated needs (like baby boomers retiring all at once)?

Help, I fell down in Illinois and I can’t get up!

Comment by dupage dan Tuesday, Apr 26, 11 @ 11:46 am
Very interesting historical lesson, Rich. Thank you very much for posting it here.

As for the editorial idea…. I love it. If the G.A. really wants to tackle this problem, let them be the ones that tighten their belts first to see if it flies. After all, they’re the ones that have dug us into the mess over the decades, so them sacrificing a little bit sound only fair to me if they want to take from others as well.

Additionally, and I know this is a separate issue, but I’d love to see a reform that elected officials can only draw pensions from one source, or at least only draw limited pensions. If I remember correctly, Congressman Johnson (just an example, I’m not trying to single him out) draws pension payments from the Urbana City Council, the Illinois General Assembly, and will be drawing from the U.S. House pension when he retires, plus maybe one other that I’m not remembering. Doesn’t seem that fair to the taxpayers that someone that gets elected to many different offices over the years can more or less double dip from each office he or she has held, even if it’s from varied local, state, and federal slots.

Comment by TJ Tuesday, Apr 26, 11 @ 11:53 am
Thanks for the perspective, Rich.

Not to get too far afield here, but Cinc, I think you’re ultimately frustrated because most people don’t share your values.

Forgive me if I misrepresent your views, but you seem to hate government. On the other hand, most people think government could do better — in particular, that politicians could be more accountable and responsive — but they are pretty happy with the health care, education, and public safety etc in their own community (and the nurses, teachers, police and fire fighters et al who provide those services).

Similarly, you appear to believe that the free market is the answer to every question. But most people think that selling off the Chicago parking meters was a boondoggle, that unregulated oil companies will befoul our land and water, that insurance companies left to their own devices would sooner see people get sick or go bankrupt than pay health claims, and that unchecked Wall Street speculators will ruin our economy with bad bets.

Same thing with pensions. You think it’s OK to take a set of hard-working people who always played by the rules, then change those rules and tell them they lost the game. Most people disagree with you and believe that’s wrong.

Comment by Reality Check Tuesday, Apr 26, 11 @ 12:04 pm
There are over 600 government employee pension plans in Illinois. All we presently hear about are the 5 or 6 state plans. Remember when the CTA Pension Plan was in trouble years ago and was saved by borrowing? I suspect that the issue of pension plan insolvency will become apparent to all first in some small, local plans, and then begin to cascade. When? Maybe in 10 years or less. The real first issue will be with retiree healthcare promises. I understand these are on a pay-as-you-go, non-budgeted scheme. The issue will evolve with increasing taxes and diminishing services, until folks wake up and start really noticing where the money is going. There will be some nibbling at the edges of public pensions, which will buy some time, but I don’t see Illinois politicians giving up their cash from the gov employee unions. Absent some sort of miraculous financial turn around, the issue will gradually get worse and folks will be forced to move on due to increased taxation. No clap of thunder. Just slow, inexorable deterioration.

Comment by Cook County Commoner Tuesday, Apr 26, 11 @ 12:05 pm
Maybe have the legislators follow the same requirements to receive the pensions as state employees do. Maybe even vest them at four years instead of eight, but they don’t receive the insurance until after 20 years. They get the same 1.67 percent times their years of service times the average of the highest four years of their last ten years salary. I wonder what savings that would show.

The way it currently runs is:
General Assembly -

Assume a member is age 55, has 20 years of credited service, and a final salary of $57,619:

First 4 years x 3.0% = 12.0%
Next 2 years x 3.5% = 7.0%
Next 2 years x 4.0% = 8.0%
Next 4 years X 4.5% = 18.0%
Next 8 years x 5.0% = 40.0%
TOTAL = 85.0%

85.0% x $57,619 = $48,976.15 annually or $4,081.35 a month.

A regular state employee making an average salary of $57,619 would get the following for FORTY years of service, TWICE the amount of time as the GA member.

$57,619 X 1.67% X 40 = $38,480.00 annually.

If the GA wants to make things fair let them come down and join those of us working at the 1.67% level.

Comment by Irish Tuesday, Apr 26, 11 @ 12:11 pm
==Actually, it would be the price of covering all benefits paid out at once. ==

Not actuarially. The 100% funding amount is the amount that, if invested today at the assumed rate of investment return, would provide the exact amount necessary to pay the earned benefits as they are projected to come due. This would equal the amount necessary to pay all benefits at once only if you assume a 0% rate of return on investment.

Comment by Pat Robertson Tuesday, Apr 26, 11 @ 12:21 pm
If memory serves, 70+/-% funding was the target used by most actuaries for corporate defined benefit plans. I would think that employee turn-over (an assumption along with rate of return, increase in wages to retirement and life expectation for retirees) factored into the target funding calculation by the actuary for a government workforce would be at a lower rate than that of a corporate workforce. Rate of return has become much dicier to project with the market of the last 3 or so years. The early-outs offered by the state also contribute to the lack of funding problem, as the sweetener increases the amount paid out to a younger group of people who will be paid for a longer time period. COLAs multiply the effect more. The politically easier answers keep coming back to bite the legislature in the rear 3 -5 yrs downstream.

Comment by Distant Observer Tuesday, Apr 26, 11 @ 12:31 pm
Maybe 100% funding is not needed (or even the 80% level the GAO apparently advises). But given how well the state has handled its finances generally over the last several years, I think a 51% funding level might be cause for serious concern.

Comment by JJB Tuesday, Apr 26, 11 @ 12:36 pm
–The entire status quo must be changed. The current path is unsustainable. Period. We can look at each element separately, as you and Wordslinger are doing, and say that the problems are manageable. I refuse to fall into that trap.–

Thank you, Mr. Malthus.

–why the panic now?–

In regards to pensions in Illinois, it serves everyone’s purposes. “Pensions are underfunded, so we need to raise taxes,” or “Pensions are underfunded, so we need to bust the greedy unions.” Works for everybody.

In the larger society, if you pay attention to the 24/7 news cycles, there’s a new existential crisis every couple of weeks. They have to feed the elephant content, and it keeps people outraged, excited and tuned in.

For the most part, you just muddle through, but the historic arc of progress is still climbing the ladder.

Comment by wordslinger Tuesday, Apr 26, 11 @ 12:37 pm
There is an interesting chart in the Budget Book that shows 4 years of pension history along with the actuarially determined liability. What is interesting is the large increase from 2009 to 2010 in SERS - about the same time everyone went into the union. What no one talks about is the increased presssure put on the pension systems due to job titles being swept into the union. So merit comp employees are denied raises for years, everyone goes into the union, and taxpayers are on the hook for an additional $2B in pension liabilities? I’d love to see COGFA do a study on that!

Comment by Scottish Tuesday, Apr 26, 11 @ 12:49 pm
“why the panic now?”

Bond Vigilantes & Neo-anarchists.

Comment by jerry 101 Tuesday, Apr 26, 11 @ 12:53 pm
The 100% funded thing is not well understood at all, I agree.

By that theory, when I bought my house I had an 80% “unfunded liability” on the books. Of course, that is not how anyone would look at the purchase of their home, or a car payment, or anything in the nature of a long-term obligation.

Hell, my future 50 years of life is probably close to 100% “unfunded liability” right now… but I dont have to pay the cost of the rest of my life today.

Comment by Peter Snarker Tuesday, Apr 26, 11 @ 12:55 pm
- Reality Check - Tuesday, Apr 26, 11 @ 12:04 pm:

“Not to get too far afield here, but Cinc, I think you’re ultimately frustrated because most people don’t share your values.”

As shown nation-wide by the drubbing Democrats took in 2010, I guess.

“Forgive me if I misrepresent your views, but you seem to hate government.”

Wrong, I hate inefficient and overreaching government. I believe the pendulum has swung too far in the past 10 years to over reliance on government as the solution to all our problems.

“Similarly, you appear to believe that the free market is the answer to every question.”

Nope, government has a proper role. Where that line is is subject to debate. My instincts are toward the free market and the individual. Others differ in that view. If parking meters are a government role at all (one can question that role, is government charging for parking to improve streets or as a revenue stream for other uses), but if you are going to privatize, at least do it right. Obviously, Daley did not know how to cut a deal or think ahead, or was corrupt. Take your pick.

Over regulated oil industries do not drill. The insurance industry is among the most highly regulated businesses in the country, and many argue it is the result of government meddling that insurance is not allowed to be a competitive market. Five words about the banking industry: Barney Frank and Chris Dodd.

I have been among the most vocal supporters that government must live up to its obligations. I am also among the most vocal critics that say the current system is too easily corrupted by politicians and bureaucrats, and that the employees’ money should be put in their own hands so they can accept the responsibility and accountability for their own retirements and get them away from political shenanigans.

Comment by Cincinnatus Tuesday, Apr 26, 11 @ 12:59 pm
–I believe the pendulum has swung too far in the past 10 years to over reliance on government as the solution to all our problems.–

Stop blaming everything on Bush and Hastert!

Comment by wordslinger Tuesday, Apr 26, 11 @ 1:03 pm
Peter Snarker,

Do you use the money for your mortgage to pay for your McDonalds? Do you buy a new car every three months? Did you default on your mortgage?

You did not because your income is fixed and identifiable. If you want more money, you get another (or additional) job to support your spending. With the government, the only recourse is to tax, that is the only way to increase revenue streams when recessions occur.

Unless the cycle of increased spending and flat revenues is broken, this is what you get.

Comment by Cincinnatus Tuesday, Apr 26, 11 @ 1:04 pm
===and that the employees’ money should be put in their own hands so they can accept the responsibility and accountability for their own retirements and get them away from political shenanigans.===

And when some of these individuals make bad decisions with their own money, or the markets inevitable crash, what then? Tough luck? They’re on their own?

That’s a pleasant view of the future you have there Cinci. All rainbows and lollipops. It’s every man for himself in your world, dog eat dog, survival of the fittest. Nice.

Comment by 47th Ward Tuesday, Apr 26, 11 @ 1:08 pm
wordslinger,

They did start it! Bush’s biggest failure was that he did not reign in spending both when the Republicans were like kids in the candy shop, and when Democrats took over in 2006 so that he could get support for the war in Iraq. And it certainly does not excuse Obama’s doubling of Bush’s eight year debt in only three years.

Comment by Cincinnatus Tuesday, Apr 26, 11 @ 1:17 pm
47th,

Somewhere between my worldview that people should have responsibility for themselves, and yours that the government should provide all things to all people, lies a balance we can debate about. As I said above, I think the pendulum has swung too far in one of those directions. And hence, our debate, and your apparent disgust for me and approximately half of the population.

Comment by Cincinnatus Tuesday, Apr 26, 11 @ 1:21 pm
I think that the Peoria Newspaper has a great idea and it should be implemented. I have to agree with the majority of the bickers.

Comment by Palatine Tuesday, Apr 26, 11 @ 1:22 pm
===and yours that the government should provide all things to all people===

Yes, I’m a communist. That’s clear from all of my comments here. In the future, you can refer to me as Comrade 47th Ward.

Comment by 47th Ward Tuesday, Apr 26, 11 @ 1:28 pm
Enough with this back and forth, people. Stick to the topic, please.

Comment by Rich Miller Tuesday, Apr 26, 11 @ 1:32 pm
Hopefully Greg Hinz reads this blog. He writes another woefully ill-informed blog post, this time on the pension “crisis.” He claims, without attribution, that “financial experts say a prudent state ought to have 90% of the money on hand for pensions that it will need.” Yes, and prudent financial experts say you shouldn’t have a mortgage, or a car payment, and that you should have at least $4 million in your IRA to afford retirement. Unfortunately, from the comments following that blog entry, many folks other than Hinz are equally ignorant about the facts surrounding the public pension situation. But, writers, especially for Crain’s, should be more careful when opining a topic they know absolutely nothing about.

Comment by phocion Tuesday, Apr 26, 11 @ 1:46 pm
As a public employee who has paid into the pension systems of both the State of Illinois and the City of Chicago for over 30 years I am sick and tired of the politicians trying to find a villian to blame for their inadequacies and ineptitude as State legislators and Alderman in the Chicago City Council.

For years Democratic legislators in the Illinois House have been bobble head dolls for Speaker Mike Madigan. They do any and everything he says out of fear and intimidation.Sometimes you wonder if we need a legislative body because the party in power leaders such as the House Speaker and Senate President limit what will be called and what will be passed in their respective chambers.The same goes for the Chicago Alderman. When Daley gets red faced, arms swinging and all contorted and the veins pop out of his head they all hide under there desks and vote his way out of fear and intimidation.

So now they need a bogeyman and that bogeyman is the public employees who have paid over 4% of their yearly salaries into the pension each and every year and in many cases more than 4% percent of salary. While the State of Illinois has sporadically paid their collectively bargained appropriated amount with the unions over the past 30 years and in some cases not at all for years.

For example, that former fiscal responsible Governor Jim Edgar negotiated with the unions back in the early 90`s an agreement that called for the State to pick up the employees 4% pension contributions in lieu of a raise. Only problem was the State never made the contributions for the ensuing years only to defer to a future date.The public doesn`t realize that the state employees also pay into social security but, because of the Federal law introduced and passed by former Congressman Dan Rostenkowski will only receive 60% of the amount they should receive because they receive a pension.They were sacrificed in order to save social security. So pensioners have been asked to bail out social security and after that sacrifice politicians are calling to take away benefits from pensioners and participants that were collectively bargained and approved by the very same legislators and alderman that are blaming the budget shortfalls they created as a result of not paying thier pension obligations over the years.

The City of Chicago Administration is as guilty as the State in the same respects. The City of Chicago has over the past 14 years practiced the same accounting principles by deferring payments and contributing sporadically to the Municipal and Laborer`s pension funds.At that time the Municipal Fund was 90% funded and the Laborers` Fund was about 110% funded.It was the City of Chicago that decided they were not going to make the contributions while the employees continued to pay their end of the deal.

The pension formulas and benefits are all collectively bargained and unless the reductions in benefits are collectively bargained with the unions all the pension funds for public employees are protected by state statute.Senate President Cullerton has pointed this out in his report which states that the benfits shall not be diminished. If the legislature does act and changes the pension benefits without negotiations I for one will file an unfair labor practice with the Illinois Labor Relations Board because any unilateral change to a contract without being bargained to a collective bargaining agreement by an employer is illegal under state law.The courts will be another avenue that will be used to remedy any changes.

Lastly, Let`s look at the persons and organizations that are fueling the fire for reform. State Treasurer Dan Rutheford is calling for the legislature to proceed with a unilateral change and to let the courts sort it out.Well, I could see why an overseas Corporate businessman like himself for Servicemaster a non union busting firm would want to end pensions so that a sustainable middle class of pensioners would cease to exist and we could become a class of rich and poor. If we have no middle class their will be no one to challenge groups such as “Illinoisisbroke.com”.I researched this group and it is an offshoot of the Commercial Club of Chicago.The deceiving slick commercial that they have been airing states that, 95% of the citizens of the state are paying the freight for 5% of the public pensioniors benefits. I wish that were true because we would not be in the situation we are now. The funds would be fully funded. The Civic Committee of the Commercial Club membership consists of the poor millionaires and billionaires such as the Pritzkers, Crowns, Bill Daley, etc.That poor bunch of corporate and trust baby millionaires want to end benefits of the average public pensioners $40,000 a year.I feel for those poor millionaires at the Commercial Club. We would gladly trade places with them.Lastly, all this talk about a 401(k) is rubbish. If you institute a 401(k) now who will be paying into the pension to cover the vested particpants in all the pensions for the future. The shortfalls will only increase while the revenue streams will decrease.More smoke and mirrors by the politicians. Sell the Skyway, sell the parking meters, sell Midway. I say sell the politicians responsible for this mess. It starts with Gov. Thompson, Edgar, Ryan, Madigan, Phillip,Daley and so on. They make the budgets and appropriate dollars that never made it to the pension funds and the participants are to blame no the politicians are the bogeyman and maybe they one day will take ownership for thier misdeeds.

Comment by Teamster Tuesday, Apr 26, 11 @ 1:50 pm
Teamster, I sure hope you wrote that lengthy missive on your day off. Otherwise, you might have helped to reinforce certain stereotypes….

Comment by phocion Tuesday, Apr 26, 11 @ 2:12 pm
Wordslinger @ 104:

I dont disagree with your general premise whatsoever. I think there IS indeed a problem that needs remedying.

And if “unfunded liability” is the scare tactic that gets the general public to take notice and force some change, I guess it has served it’s purpose to an extent.

Your point about defaulting on the mortgage is way-off. Rich’s whole point about the underfunding in the 1950s was that, hey, we were actually WORSE off then and we still havent defaulted.

I dont think “unfunded liability” is the best metric to measure the problem.

I am not an accountant, so someone please correct me, but if the State was booking future REVENUES 40 years into the future everyone would be howling about voo-doo math. So why do we accept future liabilities counted decades into the future without looking at the income side of the equation?

I mean, Enron booked decades worth of future (and phantom) profits, and we know how that ended.

You cannot just look at one side of the equation. That’s all I am saying. The reality is scary enough, for me anyway, without pretending that the entire liability is due tomorrow.

Comment by Peter Snarker Tuesday, Apr 26, 11 @ 3:43 pm
I will be the first to admit that pension funding levels are ever changing things. The plan I belong to was told in the years before 9/11 that it in fact was overfunded. This came from folks at the government level. So one of the choices to get right with god was to sweeten benefits. We reduced penaltys for early out and for two years sent a thirteenth check to retirees. After 9/11 and those bad market years we became underfunded and had to cut the multiplier for future benefits. Right before this last market collapse we had again almost climbed out of the hole and was back in the 90% funded range. The trustees were looking to go back to a past multiplier. Bingo Bango in a year we lose 30% of assets and go from green zone to red zone. The zones are a government thing. Red zone means you are in danger of being thrown into PBGC. You need to make extreme changes in your plan to move toward green zone. All State plans would be in that zone now. Some of those changes ment our members were paying money in they would get no benefit from until plan was once again green. Recent market uptick has helped a bunch. As has already been stated the big problem with public employee plans is little or no money going in. I do think it looks like they have no method to adjust future payouts do to market conditions. These can be worked out.

Comment by Bemused Tuesday, Apr 26, 11 @ 3:55 pm
y can’t just be one pension system that covers everyone, instead of five different ones?

Comment by Anonymous Tuesday, Apr 26, 11 @ 4:52 pm
- Anonymous - Tuesday, Apr 26, 11 @ 4:52 pm:

“y can’t just be one pension system that covers everyone, instead of five different ones?”

Because then the GA and their buddies in the judiciary could not carve out the sweetheart deals they have compared to the average government worker. Silly boy…

Comment by Cincinnatus Tuesday, Apr 26, 11 @ 5:10 pm
Rich, any chance of a hiatus on pension stuff? There doesn’t seem to be any real new info, and I think I could now write the script for each commenter on here. For the time being, could we simply agree that there are a lot of fools out there and each of us might or might not be one of them?

Comment by steve schnorf Tuesday, Apr 26, 11 @ 5:27 pm
Steve, you’re absolutely right, but Rich had a bew piece of news that I think is very telling. TRS was underfunded at a much lower level in 1950. They never missed a payment. With all the talk about unsustainable,bloated pensions, it provided a perfect tidbit of undeniable fact against “the sky is falling!” crew on this blog. Additionally, with the “IllinoisIsBroke” plutocracts buying up airtime on an advertising blitz, this is a breath of fresh air.

Comment by PublicServant Tuesday, Apr 26, 11 @ 9:01 pm
Greg, when state employees have to run for their jobs in a public election every 2 years I’ll agree we should all be in the same pension system. My point is we;re learning nothing mew, simply rehashing the same old points over and over. None of us on here are going to change the minds of anyone else on here.

Comment by steve schnorf Tuesday, Apr 26, 11 @ 9:59 pm