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“A ramp toward disaster”

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Illinois

* Dave McKinney examines the pension problem for Crain’s. It’s today’s must read…

• Enhancing pension benefits. Former GOP Gov. James Thompson agreed in 1989 to establish a compounding, 3 percent cost-of-living increase for retirees. Another round of benefit enhancements followed in the late 1990s. In May, the state Supreme Court ruled that those changes can’t ever be revoked for tens of thousands of current and retired government workers.

• Clearing a bloated state payroll by letting workers retire early. A 2002 plan created under Republican Ryan and pushed by Democratic House Speaker Michael Madigan cost the pension systems at least four times more than originally billed and won’t be paid off until after 2045, when early-century budgetary ills will be the stuff of history books.

Other factors happened outside policymakers’ control. The collapse of the dot-com bubble in the early 2000s and the 2008 stock-market meltdown accounted for a combined $15.9 billion in pension-investment losses, CGFA reported. And an adjustment downward in long-term investment return assumptions in 2011 pushed Illinois’ pension systems $9.8 billion deeper into the red.

But perhaps the most enduring culprit is the “Edgar ramp,” conceived in 1994 by Republican Gov. Jim Edgar as a 50-year program to stabilize the retirement systems.

* Our resident pension expert RNUG e-mailed me today…

Pretty decent overall but they blew it at the end, failing to note the Rauner pension reform proposals are just as unconstitutional as SB-1 was. Still, it’s a decent primer for people who won’t take the time to read Eric Madiar’s report.

Go read the whole thing.

posted by Rich Miller
Friday, Aug 7, 15 @ 11:01 am

Comments

It’s worth noting that none of those points are the fault of the State Employee yet the blame seems to fall on them.

Comment by Stones Friday, Aug 7, 15 @ 11:08 am
It was the height of optimism, to say the least, that one governor and one GA could commit future governors and General Assemblies to a course over 50 years.

Comment by Wordslinger Friday, Aug 7, 15 @ 11:09 am
Clearing a bloated state payroll by letting workers retire early. A 2002 plan created under Republican Ryan and pushed by Democratic House Speaker Michael Madigan cost the pension systems at least four times more than originally billed and won’t be paid off until after 2045, when early-century budgetary ills will be the stuff of history books.

This is an odd bit of scaremongering. Yes, the people who retired early in 2002 will be paid benefits for a long time to come, in fact the pension systems will still be paying out benefits to those people until the last one passes away and is no longer collecting benefits because that’s how pensions work.

Comment by The Captain Friday, Aug 7, 15 @ 11:09 am
Eventually, this debt’s going to come due, folks. So, you know, realize that in this bill there are all kinds of windows that have been opened for all kinds of people… special situations that everybody around here has asked for. But the fact of the matter is, that doesn’t cost much. What really costs the money is the 3 percent compounding. I have no objection to it, if you want to set aside a billion dollars to pay pension benefits, But if you don’t, then maybe you’d better back off a little bit.

State Sen. Calvin Schuneman, R-Prophetstown, June 30, 1989

Comment by nixit71 Friday, Aug 7, 15 @ 11:16 am
Wait, I thought this mess was made by the Democrats, who’ve been in charge of everything in Illinois forever?

Maybe we can move beyond the blame game now and just accept that Illinois has been kicking the can down the road for a few generations now, on a bi-partisan basis, because it’s easier than making tough decisions.

It used to be that Illinois’ growing economy would cover up a lot of the fiscal problems. That doesn’t appear to be working anymore.

Comment by 47th Ward Friday, Aug 7, 15 @ 11:17 am
It’s a really nasty thing that happens when you don’t pay your credit card and that interest (and late fee) starts blowing things out of control. At some point, you do have to pay what is owed.

Comment by Anonymous Friday, Aug 7, 15 @ 11:19 am
So it seems the root of most of the problems were with allegedly Republican Guvs Edgar and Thompson. I certainly can’t disagree with that.

Bad policy, bad economics, but very good short term politics and political payback. Someone serious journalist (are there any left in Illinois?)ought to interview them and ask them why they created this mess.

Comment by Arizona Bob Friday, Aug 7, 15 @ 11:21 am
Big fan of McKinney, it’s a must-read to understand that “Speaker Madigan and the legislators he controls…” are not the problem, or the “30 years of Madigan and ‘Democrat’ rule” either.

Institutional knowledge, and the history supporting that knowledge is critical… to moving forward.

Comment by Oswego Willy Friday, Aug 7, 15 @ 11:22 am
“It was a stampede toward the exit for anyone in state government who’d come up through the ranks from the Thompson-Edgar years.”

When your employees are that anxious to leave, one should wonder if they were the right employees to begin with. Or perhaps your selling price is too low.

Comment by nixit71 Friday, Aug 7, 15 @ 11:23 am
AB, you obviously didn’t read the story (shocking).

A serious journalist did interview Edgar and Thompson. An informed, serious commenter would have known that.

Comment by Wordslinger Friday, Aug 7, 15 @ 11:24 am
Education Association President Cinda Klickna was not in union leadership in 2005. But she says the union sat between a “rock and a hard place of, do you want to help students or do you want to put your money into the pensions?”

Teacher union presidents have never found a student they couldn’t hide behind.

Comment by nixit71 Friday, Aug 7, 15 @ 11:24 am
“Republican Ryan” - wrong republican governor - -
The former republican governor Thompson came up with the 5 & 5 early out plan to protect his people.

Comment by Mama Friday, Aug 7, 15 @ 11:25 am
==But perhaps the most enduring culprit is the “Edgar ramp,”==

It is. Not that Gov Edgar will acknowledge any failings while criticizing his successor left dealing with the fallout.

@stones, @nixit71, @47th - all very well said.

Comment by Formerly Known As... Friday, Aug 7, 15 @ 11:25 am
Despite the union blame game, the unions never had a chance. The threat was to keep them from complaining not to change anything. No one in the state would have agreed to cut education funding to pay for pensions.

Comment by Liberty Friday, Aug 7, 15 @ 11:28 am
==Bad policy==

The bad policy was not paying for it. There’s nothing wrong with the substance of the policy.

Comment by Demoralized Friday, Aug 7, 15 @ 11:30 am
I thought it was a pretty good piece as well. I think he should have referenced that underfunding has been a longstanding practice the predates Thompson. Read Madiar. Knowing that the trolls will ignore the rest of the article and cite the paragraph on the 3% AAI, I wish he would have added that employee contributions were increased to help pay for it.

RNUG is right to point out that the biggest failure is to ignore politician’s continued efforts to pursue unconstitutional solutions.

Comment by Norseman Friday, Aug 7, 15 @ 11:30 am
== When your employees are that anxious to leave, one should wonder if they were the right employees to begin with. Or perhaps your selling price is too low. ==

I’ve made no secret I retired under the 2002 ERI. I liked my job and I wasn’t planning to retire for another 5 years but it changed my mind. Once you did the math, it was just too good to pass up.

The State did learn they gave away too much in 2002 and the 2004 ERI offering was much less generous.

Comment by RNUG Friday, Aug 7, 15 @ 11:32 am
Norseman - you are so right to point out that employee contributions were increased to pay for the AAI..thanks for the reminder

Comment by Spidad60 Friday, Aug 7, 15 @ 11:33 am
== “Republican Ryan” - wrong republican governor - -
The former republican governor Thompson came up with the 5 & 5 early out plan to protect his people. ==

-mama-, the 5+5 early out aka the 2002 ERI … WAS George Ryan plus the Democrats in the GA who thought they would have a lot of patronage jobs to hand out …

Comment by RNUG Friday, Aug 7, 15 @ 11:35 am
Good solid article. I’m not surprised everyone is still blaming someone else for their mistakes. It is important though that today’s leaders learn from the mistakes that were made in the past and fix the situation. This will probably involve a Tier 3 solution (because we still need to fix tier 2, a new ramp and more revenue.

Comment by Ahoy! Friday, Aug 7, 15 @ 11:36 am
“When your employees are that anxious to leave, one should wonder if they were the right employees to begin with.” “Do I stay and work-a-day for another 10 years (if I’m lucky enough to stay employed that long) until I can retire, or do I retire now for the same benefit?”

And you question the integrity of the employees who made that choice? Very sad.

Comment by Skeptic Friday, Aug 7, 15 @ 11:37 am
Now we know why Illinois has the lowest amount of state workers per capita in the country… These terrible solutions created ideas for the Tier 2 system… With the state broke and not able to pay universities, all universities in Illinois have to raise tuition. Students in Illinois who graduate with technical degrees and with thousands of dollars in student loans, won’t work for the state because of the benefits and long term problems. It comes full circle.

Red State Tax system, blue state spending policies.

Comment by Almost the Weekend Friday, Aug 7, 15 @ 11:40 am
I don’t usually read the Sun Times Op Ed page, but they have. Great piece on why the three tops need to put away their egos and schemes and solve the budget crisis and pension debacle…everyone should read it and the send a copy to Rauner, Madigan, and Cullerton…

Comment by Loop Lady Friday, Aug 7, 15 @ 11:40 am
RNUG, nixit71 is a hater and gets his jollies by dumping on public sector workers. His bashing of Cinda Klickna is especially pitiful. My son was taught by her and I’d be proud to have him and the rest of my family stand with her.

Comment by Norseman Friday, Aug 7, 15 @ 11:40 am
I find it interesting that Governor Edgar doesn’t get more blame on the pension issue. In his final State of the State, Meeting the Challenge, The Edgar Administration 1991-1999 on page 29 under State Employees, “The Governor approved the most significant increase in pension benefits for state employees in a quarter century. As a result, Illinois moved from next to last among states in pension benefits to near the national average.”

Comment by yeoman Friday, Aug 7, 15 @ 11:42 am
Has anyone ever done an accurate study of how much of the pension deficit is due to state underfunding? And how much is due to retirees living longer and other such factors. I seem to recall one study that said about 80-85% of the pension deficit is due to state underfunding - and 15-20% is due to things like retirees living longer, etc. But I can’t remember if it was a legitimate source - or even what the source was.

Comment by Joe M Friday, Aug 7, 15 @ 11:47 am
No one who pays minimal heed to this blog believes it is the fault of the current GA or only democrats that we are in trouble. Those who do are partisans, ignorant or obtuse.

Madigan is certainly a constant thruout but the blame can’t be laid on him alone. The media has their scapegoats in place and will run with them.

Fine - now that we have found who is to blame - WHAT’S NEXT? The post-mortem is OVER. Unless anyone here can show how pinning the blame on the right person(s) party or whatever I just don’t see how this helps.

Again, the tortuous path of the pension crisis is known to folks here even if they don’t agree with every twist and turn.

Curious, tho, to note the biggest culprit is Edgar with his ramp. When I read of some of the current proposed constitutional cures (eg Martire) most involve a timeline that stretches for many years. Doesn’t that, too, “commit future governors and General Assemblies to a course over 50 years”?

Comment by dupage dan Friday, Aug 7, 15 @ 11:50 am
Blaming the Edgar ramp is a bit of a red-herring. It’s a bad ramp, no doubt, but they could have changed it any time since then and didn’t. The 1995 “Edgar ramp” was an uneven payment plan to get the pension systems to 90% fully funded within 50 years. If the political will was there they could have amended the law to pass an even funding plan to get the systems X% funded in Y years, they just didn’t.

Not that there weren’t attempts. A lot of the really steep increases happened during what was supposed to be Blagojevich’s second term. Back then it seemed like every year Blagojevich/Filan introduced some new bill that included a smoothing of the pension ramp. It was always blocked by the Speaker because back then they were at war and the Speaker was trying to put the brakes on Blagojevich’s spending, so forcing Blagojevich to accept steep pension funding increases was an asset.

I always thought there’d be a pension ramp smoothing pass during the Quinn years but for whatever reason it didn’t happen.

Comment by The Captain Friday, Aug 7, 15 @ 11:51 am
Pension benefits cannot be changed. The ramp can be. There needs to be serious consideration of lengthening and flattening it. There would be some hit to the State’s bond ratings but the State’s fiscal problems would be dramatically eased.

Comment by Quiet Sage Friday, Aug 7, 15 @ 11:55 am
DD, the Supreme Court has committed the state to paying the pension liability.

How they will do it now, ten years from now, 20 years from now remains to be seen.

Governors and General Assemblies undo actions by previous governors and General Assemblies all tne time. Isn’t that obvious?

Comment by Wordslinger Friday, Aug 7, 15 @ 11:57 am
It’s clear that the problem stems from the failure to fund the pensions adequately and that no one’s hands are entirely clean.It’s also clear from the Supreme Court decision that we can’t reduce benefits for current employees. Why isn’t the discussion about how we pay the bill rather than who was more to blame? This exchange only perpetuates the problem by avoiding the question of how and when we’re going to pay.

Comment by Truthteller Friday, Aug 7, 15 @ 12:01 pm
===The collapse of the dot-com bubble in the early 2000s and the 2008 stock-market meltdown accounted for a combined $15.9 billion in pension-investment losses,=====
Ironically, if the fund was fully funded these losses would have been even higher.

Comment by Been There Friday, Aug 7, 15 @ 12:02 pm
The “Ramp” became a problem once it had passed and its effects became known. So why hadn’t these problems been addressed until it was too late?

We need to tax retirement income so that the money raised can pay it down.

Comment by VanillaMan Friday, Aug 7, 15 @ 12:04 pm
The Captain - “Blaming the Edgar ramp is a bit of a red-herring. It’s a bad ramp, no doubt, but they could have changed it any time since then and didn’t.”

Actually, no. As Rich has pointed out on more than one occasion, Wall Street is in love with “The Ramp” and any change to it by the State would bring Wall Street caused nasty consequences.

Comment by Anyone Remember Friday, Aug 7, 15 @ 12:04 pm
Pretty good article, with at least one glaring error. The “ramp” in the ‘95 legislation ended almost 5 years ago. Apparently virtually no one, including the author and the commenters on here understand that. One other point: the ‘02 ERI had significantly more onerous financial terms for the employees who took it than the ERI 10 years earlier had. And just for clarification, the ‘02 ERI, while it shifted cost to the pension systems, also freed up hundred of millions in avoided salaries and FICA/Medicare costs for the state’s operating budget, which those of you with any institutional memory know was under huge strain in ‘03.

Comment by steve schnorf Friday, Aug 7, 15 @ 12:07 pm
==His bashing of Cinda Klickna is especially pitiful. My son was taught by her and I’d be proud to have him and the rest of my family stand with her.==

Norseman - When Klickna is pulling in a TRS pension based entirely on her union salary, then you can stand by her and pay the inevitable shortfall because her union did not pay their fair share. So go ahead and stand with the political elite. I’ll be standing over by the taxpayers who will be funding that difference.

Comment by nixit71 Friday, Aug 7, 15 @ 12:22 pm
Great work by McKinney. Eternal shame on the Sun-Times and Michael Ferro for forcing him out.

Comment by Roland the Headless Thompson Gunner Friday, Aug 7, 15 @ 12:27 pm
“This is an odd bit of scaremongering. Yes, the people who retired early in 2002 will be paid benefits for a long time to come, in fact the pension systems will still be paying out benefits to those people until the last one passes away and is no longer collecting benefits because that’s how pensions work.”

but that’s not how they determine how pensions are funded. Actuaries determine that depending on how long the average pensioneer is expected to draw their pension. Early out means the draw is longer and the funding calculation is screwed up. That’s part of the problem.

Comment by Anonymous Friday, Aug 7, 15 @ 12:41 pm
==employee contributions were increased to pay for the AAI.==

In looking at TRS benefit history:

- 2% AAI in 1971 coincided with % contribution increase
- 3% AAI in 1978 did NOT coincide with a % contribution increase
- change from single to compounded AAI did NOT coincide with a % contribution increase

I haven’t reviewed the other pension systems, but it seems to me TRS, at the very least, was gifted 3% COLA at a simple rate, let alone compounded.

Comment by nixit71 Friday, Aug 7, 15 @ 12:46 pm
Anonymous 12:41pm was me, sorry.

Comment by a drop in Friday, Aug 7, 15 @ 12:47 pm
The ramp provisions in question are contained in Public Act 88-593 (SB 533), effective August 22, 1994. Under the provisions of P.A. 88-593, each of the five State pension systems (SERS, TRS, SURS, General Assembly, and Judges), were required to make additional contributions according to fixed statutory requirements for State Fiscal Years 1996 through 2010. The required State payments were set either as a minimum percentage of payroll or a fixed dollar amount. Initially, the required contributions were low, but they increased in parabolic fashion. These contributions of FY 1996 through 2010 constitute the “ramp.”

The legislation additionally required that contributions for State Fiscal Years 2011 through 2044 must be sufficient to bring the pension systems to a 90% level of funding by FY 2045. This provision was later amended to require a 100% level of funding by FY 2045. Because of the low initial ramp payments, the FY 2011 through FY 2044 are high, and although the statutory ramp has expired, they still increase from year to year.

There is nothing to stop the General Assembly from enacting another (this time, hopefully flat)ramp, and delay the date by which 100% funding must be reached beyond FY 2045. This would not constitute a shortchanging of the pension systems year to year, rather, it would delay the date by which the State was required to achieve full pension funding.

Comment by Quiet Sage Friday, Aug 7, 15 @ 12:55 pm
Kudos to McKinney for his well thought and thoroughly researched story. For many of us, I am thinking specifically of RNUG, it is an independent vindication (along with Madair) of what we have been saying all along.

- Single biggest driver is the underfunding and the penalties and interest that follow.

- So called “Pension Spiking” that the meatball element dishonestly blame for the issue is negligible at best.

-Decades of bipartisan poor pension system management by basically every governor and most of the legislators is probably the real issue. And the reason I have always said that LEGISLATIVE reform is what is really needed.

-Quinn, for all of his many failures, got the pension issue correct.

-Reducing annual pensions will do almost nothing to “fix” the issue. It will hurt a lot of hard working people that took less pay for good benefits and were not party to political or union scheming

At the end of the day the problem is the DEBT!!!!!

Comment by JS Mill Friday, Aug 7, 15 @ 12:59 pm
===

- Wordslinger - Friday, Aug 7, 15 @ 11:57 am:

DD, the Supreme Court has committed the state to paying the pension liability.

How they will do it now, ten years from now, 20 years from now remains to be seen.

Governors and General Assemblies undo actions by previous governors and General Assemblies all tne time. Isn’t that obvious? ===

It is obvious. How does that make Edgar’s decision the worst one in the long string of bad decisions? Relying on the good acts of future members of the GA and/or Governors? What was Edgar supposed to do different at that time? What would have been the right decision? That is one point I am trying to get to - regarding the futile autopsy of the crisis.

But the real question remains - what now? And if it involves anything more that borrowing 100 billion dollars (or whatever the current pension debt number is) to fill up the coffers, doesn’t any plan to bring the pension to a state of financial stability necessarily involve the acts of future Governors and members of the GA?

Comment by dupage dan Friday, Aug 7, 15 @ 1:00 pm
=== The legislation additionally required that contributions for State Fiscal Years 2011 through 2044 must be sufficient to bring the pension systems to a 90% level of funding by FY 2045. This provision was later amended to require a 100% level of funding by FY 2045. Because of the low initial ramp payments, the FY 2011 through FY 2044 are high, and although the statutory ramp has expired, they still increase from year to year. ===

Steve, the above excerpt from Quiet Sage is consistent with my understanding of the ramp law. Aren’t you simply splitting hairs by pointing out the specific ramp is done? It’s the ramp law that is causing the crowding out problem that is the crux of the current crisis.

Comment by Norseman Friday, Aug 7, 15 @ 1:10 pm
The automatic annual increase ( NOT a COLA) came after a period of double digit inflation that severely impacted the existing annuitants. The average (uncompounded inflation rate 1990-2014) was 2.7%. Not much of a bonus in that AAI. Few at that time would expect that 3% would exceed inflation very often.

Comment by anon Friday, Aug 7, 15 @ 1:14 pm
JSM, I really agree with your entire premise with the exception of this:

===So called “Pension Spiking” that the meatball element dishonestly blame for the issue is negligible at best.===

Spiking isn’t the key problem with this issue, but it was done, done systematically, and in some cases continues. Given all of the problems with the pension system, nothing is truly negligible. This was (as is) a horrible practice.

I’ll accept the rest of your very well laid out thesis, but downplaying this is just as “meatball” as suggesting it’s the biggest problem with the issue.

Comment by A guy Friday, Aug 7, 15 @ 1:17 pm
See amendments to PA 88-0593. 40 ILCS 2,14,15,16,18.

Happy Friday exploring.

Alternatively, “Thanks, Steve. I never knew we got hosed that way.”

Comment by Arthur Andersen Friday, Aug 7, 15 @ 1:19 pm
The ramp was to be followed by 30 years of level percent of payroll contribution to then reach 90% funded. The changes made since then stand on their own and were not part of the original legislation. My simple point was what is happening now is not per se a product of the original legislation.

Comment by steve schnorf Friday, Aug 7, 15 @ 1:22 pm
@Aguy- do you know why the practice started in the first place? If you do, I will be very impressed. Not that you are not intelligent, just that almost no one does.

Comment by JS Mill Friday, Aug 7, 15 @ 1:22 pm
=The automatic annual increase=

There is one thing I did not read in the article (might have missed it). It is the point that compounding COLA (as it is commonly refereed) while not a major driver of the debt, according to Madair, it is the largest drive of the increasing annual cost.

It should be addressed but I believe it is protected by the constitution for Tier 1 employees. Tier 2 (another can of worms) addresses the issue moving forward.

Comment by JS Mill Friday, Aug 7, 15 @ 1:27 pm
JS-do you mean pension spiking?

Comment by Arthur Andersen Friday, Aug 7, 15 @ 1:28 pm
=JS-do you mean pension spiking?=

Yup

Comment by JS Mill Friday, Aug 7, 15 @ 1:35 pm
===JS Mill - Friday, Aug 7, 15 @ 1:22 pm:

@Aguy- do you know why the practice started in the first place?===

I know what was rationalized and winked at with regard to early retirees who hadn’t enjoyed the higher pay scale during their tenure, and with impending early retirement, a quasi-approved process was put in place to incentivize them to accept the early retirement at a more livable level. Some cases probably justified this.

The fact they got so good at it and Superintendents were even proud of what they were able to accomplish with this process belied any sincere effort.

Some got up to snuff, then pigs got fat, then hogs who should have been slaughtered…simply had to put up with some bad press. In many cases they moved anyway.

Now, I’ve simplified things very much in my explanation, but I think you’ll get the gist that I was paying attention. The first person who really alerted this to me was my Tax Attorney nearly 20 years ago. He couldn’t believe what was happening.

Comment by A guy Friday, Aug 7, 15 @ 1:42 pm
DD, you have me confused with someone else. I didn’t say Edgar’s decision was tne worst one.

Comment by Wordslinger Friday, Aug 7, 15 @ 1:42 pm
@Aguy - I agree. Every dollar put towards a spiked pension is a dollar that cannot be spent elsewhere.

When debt roll ups into the billions, folks like to downplay the millions that add to the billions.

Comment by nixit71 Friday, Aug 7, 15 @ 1:44 pm
“Underpayments between 1985 and 2012 totaled $41.2 billion, the agency calculated.” (from Crains report)

That’s the biggie and everybody knows it. And while it is clearly stated in this report they seem to harp much more on other issues that although accurate and relevant, pale in significance to the underfunding in the first place.

So is this report good. Yes, to a certain degree but it manages to provide a little of SPIN as well.

Comment by Federalist Friday, Aug 7, 15 @ 1:46 pm
@A Guy- With respect, you were paying attention, but did not fully understand what you were paying attention to.

The retirement incentive was real, to be totally factual. But while it provided additional pensionable income and helped districts with financial planning by requiring people to submit a binding retirement notice we were able to plan for personnel cost changes. The main driver of the “why” of the increase, not simply for the sake of more income but income to a specific cost incurred during retirement.

More than “padding” pensions for the sinister, money hungry reasons most think it was to help offset the cost of private health insurance that retirees would experience. At the time, teachers did not pay TRIP (pre paying insurance premiums) and the program did not exist. For those that started immediately out of college, retirement could come as early as 55. This does not include ERO people but the effect would be the same. They were not yet old enough to be eligible for medicare and even 20 years ago, health insurance was very expensive. That was the basis for the retirement incentive. provide additional dollars to cover health care. Right, wrong, indifferent, that was the genesis.

Was it misused? Sure.

Is that semantics? I would assert that it isn’t. The last time I checked, health insurance is still a huge issue and it was 20 years ago.

Comment by JS Mill Friday, Aug 7, 15 @ 1:56 pm
FYI,

State University employees were never allowed to participate in the early retirement plans.

That never seems to get mentioned.

Comment by Federalist Friday, Aug 7, 15 @ 1:57 pm
There remains a real-world difficulty in fixing the pension problem. It certainly seems that a lot of people on this blog take the approach that one must simply raise taxes to fix the problem. And certainly the court rulings to date seem to lead that way as well. But the tax increase needed to solve the pension crisis and continue state government at its typical rate of growth will be unpalatable to the large majority of Illinois residents who have no access to pensions, let alone pensions as generous as those provided by the state. Maybe the U.S. Supreme Court will provide a different solution. I don’t think anyone wants to “rob” state employees of their pensions, but modifications, particularly to the 3 percent compounding, certainly seems like a way for all to share in the pain of fixing this enormous problem.

Comment by Anon Friday, Aug 7, 15 @ 1:59 pm
nixit71- Just wondering if you are a politician, because you are misrepresenting words like one.

I wasn’t “downplaying” millions. simply pointing out that the meatball element loves to misrepresent the pension issue factors and claim that retirement incentives are the reason for the problem. It is an ignorant, usually purposeful, distortion of the truth.

Reading is fundamental. So is math.

Comment by JS Mill Friday, Aug 7, 15 @ 2:00 pm
==I know what was rationalized and winked at with regard to early retirees who hadn’t enjoyed the higher pay scale during their tenure==

But we’re continually told a pension is payback for accepting a lower salary while employed in the public sector. So if the pension alone is the payback, there should be no need for a spike.

In my school district, teachers making over $70K were getting 20% salary spikes…compounded 2 years in a row. Separately, ERO was offered as a way to trim salaries and replace “expensive” teachers with new “cheaper” ones. But what often happened was the replacement teacher already had 10-20 years experience, so the up-front salary savings never really materialized as much as they said.

Comment by nixit71 Friday, Aug 7, 15 @ 2:02 pm
Federalist - Friday, Aug 7, 15 @ 1:46 pm:

“Underpayments between 1985 and 2012 totaled $41.2 billion, the agency calculated.” (from Crains report)

Had those payments been made & invested they would have compounded to more than $115 billion - gee isn’t that closer to what needs to be made up now?

Comment by anon Friday, Aug 7, 15 @ 2:06 pm
@Anon, 1:59
You’re being way too alarmist!

Many people seem to think, as you apparently do, that the pension debt is unpayable. But in fact under the 5% income tax rate pension contributions were being made at a sufficient rate to pay the debt. That’s 1.75% higher rate than at the moment—not good, but not a disaster. (We managed with it for a few years.)

It would be much better to have a graduated income tax, which would make it possible for most people to pay LESS and the state still to take in MORE. For some reason we don’t seem to be able to change the constitution to make that possible, don’t understand why.

Comment by UIC Guy Friday, Aug 7, 15 @ 2:14 pm
The “ramp” is a cliff that increases the pension payments from an average annual contribution of 3.5% from 1996 - 2012 to 22% in 2015. The “ramp” shifts the debt from one generation (baby boomers) to the next (millennials). The taxpayers in the 1990s were sparred while the next generation can’t pay for schools, public safety or infrastructure because a quarter of their tax dollars go to retirees in Florida and Arizona. The “ramp” is the best evidence of the unconstitutional nature of Illinois pension arrangement. A $250 billion loan taken out on the future of millions of minors who were unable to vote

Comment by Chupacabra Friday, Aug 7, 15 @ 2:19 pm
That’s pretty well written and researched going all the way back to Thompson. But I think it leaves out the context of the 3% COLA. It says

“Previously, raises for retired state workers and downstate and suburban teachers had been calculated on a noncompounded basis. Thompson allowed for annual, compounding 3 percent raises for retirees beginning Jan. 1, 1990, after what one lawmaker described during floor debate as a letter-writing campaign from ‘really underpaid retired teachers.’”

As I remember it, before 1989 there were no colas and as years would go by, the value of the pensions would erode and the GA would then have to pass a bill giving everybody a cost-of-living bump that would look huge because it covered many years which made it politically hard to do. The 3% automatic COLA was meant to get the GA out of having to do it. It also followed years of very high inflation. I think the 3% was thought to be low at the time. They should have said 3% or the CPI whichever is lower. The CPI was higher than 3% in the 15 years before, except for 1986 recession.

CPI
1972 3.2%
1973 6.2
1974 11.0
1975 9.1
1976 5.8
1977 6.5
1978 7.6
1979 11.3
1980 13.5
1981 10.3
1982 6.2
1983 3.2
1984 4.3
1985 3.6
1986 1.9
1987 3.6
1988 4.1
1989 4.8
1990 5.4
1991 4.2
average 6.1

Comment by Mugwump Friday, Aug 7, 15 @ 2:30 pm
I don’t mean to be alarmist, but UIC guy if the 5 percent rate was the panacea, why is this true?

Between fiscal years 2008 and 2012, the funded ratio of Illinois’s state-administered pension plans decreased from 54.3 percent to 40.4 percent. The state paid 76 percent of its annual required contribution, and for fiscal year 2012 the pension system’s unfunded accrued liability totaled $94.5 billion. This amounted to $7,421 in unfunded liabilities per capita.

Comment by Anon Friday, Aug 7, 15 @ 2:32 pm
anon 2:32 I’m not sure what you mean by the 76% comment. I am under the impression that the state paid 100% of its statutorily required contribution during that period.

Comment by steve schnorf Friday, Aug 7, 15 @ 2:38 pm
Anon “modifications, particularly to the 3 percent compounding, certainly seems like a way for all to share in the pain of fixing this enormous problem.”

Your ’solution’ does not share the pain! The pain is all on the pensioners! You need to actually do the math. What you will find, much to your frustration I suspect, is that the pension costs are not as unreasonable as you and others portray them. The fact is that the state was making the full required payments until the income tax was rolled back.

BTW don’t look for the USSC to bail Illinois out of its pension debt. The U.S. Constitution is pretty firm on contract law in this regard. Dream on!

Comment by Old and In the Way Friday, Aug 7, 15 @ 2:39 pm
Tight summary of how we got to where we are
We have had a series of governors and general assemblies willing to kick the can until later.
Sad to hear they were so uninformed when they voted. Here comes Tier Three.

Comment by Jake From Elwood Friday, Aug 7, 15 @ 2:45 pm
Schnorf, I think he’s talking about the “ARC” or actuarially required contribution, which is a GASB reporting requirement and is a 30 year level amortization calculation.

But I’m not a pension expert or anything like that.

Comment by Arthur Andersen Friday, Aug 7, 15 @ 2:49 pm
AA, I also suspect he is, but either he is unable to make his point with clarity or he doesn’t know the difference and I am impatient by Friday afternoons. One is actuarially sufficient, the other is required by law. As you and I and several others on here know, the actuarially sufficient number is geared toward meeting a different standard that is not legally required.

Comment by steve schnorf Friday, Aug 7, 15 @ 2:58 pm
Old and in the way: with a quarter of the budget going to pensions, I hardly think all of the pain is on the pensioners. BTW, I am a state worker who qualifies for a pension, but I also took personal responsibility for my retirement by saving money, I realize that appears to be a novel prospect but it actually is possible and works.

Comment by Anonymous Friday, Aug 7, 15 @ 3:00 pm
@JS Mill-I didn’t think I was calling you out specifically on that. My apologies.

But I stand by my point. No one can deny the employer portion is the biggest share of that debt. But the pension spike is one of the other minor components. And it all adds up to one big debt.

For example, if the employer portion is 90% of the debt, then all taxpayers share in that burden. But if spiking was 10% of that debt, why should the taxpayer share that burden? That falls completely on the pensioner. Are we working to recoup that money? Doesn’t look like it.

How about a 1% point increase on pension contributions to pay for spikes in the past? That’s no different than raising the income tax to pay down pension debt. But one of those will surely happen while the other surely won’t.

Comment by nixit71 Friday, Aug 7, 15 @ 3:05 pm
“- nixit71 - Friday, Aug 7, 15 @ 11:16 am:

Eventually, this debt’s going to come due, folks. So, you know, realize that in this bill there are all kinds of windows that have been opened for all kinds of people… special situations that everybody around here has asked for. But the fact of the matter is, that doesn’t cost much. What really costs the money is the 3 percent compounding. I have no objection to it, if you want to set aside a billion dollars to pay pension benefits, But if you don’t, then maybe you’d better back off a little bit.

State Sen. Calvin Schuneman, R-Prophetstown, June 30, 1989″

A prophet from Prophetstown. A cost of living allowance that has nothing to do with the actual cost of living. It will end eventually, that I will prophesize.

Comment by Striketoo Friday, Aug 7, 15 @ 3:05 pm
It comes due every single day, year in and year out, and not a single payment has ever been missed

Comment by steve schnorf Friday, Aug 7, 15 @ 3:10 pm
word,

I should have separated the mention of Edgar’s decision being the worst out and placed it in another paragraph.

I have not seen where anyone can describe how and why Edgar’s ramp was so bad. Not that it matters - it’s old news.

Still, other than adopting something similar I don’t see how the problem can be managed without something similar (something that can be easily ignored by future elected politicians) being put into place unless the state borrows the $100 billion dollars to bring the state up to the 90% funding level being touted as the absolute bottom basement level needed.

Comment by dupage dan Friday, Aug 7, 15 @ 3:12 pm
dd, there’s great debate on what level of funding is necessary to be reasonably safe. 90% is certainly not the minimum number in many experts’ minds. I’m far from an expert, but I would personally be comfortable with anywhere between 80 and 100%, maybe 75%. Those numbers look very good when you’re below 50.

Comment by steve schnorf Friday, Aug 7, 15 @ 3:19 pm
=My apologies.= Appreciated, and you have mine if I was presumptuous.

=That’s no different than raising the income tax to pay down pension debt. But one of those will surely happen while the other surely won’t.=

Closing corporate welfare for one year would be enough to recoup that cost for ever. bet that one does not happen either.

=I would personally be comfortable with anywhere between 80 and 100%, maybe 75%=

I think 70-80% would be adequate and, I have been told that is in the range of industry standards. If that is true then why not go there?

Comment by JS Mill Friday, Aug 7, 15 @ 3:28 pm
@anon - Friday, Aug 7, 15 @ 2:06 pm:

Federalist - Friday, Aug 7, 15 @ 1:46 pm:

“Underpayments between 1985 and 2012 totaled $41.2 billion, the agency calculated.” (from Crains report)

Had those payments been made & invested they would have compounded to more than $115 billion - gee isn’t that closer to what needs to be made up now

Yep. that’s the point!

Comment by Federalist Friday, Aug 7, 15 @ 3:30 pm
Interesting that no politicians has offered for pensioners to freely trade their 3% annual compounded for a CPI-U, which for now is lower.

Don’t know how many pensioners would take the offer but, again, it has not been offered.

Comment by Federalist Friday, Aug 7, 15 @ 3:38 pm
I’ll keep 3% AAI. As RNUG has pointed out several times on this topic the COLA for any given period of time has averaged anywhere from 2.9% to 3.1%

Comment by Pacman Friday, Aug 7, 15 @ 3:54 pm
The article covers a lot of bases and history. It places the mess in context of republican and democratic legislative control.

Another piece of information that would have been helpful would be to assign the portion of the $107 billion unfunded liability to each action.

For example, the annual increase went from 3% simple to 3% compounded in 1989. Had it stayed as a simple (non-compounded) increase how much of the unfunded liability would disappear? TRS employee contributions were 8% in 1988 and are 9.4% now - would they have increased without the compounding 3%?

An annuity calculation shows that 4% more is needed for a 3% compounding versus 3% simple annual increase. The current actuarial liability for all five pension funds is $243.8 billion. It would be $234.1 billion if the 3% increases were simple instead of compounded (4% less) - a cost reduction of $9.7 billion. Theoretically, this would reduce the unfunded liability to $94 billion - and the % funded would increase from 42.9% to 44.6% (using market value of assets).

So - from the above the benefit increase in 1989 providing 3% compounded annual increases makes up 4% of the total actuarial accrued liability. The funded ratio would increase 1.7% if it had never been granted.

Comment by archimedes Friday, Aug 7, 15 @ 3:56 pm
Arch, don’t try to be an actuary. It ain’t that simple and I’m too fried to explain it.

Read some TRS CAFRs. They’re the most comprehensive and will among other things, explain to you when and why the member contributions increased.

Comment by Arthur Andersen Friday, Aug 7, 15 @ 4:34 pm