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Unclear on the concept

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Illinois

* From a Decatur Herald & Review editorial…

In hindsight, the pension problems began during the Jim Edgar administration, when a 1994 law was approved to have pensions funded at the 90 percent level within 50 years.

They’re kidding, right? The pension problems “began” in 1994?

* Look, there’s no doubt that Edgar’s pension ramp plan was flawed. I’ve been saying so for years. It seriously backloaded payments and burdened future generations instead of tackling the issue head-on.

But can anyone say for certain that if Edgar’s ramp had not been passed that we would be better off today? Does anyone seriously believe that the unfunded liability would be lower today if not for the ramp?

Anyone?

Bueller?

* The state’s pension problems date back to at least the 1940s. The underfunding problem had gotten so bad that by the time the state constitutional convention convened in 1969, delegates decided to scare the pants off legislators by making pensions an unbreakable contract.

But even that didn’t work. It wasn’t until Edgar decided to force the issue that something was done. Yes, they kicked the can down the road, but they did do something.

* On that same topic, this claim in a column is nonsense…

On Monday, the U.S. Securities and Exchange Commission, or SEC, investigation charged the state of Illinois with fraud.

Here is what it had to say:

“… that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.”

That’s lawyer-speak for “the Edgar Ramp fell well short of the mark.”

Oh, please. It’s actually “lawyer-speak” for “Rod Blagojevich’s administration lied.”

* And this editorial is only partly true…

The SEC report says the underfunding mess dates back to a protracted payback plan put forth in 1994 by then-Gov. Jim Edgar. It was compounded exponentially by pension holidays given under ex-Gov. Blagojevich. What [House Speaker Michael Madigan] didn’t say, is that he helped to lead the Legislatures which signed off on those pension holidays.

The first sentence is woefully inadequate, but the rest is spot on, including Madigan’s culpability.

* A little history…

That [Edgar pension payment ramp] legislation, which took effect in 1995, passed both chambers of the Legislature unanimously, drew no opposition from unions and had backing from business groups and newspaper editorial boards. It set out an escalating schedule that required gradual pension payments of as little as $500 million at first but a much steeper ramp-up after 15 years. By 2009, the state paid $2.4 billion toward its pension tab, and next year that obligation will reach a staggering $6.7 billion.

Yes, the ramp was flawed, but at least there was something on the books that hasn’t been totally ignored.

* This section of the recent SEC fraud report is the reason why the law was flawed, but also contains some information that is almost always conveniently ignored by newspaper editorial writers, particularly at the Tribune…

“Rather than controlling the state’s growing pension burden, [the law’s] contribution schedule increased the unfunded liability, underfunded the state’s pension obligations and deferred pension funding,” the SEC wrote. “This resulting underfunding of the pension systems … enabled the state to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the state.”

The contribution schedule purposely increased the unfunded liability.

So, when anybody bemoans the pension systems’ unfunded liability, they ought to remember that it was a feature, not a bug of the Edgar plan. It was, however, made far worse by Blagojevich and everybody else who backed the pension holidays.

* Henry Bayer has the last word here about the Edgar plan, which passed unanimously…

“I’m sure if we’d have been opposed to it, maybe there would have been 10 or 20 votes against it,” said Henry Bayer, AFSCME Council 31’s executive director. “If it didn’t pass, it wasn’t like there was an alternative bill that would have made things better. If it didn’t pass, we’d still have what we had. There would have been no contribution or what they’d decide to put in every year, which would have been even less.”

Henry is exactly, totally right.

posted by Rich Miller
Monday, Mar 18, 13 @ 9:33 am

Comments

From my perspective, the pension funding plan was at fault for this particular situation (sec investigation) because it created a false crutch for the state to underfund the pension systems.

It enabled all players involved to falsely state they were meeting pension obligations when they were simply meeting the legislative schedule. It removed political culpability, but not legal culpability.

Comment by Gb Monday, Mar 18, 13 @ 9:43 am
“It was, however, made far worse by Blagojevich and everybody else who backed the pension holidays”

including Henry Bayer and the unions - SB 27

Comment by Old Milwaukee Monday, Mar 18, 13 @ 9:45 am
The more I read about this issue the more depressed I get. To me anyway, it seems that every proposed legislative solution to date is clearly unconstitutional.

Using this approach signals that the legislature and the Gov. don’t really want to solve the problem, at least right now. The unconstitutional approach just means more time passes and the problem gets worse.

The worse the problem the better chance their “police powers” argument has a chance to succeed. Retiree’s are going to be no better than road kill.

Comment by Leave a Light on George Monday, Mar 18, 13 @ 9:45 am
And we haven’t done anything sense to fix the problem.

Comment by Ahoy! Monday, Mar 18, 13 @ 9:49 am
–The state’s pension problems date back to at least the 1940s.–

And how many pensioneers have missed or been shorted payments since then? And the state has gone broke how many times?

There is a hysteria on this issue, fueled by Ty and the gang who see it is a way to bust public unions, and a gullible or compliant press who always have had trouble with “big, scary numbers” stories.

When you signed your mortgage papers, did you take a look at your “unfunded liability?” That’s a big, scary number, too. Get on a reasonable payment schedule, stick to it, and you’ll be alright.

Comment by wordslinger Monday, Mar 18, 13 @ 9:56 am
If te problem only dated back to 1994, how did we find ourselves so severely unfunded at that time that we needed a ramp up to solvency?

Comment by titan Monday, Mar 18, 13 @ 9:59 am
= When you signed your mortgage papers, did you take a look at your “unfunded liability?” That’s a big, scary number, too. Get on a reasonable payment schedule, stick to it, and you’ll be alright. =

Tell that to S&P, Tell that to Fitch, tell that to Moody’s.

Even if we can get on a schedule & make these payments like you’re proposing, we won’t be able to issue any debt as our paper will no longer be investment grade. There are many more facets to this than making a plan & sticking to it. You know this stuff, Word.

Comment by TCB Monday, Mar 18, 13 @ 10:01 am
@TCB:

You want to point out any time we haven’t been able to issue debt? I didn’t think so. That kind of hysteria is part of the problem, not the solution.

Comment by Demoralized Monday, Mar 18, 13 @ 10:05 am
“There is a hysteria on this issue”

Exactly Word, exactly.

Comment by Calhoun Native Monday, Mar 18, 13 @ 10:13 am
===You want to point out any time we haven’t been able to issue debt?===

Yeah. Right now.

Comment by Rich Miller Monday, Mar 18, 13 @ 10:14 am
–Even if we can get on a schedule & make these payments like you’re proposing, we won’t be able to issue any debt as our paper will no longer be investment grade.–

Getting on a schedule and sticking to it will lead to junk bond status? I thought it was a good thing.

Given the schizophrenic nature of today’s rating agencies, you could be right. MBS went from Triple-A to junk in a matter of weeks.

You can’t control what they or the SEC say or do. They remain in full panic mode for their indispensable roles in crashing the world economy, and are acting tough, with everyone but the Big Banks, to keep Congress from giving them the beat-down they so richly deserve.

By the way if you get a chance, read the Levin-McCain report on the London Whale and JP MorganChase. Dodd-Frank is useless if the banks can continue to lie without consequences to investors and regulators, and regulators don’t do their jobs. What happened in 2008 can, and probably will, happen again.

Comment by wordslinger Monday, Mar 18, 13 @ 10:17 am
Illinois, of course, is still investment grade and can issue debt.

But with the stock market breaking records every day, it’s the absolute worst time to do so. You’ll pay a premium. Them’s the breaks.

Comment by wordslinger Monday, Mar 18, 13 @ 10:27 am
=== Oh, please. It’s actually “lawyer-speak” for “Rod Blagojevich’s administration lied.” ===

This is a big part of why I’m such a fan of CapFax and the community here.

Cold, hard truth.

That applies whether it is Republican, Democrat or the Abraham Lincoln museum.

Truth.

Comment by Formerly Known As... Monday, Mar 18, 13 @ 10:35 am
It was also around 1994 that the state employees gave up their raise in exchange for the state making the state employee pension contributions - and hence more take home pay - this was taken back for SPSA’s by Blago - and then on

Comment by Elise Monday, Mar 18, 13 @ 10:55 am
Pension hysteria is very much like the Republican’s deficit hysteria. Everyone seems to think some “grand solution” must be achieved yesterday by the same people who spent years screwing everything up…and it must be fixed on the backs of those who had nothing to do with the problem. The pension hysterics want workers and pensioners to take the hit when it was the state taxpayers who benefited by having pension payments diverted to fund public services; Republican deficit hawks want the poor and middle class to take the hit for rich tax cuts and Bush/Cheney’s oil war. Illinois, adopt a graduated income tax and start scheduled pay down of pension debt. Congress adopt balanced plan closing of tax loop holes, eliminate various oil, business and farm subsidies and let economy grow. There, I’ve solved it, so just take care of it.

Comment by D P Gumby Monday, Mar 18, 13 @ 11:00 am
Unfortunately, there were a number of poorly written articles in response to the SEC action. That’s one of the problems with the whole debate on pension reduction. People are often mislead on the causes of the problem. Folks all need free subscriptions to Capitol Fax to get the true story. Never mind that last suggestion, I don’t want Rich to lose money.

Comment by Norseman Monday, Mar 18, 13 @ 11:01 am
As far as the U.S. bond market goes, it will be interesting to see in the coming days the Europeans’ reaction to the out-of-the-blue move by the EU on Cyprus.

The instant-conventional-wisdom is that European bank depositors are going to bolt and seek save haven in the U.S. securities. That could help on new debt price.

Comment by wordslinger Monday, Mar 18, 13 @ 11:02 am
D P Gumby is right on. The solutions that would actually hurt the fewest and get us on track are exactly the ones that are rejected. (e.g. Martire’s plan) This is a grand orchestration with plenty of hysteria as a side dish to demonize public workers and their pension plans with the Tribune being used as the mouthpiece.

Comment by geronimo Monday, Mar 18, 13 @ 11:11 am
=Getting on a schedule and sticking to it will lead to junk bond status? I thought it was a good thing.=

It is a good thing for the pension systems…..but maybe not the state. Sure, we can stay on the Edgar ramp & pension payments will continue to soak up state dollars like a sponge, causing massive cuts to education & the social safety nets. Or we can make up a new payment plan, stretch out the term of the repayment, and increase the unfunded liability (see Todd Maisch’s plan) which would likely result in further downgrades. Or we can attempt to make changes to the benefits (most controversial) and get sued before the ink is dry.

We have literally painted ourselves in the corner with inadequate funding of the system for decades……it’s going to take a combination of fixes, not just getting on a schedule & sticking to it to fix this, that was my only point.

Comment by TCB Monday, Mar 18, 13 @ 11:13 am
Sorry……I meant Martire’s plan, not Maisch

Comment by TCB Monday, Mar 18, 13 @ 11:17 am
=It was also around 1994 that the state employees gave up their raise in exchange for the state making the state employee pension contributions - and hence more take home pay - this was taken back for SPSA’s by Blago - and then on=

I was too. Figured out what amount was that the state was SUPPOSED to pay and started to put it in deferred comp program.

Smartest move I ever made ….until 2008 came along.

Comment by Leave a Light on George Monday, Mar 18, 13 @ 11:25 am
@Rich:

“Can’t” and “choose not to” are two very different things. I stand by my statement.

Comment by Demoralized Monday, Mar 18, 13 @ 11:31 am
===“Can’t” and “choose not to” are two very different things.===

Only if they’re choosing not to for no reason. That doesn’t appear to be the case here.

Comment by Rich Miller Monday, Mar 18, 13 @ 11:41 am
It’s correct to say that the 1994 plan design caused the unfunded liability to increase, but to say that increasing the UAAL was a “feature” is a bit of a stretch for me.
Unlike most of you folks, old AA was there when it happened.
As I recall, the focus was on getting an agreeable and affordable plan that would fund the systems over the long term. There was not a lot of discussion, if any, about the shorter term impact on the unfunded.
The ramp would have worked more effectively had it not been FUBARed by Filan on Blago’s behalf. I would estimate at least 10% if not more of today’s unfunded comes from their games and gimmicks.
I agree with Rich that Henry Bayer is spot-on right.

Comment by Arthur Andersen Monday, Mar 18, 13 @ 11:49 am
On the bond issue, there is:
(a) Can’t because it might fail
(b) Choose not to because waiting may bring a better deal
(c) Choose not to because short-term you expect a higher rate and do not want to establish it as a baseline for future issues
(d) Choose not to for political reasons

Did the advisors really think it might fail?

Comment by east central Monday, Mar 18, 13 @ 11:58 am
== The ramp would have worked more effectively had it not been FUBARed by Filan on Blago’s behalf. ==

And where was the rest of Springfield when Blago was busy FUBARing the system?

Comment by Willie Monday, Mar 18, 13 @ 12:22 pm
the only way to solve the fiscal problem (and there actually is a problem for those out there are think differently) is to raise revenue and cut pension benefits. it is a really terrible place to be in for state, and there are no ways out of this mess which will not cause great pain to many people, not just pensioners.

but if nothing is done, it will be even worse. wait and see what things look like in 1-3 years for all of you people who dont really think there is a fiscal problem and feel no pressing urge to do anything.

Comment by unbiased observer Monday, Mar 18, 13 @ 1:30 pm
Whether the Edgar ramp was better than nothing, we can say for sure that the ramp perpetuated underfunding of the system for 15 years. Consequently, Republicans who like to attribute all blame for the unfunded liability to Democrats are using a memory hole for inconvenient facts.

Comment by reformer Monday, Mar 18, 13 @ 1:33 pm
===As I recall, the focus was on getting an agreeable and affordable plan that would fund the systems over the long term. There was not a lot of discussion, if any, about the shorter term impact on the unfunded.===

OK, but regardless, it’s still a feature, not a bug.

Comment by Rich Miller Monday, Mar 18, 13 @ 1:35 pm
Point of information:

In fact, the so-called “Edgar ramp” was the second time the Legislature and governor attempted to address the state’s chronic underfunding of the five retirement systems for which it’s responsible for paying the employer’s share.

Legislation enacted in 1989 (Public Act 86-273) among other things set out a plan to amortize the unfunded liability over time, complete with seven-year ramp up to reach actuarially-sound annual contribution levels. But the law contained no enforcement provision and thus was ignored in the budget-making decisions, so that the funding ratios actually dropped following its enactment. See, for example, an analysis by former Comptroller Dawn Clark Netsch, one of the authors of the 1989 law, at http://www.lib.niu.edu/1993/im930215.html.

Despite its acknowledged shortcomings– an unrealistic ramp and significant backloading, among others– the 1995 law was seen as an improvement because it contained an automatic funding provision: by law, the comptroller and treasurer were required to transfer into the retirement systems the amounts called for as calculated under the law, regardless of whether the Legislature and the governor appropriated a single penny for that purpose. In fact, for Gov. Blagojevich and the Legislature to take the so-called two-year pension holiday, the 1995 law was amended to specify the dollar amounts the state would contribute in FY 2006 and FY 2007, rather than follow the 1995 law’s original dictates.

Comment by Charlie Wheeler Monday, Mar 18, 13 @ 1:50 pm
Charlie, nice piece of historical perspective. The link to the Netsch works if you remove the trailing “.”

Comment by mid-level Monday, Mar 18, 13 @ 2:11 pm
It seems that defined benefit pension plans will eventually be a benefit of the past.

The U.S. auto making industry required a federal bailout in order to overcome the burden of these types of legacy costs.

Retiring a worker at fifty years of age always seems now to have been a mistake, yet the actuaries were telling government officials those early retirements made business sense.

It is a sad day, but the truth is that the markets drive capitalism and the market and its consumers are unwilling or unable to pay for these large legacy costs.

Comment by Endangered Moderate Species Monday, Mar 18, 13 @ 2:11 pm
For what its worth, in the late 1990s, various state pension groups, including SERS, SURS, and TRS, sued the State for under-funding the pension systems. But the Illinois Supreme Court ruled that the pension protection clause of the state constitution was intended to create a contractual right to benefits, without freezing the politically sensitive area of pension financing and, thus, the beneficiaries had no cause of action for the state’s alleged failure to meet its funding obligations.
695 N.E.2d 374

In other words, the pension benefits cannot be impaired or diminished, but the Courts can’t force the General Assembly to put in the proper amount of money.

Comment by Joe M Monday, Mar 18, 13 @ 2:51 pm
Rich, I’ll concede the point on the word “feature.” It’s your blog lol.
Thanks to Charlie Wheeler for the institutional perspective and reminder of another important “feature” of the 1994 funding law.

Comment by Arthur Andersen Monday, Mar 18, 13 @ 4:11 pm
Pathetic misrepresentation by the Newspaper. Surely the problem did not begin in 1994 and it’s wrong to even remotely place the bulk of the blame on former Gov. Edgar. But with that said, 19 years later, is this really worth nit-picking over or are Republicans seeming a bit hypersensitive to even the slightest criticism against a past GOP Administration which I’m quite sure Illinois History has and will recognize as decent and respectable on the whole?!

Comment by Just The Way It Is One Monday, Mar 18, 13 @ 5:29 pm
the markets drive capitalism and the market and its consumers are unwilling or unable to pay for these large legacy costs.

The auto workers didn’t have a constitutional guarantee of their pension benefits, and they still got paid. In the case of state pensioners, the business case for the early retirements was that the higher pension costs would be offset by the lower salaries paid to the entry level workers that would replace their spot on the payroll. If the state followed an actuarially sound plan and hired and paid accordingly, and put the pension money where it was supposed to go, I surmise that the current situation would be less stressful.

Comment by Six Degrees of Separation Monday, Mar 18, 13 @ 7:00 pm
I hear younger folks say there will be no social security and no pensions. Are they planning to work until they die at 90? Or are they saving 15 percent of their income and properly investing it so they can retire at 65 -70? So far that has not been happening.

Has anyone looked at how much the state paid in since 1994 that was not from the bond issueds?

I will if I get a chance.

Too bad there was not more investment into the pension fund by the state in the 1990s before the first tech bubble and during some of the dips. I would like to see if the state was buying securities and bonds when the prices were low.

Comment by Lost in the Weeds Monday, Mar 18, 13 @ 7:17 pm
Old Milwaukee- for the record, AFSCME did not support the pension holiday. It was another example of the decision-makers in Springfield refusing to raise the revenue to avoid cuts to important programs.
Instead they followed the historical path of borrowing from the pension funds whose annuitants are being asked to pay for the politicians shortsightedness.

Comment by truthteller Tuesday, Mar 19, 13 @ 7:37 am