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* UPDATED x1 * One hand giveth while the other taketh away

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* Amanda Kass has been working on another white paper about pensions and posted about one aspect of it on Twitter. I’ve copied and pasted her tweets into one post, but click here to read it online…

One big trend I see throughout the legislative history is a sort of sleight of hand.

A pension crisis narrative emerges that focuses on the finances of the pension systems using one or two metrics (the funded ratio and/or unfunded liabilities) and a flurry of speeches, op-eds, etc about how the crisis is dire and must be solved immediately ensues.

But these same speeches and op-eds also touch on a second, related issue: pension payments in context of the state’s operating budget, and concern that payments are burdensome + crowding out other areas of the budget.

The sleight of hand occurs when legislation is passed that cuts the state’s required pension payments, but in such a way that that same legislation can also be used to claim the pension crisis is solved.

A prime [example] of this sleight of hand is the [Jim Edgar] 50-year pension ramp, which replaced PA 86-273. That state’s [required] contributions under that prior law were higher, but payments were subject to the annual appropriation process + lawmakers simply didn’t adhere to the payment schedule.

Rather than just make the [required] payments lawmakers elected to scrap the existing plan and put in a new 50-year one that started out with a fifteen year ramp period. So not only did this lower the [required] payment, but it kicked paying down unfunded liabilities decades into the future.

Lawmakers also made the pension contributions under the new 50-year plan subject to a continuing appropriation, which meant that if they failed to appropriate the payments during the budget making process the payments would still get made.

Passage of the 50-year funding plan was touted as a good compromise that fixed the pension mess… even though the state’s payments to just TRS would have been an estimate $400 million more under the old law.

And while the continuing appropriation was a good measure, state lawmakers can change the state’s payments through legislation. Precisely what [happened] w/PA 94-4, which cut the state’s pension payments for FY2006 + FY 2007 [under Blagojevich].

*** UPDATE *** Rep. Rob Martwick (D-Chicago)…

This year, despite the availability of more attractive assignments, I decided to remain the Chair of the House Committee on Personnel and Pensions. I decided to stay with pensions because more than ever, I believe that Illinois’ future will be determined by how we deal with out pension debt. Name a problem that the state is dealing with. I bet that at least 9 out of 10 times, I can show you how our inability to handle our pension debt has caused that problem or made it worse. If we are to solve Illinois, we must solve the pension debt crisis.

As I read Amanda’s thoughts, something echoed in my mind. Nearly every solution that has been ever been proposed to deal with pensions has involved putting LESS money into the fund, not more. Whatever your political persuasion, there is one undeniable fact: If you try to pay off a debt by putting less money toward that debt, you will not succeed. Whether it was the Edgar ramp, the Blagojevich pension holidays, we have constantly tried to lower the payment in order to solve whatever our crisis of the moment is. Until we commit money into front loading the repayment schedule, we will only make the problem worse. In my role, I will continue to push for math based solutions that solve the problem. No one wants a tax increase. No one.

However, I believe that our citizens will support us if we actually solve problems. According to COGFA, adding $1B per year to the annual pension payment would cut 7 years off the repayment schedule, reaching 90% funding by 2038 instead of 2045, saving the taxpayers $60 billion in repayment costs.

Under this scenario, the payment in 2039 would drop from approximately $16 billion to about $2 billion. That $14 billion dollar annual budget windfall could be used to pay for an increased investment in K-12, higher education, infrastructure, and social programs. It could even be used to pay for a tax decrease. Imagine that. Instead of just empty promises that certain legislators make to “fight” for lower taxes, we could provide a plan to pay for one.

We can and should consider to look at creative ways to manage the repayment so that we can find any and all savings possible. That’s what Rep. Batinick and I did with pension buyouts, and I will always be open to new and creative ideas like reamortization, consolidation and bonding. However, I will continue to advocate for additional funds. The sooner we pay down our debt in a responsible manner, the sooner we will return Illinois to a fiscally responsible state on the path to prosperity.

posted by Rich Miller
Thursday, Jan 24, 19 @ 9:45 am

Comments

When you hear 50 year plans from politicians … forget it. Today’s politicians can’t tie the hands of future politicians.

Comment by Steve Thursday, Jan 24, 19 @ 9:49 am
Oh but Steve, they do. And their children and grandchildren’s tax dollars as well. They’ll be on untaxed retirement income anyway. Meanwhile tier 2 state workers pay the bill. Nice. At least it was bipartisan.

Comment by Anonymous Thursday, Jan 24, 19 @ 9:55 am
Steve,

What about Mayor Daley’s 99 year parking meter deal?

Comment by Anon E Moose Thursday, Jan 24, 19 @ 9:56 am
Same as it ever was.

Unless you bond out the debt, future GAs and governors are always going to be tempted to short the contributions.

That said, there’s been a pension “crisis” in this state for 100 years, yet no one’s missed a check yet.

http://www.illinoissenatedemocrats.com/images/PDFS/2014/il_public_pension_reform.pdf

Comment by wordslinger Thursday, Jan 24, 19 @ 9:57 am
And the great Jim Edgar lectures us that under his administration there was a budget surplus.

but they did not make the actuarially required pension payments

Comment by Lucky Pierre Thursday, Jan 24, 19 @ 9:57 am
Yeah right Wordslinger

What do you mean I don’t have any money I still have checks in my checkbook?

Comment by Lucky Pierre Thursday, Jan 24, 19 @ 9:59 am
Politicians can’t plan beyond the next election and corporations think in terms of the next quarter. Long range may be long gone.

Comment by Anonymous Thursday, Jan 24, 19 @ 9:59 am
Of course, if the world is ending in 12 years, short term planning makes sense.

Comment by Anonymous Thursday, Jan 24, 19 @ 10:00 am
YET the very operative word, Word.

Comment by Anonymous Thursday, Jan 24, 19 @ 10:02 am
Not sleight of hand. It was, and still is simply robbing peter, then robbing him again, and again. They wanted social programs, and they robbed the system to pay for them. Over the years they have created their own problem, now they want the people they stole from to help fix that problem.

Comment by Retired Educator Thursday, Jan 24, 19 @ 10:04 am
Bonding out the debt, that’s still an option that forces a hand a bit more than a ramp of any kind, Edgar’s or otherwise.

The earliest the progressive income tax, (which is far from a slam dunk given the hoops and timetables) could be is 2021, so while Pritzker is wanting to spend a great deal of current and future monies, including legal Mary Jane to help pay for some of it, at some point, the ledger says what it says and revenue and liabilities are both challenges, let alone new spending wants.

Creative financing in the end still means making payments and a goal of lowering debt.

Comment by Oswego Willy Thursday, Jan 24, 19 @ 10:04 am
Amanda is going good work highlighting stuff most people don’t think about.

Part of the problem is the perception; now that the State is (mostly) complying with generally accepted accounting practices is the problem is more visible. But we’ve been muddling along, sometimes well funded, sometimes not, with this issue for over a hundred years.

But the standards were created for private, commercial businesses. One thing I’ve never come across in my reading is what is an acceptable level for pension funds whose sponsors can’t go bankrupt, like State government. Would a lower funding level, like 60% of 70%, be acceptable?

The other thing Amanda is highlighting is the failure of the 1970 Con-Con Pension Clause drafters. They thought just guaranteeing the pensions would be enough to scare the General Assembly into fiscal prudence. It didn’t work. I wonder if, in retrospect, those drafters wished they had put in a requirement for annual actuarially determined payments?

Comment by RNUG Thursday, Jan 24, 19 @ 10:05 am
==I wonder if, in retrospect, those drafters wished they had put in a requirement for annual actuarially determined payments?==

Agreed with everything RNUG, except this last sentence. I don’t wonder about this at all. Is it even debatable with their original intent that they wished they added one final safeguard?

Comment by A guy Thursday, Jan 24, 19 @ 10:09 am
The previous governor tried to sell us magic beans: cut taxes, strip workers rights and slash government worker pay and benefits, and we’ll attract so much business that the tax revenue will pour in. The tax cut approach backfired in Kansas, Oklahoma and Louisiana, causing fiscal shortfalls. The federal tax cuts also hurt revenue. In Illinois, we lost jobs in 2015, the year the state income tax rate dropped.

We need to focus on paying the pension debt. Our best bet is to raise revenue, through a progressive income tax, closing corporate tax loopholes and other stuff. Pension cuts have already been passed for new workers, and Democrats almost certainly won’t pass a CA to take away the pension protection clause for older workers.

Comment by Grandson of Man Thursday, Jan 24, 19 @ 10:10 am
===They wanted social programs, and they robbed the system to pay for them===

You don’t have to be such a classist bigot.

Comment by Rich Miller Thursday, Jan 24, 19 @ 10:12 am
I am stating a fact. Remember Blagos “All Kids” program. They shorted the retirement program to pay for a useless program. Save your nonsense for someone else. The attack is beneath you and this blog. If you don’t agree just say so, there is no need to get nasty..

Comment by Retired Educator Thursday, Jan 24, 19 @ 10:19 am
- Anon E Moose-
The parking meter situation is about the only thing I can think of where future politicians got their hands tied. I will admit you are right on this one.

Comment by Steve Thursday, Jan 24, 19 @ 10:20 am
RNUG - In 2011 Fitch Ratings produced a white paper with this in the summary: “Fitch generally considers a funded ratio of 70% or above to be adequate and less than 60% to be weak.” This was in the same paper that identified Illinois as problematic, “In the universe of state defined benefit pension systems, those of Illinois are clearly the most strained, despite the issuance of pension obligation bonds.” I don’t know if they’ve provided more recent statements about targets for pension adequacy.

Comment by muon Thursday, Jan 24, 19 @ 10:25 am
I think we all can agree that the money that didn’t go into the pensions went toward all kinds of things. Some things were absolutely necessary, some wouldn’t have been done if increased taxes were mentioned, some were just plain wasteful. The categories crossed all areas of state spending.

Now, the time has come to pay the pension fund back. It’s not rocket science. Everyone in the state was warned via court rulings fleshing out what the intentions of the legislation was.

Comment by thoughts matter Thursday, Jan 24, 19 @ 10:31 am
Funding the operating budget by spending long-term savings for short term needs is what households do all the time. The car breaks down? No money goes into the savings plan. Kid needs braces, etc. Illinois has been doing it since, well, practically forever. The federal government is doing it too, with Social Security.

Some day there’s going to be a reckoning and it isn’t going to be pretty.

Comment by 47th Ward Thursday, Jan 24, 19 @ 10:56 am
Great brief from Amanda. That 50 year ramp is almost criminal. Not living up to it is immoral.

But lets keep celebrating the way good old Edgar governed, knowing how to make great deals and such.

Comment by allknowingmasterofraccoodom Thursday, Jan 24, 19 @ 10:59 am
–Yeah right Wordslinger

What do you mean I don’t have any money I still have checks in my checkbook?–

I have no idea what you think you’re responding to. Did I post something inaccurate?

Comment by wordslinger Thursday, Jan 24, 19 @ 11:06 am
The pensions weren’t adequately funded and the government was deceitful about it. It took a Phd candidate to research that?

Comment by Driveby Thursday, Jan 24, 19 @ 11:06 am
==One thing I’ve never come across in my reading is what is an acceptable level for pension funds whose sponsors can’t go bankrupt, like State government. Would a lower funding level, like 60% of 70%, be acceptable?==

The “acceptable” funding percentage of a pension is merely a product of a pension plan’s discount rate and expected rate of return. It has absolutely nothing to do with an entity’s solvency.

A corporation can use an 80% funding target because they use a lower discount rate than expected rate of return. That means their pension obligation will grow at a slower rate (discount rate) than the rate at which assets are expected to grow (rate of return). By the time payment is due (retirement), the difference is no longer there. That’s why it’s safe for them to hold less pension assets than pension obligations or, in this case, 80%.

Public pension plans use the same percentage for both. GAAP tells us that means only 100% funding is acceptable. Yes, 100%. Finance 201 (or Intermediate Accounting 350, I forget which one).

Comment by City Zen Thursday, Jan 24, 19 @ 11:06 am
===One thing I’ve never come across in my reading is what is an acceptable level for pension funds whose sponsors can’t go bankrupt, like State government. Would a lower funding level, like 60% of 70%, be acceptable?===

I have some experience reviewing govt GAAP financial reports and always thought that an acceptable funding level for state/local govts was 65-70%. Although admirable, I always though the IMRF 100% funding requirement was overly conservative.

Comment by Justactizen Thursday, Jan 24, 19 @ 11:20 am
But, but, but…I thought it was due to the teachers receiving lavish benefits and “pension reform” would take care of everything. /s

Comment by Jocko Thursday, Jan 24, 19 @ 11:21 am
Good points to raise but hardly something new. I guess We can thank Edgar for the great blame game we are now in. If we really want to look at the issue in depth look at the sagacity of the pension language from 1970 Constitution

Comment by Donnie Elgin Thursday, Jan 24, 19 @ 11:32 am
IMRF is close to 100% funded. How could that be? Legally not allowed to divert fund or not pay required amount into fund. Just imagine how healthy the other pension funds would be if legislature had been required to make payments and investment interest had accrued over the decades. While this is old material, it bears pointing out (again) who created this debt and who needs to remedy it without punishing those who are mandated to pay their own income share into the funds and always have.

Comment by Anonymous Thursday, Jan 24, 19 @ 11:58 am
===Legally not allowed to divert===

Also, increases are not compounded.

Comment by Rich Miller Thursday, Jan 24, 19 @ 12:01 pm
== Also, increases are not compounded ==

True. But I believe IMRF does hand out 13th month “bonus” checks most years.

Comment by RNUG Thursday, Jan 24, 19 @ 12:46 pm
=But I believe IMRF does hand out 13th month “bonus” checks most years=

Yep. At least for the last seven (since I retired). It generally comes to just under 30% of my regular payment.

But note (from the IMRF website):

“The 13th payment amount is getting smaller every year. The pool of money available for the 13th Payment is a percentage of the total amount of IMRF employers’ payroll. Employer payroll amounts are based on the number of employees working. Since the number of retirees eligible for the 13th payment is growing faster than the number of members currently working, a larger amount of people must share a smaller pool of money.”

Comment by JoanP Thursday, Jan 24, 19 @ 1:04 pm
It’s not ok to blame the victims. The funds are short not because recipients get compounded increases. They are short because trusted so called fiduciaries of their money scammed them.

Comment by Anonymous Thursday, Jan 24, 19 @ 1:05 pm
Thanks to Rich for posting my thread, and my co-authors and I are hoping to get the paper out in the next week or two.

RNUG–you mention the changes in accounting rules and how this makes what’d already been an existing problem more visible. I have been thinking about this a lot, and hope to do a future project on the history of accounting rules.

To RNUG’s Q about what is a healthy funding level. Several things going on here. The funded ratio is used as a barometer of a pension fund’s health and for setting the funding policy. In general I think more rethinking about how to differentiate healthy vs. unhealthy pension funds is needed beyond just debating the funded ratio. The paper goes into this topic a bit. At the same time though, if we say that 60% is healthy, then lawmakers will use that as justification to lower the funded ratio target, in-turn reducing the state’s req. contributions.

Comment by Hi, it's Amanda Thursday, Jan 24, 19 @ 1:07 pm
COGFA’s March 2018 report on the health of the state retirement systems (https://tinyurl.com/ybrytwq3) describes the combined systems as being 40.4% funded at the end of FY2018 (June 30, 2017). The current ramp is intended to reach 90% funded ratio by the end of FY2045 (June 30, 2044). The combined systems are projected to reach a 65% funded ratio in FY2039. I think that the “crisis” goes away by simply re-amortizing the debt (pushing the deadline farther into the future) and changing the target funding ratio to something more reasonable- such as the 65% percent figure used by other posters. Remember that Tier 2 is paying more than actuarily required for their own benefit. Tier 2 is paying a portion of the debt for Tier 1.

Comment by regular reader Thursday, Jan 24, 19 @ 1:09 pm
=IMRF is close to 100% funded. How could that be? =

The payments from employers are made directly to IMRF and never pass through the State Legislatures hands.

60%-70% would be fine for funding level. The current level has been roughly the same since 1970.

The “crisis” started when Quinn started making the full payment. The state was not generating the revenue required and that led to the income tax going to 5% from 3%. Then the pearl clutching really started.

Comment by JS Mill Thursday, Jan 24, 19 @ 1:14 pm
Granted the USPS has many reasons why it continues to struggle in an increasing paperless messaging world, but the requirement to fund their pension obligations at 100% is contributing to their struggles.

Do the suggested funding ratios being bandied about take into consideration the increasing ratio of Tier 2 vs Tier 1 pensions and that contributions by Tier 2 recipients exceed Tier 2 obligations?

Comment by Tommydanger Thursday, Jan 24, 19 @ 1:29 pm
More from the Pension Mental Gymnastics right after these messages…

Comment by City Zen Thursday, Jan 24, 19 @ 1:29 pm
Unpopular for sure but I would like to see a tax on pensions with a sunset date of three years or so which would somewhat force those that have benefited from the past under-taxation shoulder part of the burden of making up those payments.

Also props to Rep. Martwick for his approach to addressing this issue. He has been consistent in insisting that any proposed solution be supported by…math. What a concept.

Comment by Original Rambler Thursday, Jan 24, 19 @ 1:41 pm
A 16 billion dollar annual pension payment in 2039?

That is some ramp, more like Half Dome in Yosemite

Comment by Lucky Pierre Thursday, Jan 24, 19 @ 1:43 pm
== Unpopular for sure but I would like to see a tax on pensions with a sunset date of three years or so ==

To make it more palatable, maybe put it at a lower level for a longer period, or ex got the first $40k - $50k and somehow ramp down the tax over 10 to 20 years.

Whatever was done, the bill authorizing it should (a) dedicate this tax to the 5 State pension funds and (b) be 100% explicitly clear this money is in addition to the normally scheduled payments.

Comment by RNUG Thursday, Jan 24, 19 @ 1:49 pm
funny, he mentions his pension buyout plan,sure but the latest posting on it show buyouts between $80 and $100k?????? ok,not sure on the top end but nobody took an $80 buyout..come on

Comment by jimmydean Thursday, Jan 24, 19 @ 2:12 pm
===nobody took an $80 buyout..come on ===

It’s in the report.

Comment by Rich Miller Thursday, Jan 24, 19 @ 2:13 pm
believe what you read about report. theres buyouts greater than 100k..much greater..

Comment by jimmydean Thursday, Jan 24, 19 @ 2:18 pm
==Would a lower funding level, like 60% of 70%, be acceptable?==

Acceptable in what way, exactly? Personally, I want performance that minimizes the amount of public money that has to go toward contributions, and for the funds to weather recessions better.

Comment by yinn Thursday, Jan 24, 19 @ 2:38 pm
Whatever a new revenue source would be dedicated to paying toward the pension funds, you really need to consider that if our legislature has any hand on that dedicated money, it will somehow NOT find it’s way toward the pension funds. This seems to be the status quo. A very good reason not to allow your children or grandchildren pursue a career in this state’s service.

Comment by Anonymous Thursday, Jan 24, 19 @ 2:39 pm
Jimmy
Where can the report be found

Comment by Anonymous Thursday, Jan 24, 19 @ 2:56 pm
Lucky Pierre, we are already planning on a $16 billion payment in 2039. And more in the last several years. Link: https://drive.google.com/file/d/1fX6i_4CqcC27X1IT3LyNTTEccN3b-U4W/view

Rep Martwick is suggesting paying more now to pay less later.

Comment by Perrid Thursday, Jan 24, 19 @ 3:04 pm
Having a funded ratio of 70+% might be adequate, but it is not an adequate target. If you target 70% and your assumptions get off course you can end up in bad shape.

==RNUG - In 2011 Fitch Ratings produced a white paper with this in the summary: “Fitch generally considers a funded ratio of 70% or above to be adequate and less than 60% to be weak.”==

Comment by The Original Name/Nickname/Anon Thursday, Jan 24, 19 @ 4:25 pm
sure would like to know when the Governor is going to sell the bonds for the buy out. they keep changing the date, we heard Feb. then March and now June. What is the hold up?

Comment by retired state worker Thursday, Jan 24, 19 @ 5:21 pm
“That said, there’s been a pension “crisis” in this state for 100 years, yet no one’s missed a check yet.”

This is just as misleading as the first time you said it. The state has missed countless bill payments–I guarantee you, with 100% certainty, that those checks have been missed. I’ve gotten an earful from some of those vendors myself, even though I am not in a position to do much about it.

I assume you are basing your misleading statement on the fact that a *pension check* has never been missed. The ability to pay SOME of your bills is not the standard here.

Comment by Liandro Thursday, Jan 24, 19 @ 6:02 pm
===At the same time though, if we say that 60% is healthy, then lawmakers will use that as justification to lower the funded ratio target, in-turn reducing the state’s req. contributions.===

Agree that 65-70% should not be the ‘target’. Just saying that governmental reports that I have reviewed with audited financials showing a funded status at that level generally don’t consider the pension system(s) to be in financial peril.

Comment by justacitizen Thursday, Jan 24, 19 @ 7:25 pm
–“That said, there’s been a pension “crisis” in this state for 100 years, yet no one’s missed a check yet.”

This is just as misleading as the first time you said it. The state has missed countless bill payments–I guarantee you, with 100% certainty, that those checks have been missed. I’ve gotten an earful from some of those vendors myself, even though I am not in a position to do much about it.–

LOL, I’m sorry, Liandro, I guess I should have written slower.

I. Meant. Pension. Checks.

What did you tell those vendors complaining during squeeze-the-beast the last four years, when $12 billion was piled on operating debt?

Vote Rauner?

You did, didn’t you?

Comment by wordslinger Thursday, Jan 24, 19 @ 9:13 pm
Let’s ignore your Rauner straw man (sure didn’t), and focus on the substance.

You claim that the state’s ability to pay their pension checks means there is no crisis in the pension system…despite multi-governor issues the state has had in paying education bills, mental health bills, social service bills…right on down the list. But what HAS grown during that period? The percentage of the budget that is pension payments. How is that any different, in terms of a budgetary feasibility, than if the state paid all it’s other bills and instead skipped pension payments?

Your. Point. Is. Budget. Nonsense.

If I promise to pay something I can’t afford, then successfully make my payments…while falling behind on my water bill, electric bill, student loans, and assorted credit card debt…that does NOT mean I could afford that expense. It is still a financial crisis.

Your point is misleading at best, no matter how slowly you spell it out, and condescension doesn’t make it any less misleading. Neither does repetition.

Comment by Liandro Thursday, Jan 24, 19 @ 9:38 pm
Follow the money (or lack thereof). Illinois HUGE pension shortfall has created financial liabilities for Illinois that has severely impacted the bond rating, which in turn cost more to borrow, which then limits programs that can be funded and so on and so on. We are talking about real money that is simply wasted because of the the States abysmal bond rating. Billions are wasted that could have been spent elsewhere. The continued kicking the can has had implications for decades now the real cost are showing up.

Comment by NorthsideNoMore Friday, Jan 25, 19 @ 3:31 am
“percentage of the budget that is pension payments.” Liandro, how about the percentage of pension payments that actually go to retirees? Better to check that out and then ask yourself what’s been growing, and why?

Comment by illinoyed Friday, Jan 25, 19 @ 5:52 am
Liandro, the State does not pay pensions. The pension funds pay pensions.

As far as I’m concerned, if the pensioners are getting their checks on time and in full, whatever difficulties the funds may have do not constitute a “crisis”.

Furthermore, one has to ask if the accounting standards that define the State’s “unfunded liability” really should apply.

Nearly a century of pension payments in full. Crisis?

Comment by Robert M Roman Friday, Jan 25, 19 @ 6:22 am
Extend the income tax to pensions as other states have done with a low-income exclusion.
Then enact a Tier II for new migrants, reducing social services.

Comment by Henry 65 Friday, Jan 25, 19 @ 7:02 am
==one has to ask if the accounting standards that define the State’s “unfunded liability” really should apply.==

Why have accounting standards at all? Just stop reporting liabilities altogether. Problem solved.

Stunning displays of mental gymnastics with pensions. We’re talking Eastern bloc quality here.

Comment by City Zen Friday, Jan 25, 19 @ 8:52 am
–Stunning displays of mental gymnastics with pensions. We’re talking Eastern bloc quality here.–

Almost as stunning as those who pretend that the fact the funds aren’t at 80% keeps them up at night.

So worried that a fund might fall short in 20 years? Such long-range thinkers.

The right-wingers supposedly worried about the pension “crisis” have always been about looking for a grifter out to renege on existing debt and contracts. It’s a thing for them, despite the Constitution and the Supremes interpretation of it.

They’re only slightly ridiculous as those who constantly flog a tax on retirement income — an idea that does not have one sponsor among the 177 members of the GA.

So…. childish and unrealistic.

Comment by wordslinger Friday, Jan 25, 19 @ 9:29 am