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* From a recent op-ed by Dick Ingram, the executive director of the Teachers’ Retirement System of Illinois…
The facts are indisputable. Over the next 30 years, the state will owe retirees in excess of $140 billion, but Illinois has less than $54 billion in the bank right now to meet those long-term obligations. The “unfunded” portion of that liability creates tremendous pressure on state government because it essentially triples the annual cost of public pensions to taxpayers; money that could be spent on other services.
Despite what you may read elsewhere, the real problem here is not the actual cost of annual retirement benefits. It’s the amount the state owes to the future.
* The Question: Do you think the state should follow national norms and strive to have 90 percent of the next 30 years of pension payments on hand right now? Explain.
posted by Rich Miller
Wednesday, Jan 25, 12 @ 12:28 pm
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No, I’m with you on the illogic of this requirement for a state government versus a private enterprise. At no time is the entire pensioned state workforce going to require simultaneous payout. Nobody understood or cared what the 90 percent commitment really would mean when that bill was passed and signed. Now we see that it’s burdening our recovery and causing a lot of misery to the common people. A shallower “ramp” and a lower percentage target would do much to plug the deficit without the struggle of passing more tax increases or cutting more key services. If I was a gubernatorial candidate, this would be a centerpiece of my strategy.
Comment by Newsclown Wednesday, Jan 25, 12 @ 12:36 pm
Probably not but rather then the legislature engaging in a number of senseless political haerings, The State should require each Fund to engage a firm such as Black Rock and obtain a meaningful investment plan- The Pension Systems may have been able to eke out avarage returns near or above their target rates but with such a massive future obligation it is time to substitue a respected firm for the lay Boards in terms of investment strategies
Comment by Sue Wednesday, Jan 25, 12 @ 12:39 pm
90% seems too high. Many of the folks who will need receive benefits over that time have yet to retire. Also, the investments should show some kind of return. I think the system needs to balance its finances between returns on investment and pay-as-you-go. I do not know what the correct mix is, but 90% of the next 30 years liability seems too high.
Comment by Pot calling kettle Wednesday, Jan 25, 12 @ 12:40 pm
In the private sector, pension trustees are held to criminal penalties if they dont at in a prudent manner. From the Edgar years till Blago there has always been the tendency to not make payments.
I dont see the state being under criminal penalties for not doing what they should. So unless some judge somewhere is going rule that the state HAS to set aside money and make good o. It essentially taking over a large part of the bugetaru process. I dont see that happening.
So the last question, is should we move to instead on 30 COH for liabilities, shuld the annual pension payment for benefits, just be a line item in the budget.
This year we need $XX for pension checks and walk away, knowing that we are not going anywhere the state unlike a business isnt going into chapter 7
Comment by Todd Wednesday, Jan 25, 12 @ 12:43 pm
Well, my first reaction is that if earnings hit their approx 8% goal, all future benefits can be paid out of earnings, without touching principal and without additional state contributions.
A little simplistic, granted, but it would appear to be the math. That doesn’t seem too scary, does it?
Comment by steve schnorf Wednesday, Jan 25, 12 @ 12:47 pm
It would be so convenient, Rich, to agree with your stated opposition to the 90 percent funding level. Fortunately, though, we have solid experience with this question, and it tells us that without mandated discipline, lawmakers fall into the seductive thinking that, for some reason they never can explain, it’ll be easier for tomorrow’s taxpayers to fund today’s obligations.
In 1986, state budget director Robert Mandeville told the Chicago Tribune that fully funding the pension system “doesn’t make sense” because earnings on assets would more than cover any shortfall in government contributions. That thinking justified several pension holidays and invited the present funding mess.
If we won’t reduce the future obligation to today’s employees by reducing future benefits to today’s employees, then we need to be responsible for that choice. We’ve already pushed more than enough debt onto our children. And their children.
Comment by Fight Fair Wednesday, Jan 25, 12 @ 12:50 pm
===From the Edgar years till Blago there has always been the tendency to not make payments. ===
Todd, the reason the pension language is in the state Constitution is because the state wasn’t making its pension payments when the Constitution was drafted 40 years ago. It never made enough payments, going back to the early 1950s at least.
Comment by Rich Miller Wednesday, Jan 25, 12 @ 12:51 pm
Well, I have a bias here, since this is my husband’s retirement and when I retire (from a job with no defined pension benefit) in two years will be our main source of income. But yes, 90% is probably higher than a prudent investor would require. But we sure need a lot more than we have now.
Comment by Ann Wednesday, Jan 25, 12 @ 12:52 pm
it is something that we need to start working towards. it would be nice to have a separate revenue source for these payments, but this is illinois, so…
Comment by bored now Wednesday, Jan 25, 12 @ 12:54 pm
we’re going to have to think outside the box on this issue, because inside the “box” (common wisdom and practice) there is no do-able solution. Period.
Comment by steve schnorf Wednesday, Jan 25, 12 @ 1:00 pm
Many years ago, Stanley Weinberger was the Executive Director (and respected sage) of the original Pension Laws Commission. Based on the best actuarial opinion, he always referred to a 70% target, assuming that employee/employer contributions and investment earnings would be regular and sufficient to cover normal costs. The 90% target seems arbitrary and not well-grounded in actuarial terms.
Comment by Anal Wednesday, Jan 25, 12 @ 1:01 pm
80% is a golden number with pension actuaries. If Illinois split the difference and tried to fund to 85% there would be an immediate relief on the pressure point of finding the money for 90%. The problem in Springfield would be that the tax eaters would be looking to spend that money on something else insteaad of the backlog of bills.
Comment by PQ's Primary Opponent Wednesday, Jan 25, 12 @ 1:01 pm
While the current unfunded liability is certainly not comfortable it is not the doomsday crisis that the 1% ers at the Trib and Civic Committee try to make it out to be. If the state continues to make their current payment each year and also makes some payment toward their debt service the plans will be fine.
The plans do very well in the investment arena averaging over 8% long term without paying huge fees and, of course, the corruption tax to Black Rock.
Comment by Bill Wednesday, Jan 25, 12 @ 1:03 pm
“Well, my first reaction is that if earnings hit their approx 8% goal, all future benefits can be paid out of earnings, without touching principal and without additional state contributions.”
Not too scary, except if you use the most recent CALPERS results as a unit of measurement, well… 1.1% return vrs. required 7.75% return on investments.
Well, the probability of Illinois getting annualized 8% return over the next several years doesn’t look so hot.
Maybe not 90%, but we’re going to have to do a whole lot better than what looks to be at first glance our current 38-39% funding level.
There’s actually another issue here that nobody’s talking about, and that’s going to be the new “proposed” GASB ’statement’ for local and state governments to provide multi year (up to 5 years) projections on long term indebtedness and other long term financial obligations, including such areas as bonded indebtedness, pension obligations, and other retiree non-pension obligations. And now there’s even a push to expand those projections into the revenue areas.
Can you imagine what the State of Illinois’s five year income and expenditure projections would look like if the potential GASB ’statement’ becomes operational?
Comment by Judgment Day Wednesday, Jan 25, 12 @ 1:18 pm
Rich–
I was trying to keep history within the politcal lifespan of most people, not those of you in the over 50 crowd.
I beleive it fits the blog demographics.
But you are right about the pension underfunding
Comment by Todd Wednesday, Jan 25, 12 @ 1:21 pm
–Well, my first reaction is that if earnings hit their approx 8% goal, all future benefits can be paid out of earnings, without touching principal and without additional state contributions.–
Wow. All in one sentence, too. Thanks, Schnorf.
It makes you wonder about the motives of the Civic Committee and other doomsayers. They’re smart people, right? They can understand the sentence that Schnorf wrote. Why are they funding their irrational propaganda?
Comment by wordslinger Wednesday, Jan 25, 12 @ 1:22 pm
Yes, I mean who doesn’t carry enough money in their savings account to cover the remainder of the mortgage?
Sheesh. It’s common sense people.
Comment by Michelle Flaherty Wednesday, Jan 25, 12 @ 1:25 pm
==Why are they funding their irrational propaganda?==
So that they can continue not paying their fair share.
Comment by Bill Wednesday, Jan 25, 12 @ 1:25 pm
No. The need to fund at those levels appears unnecessary. But the issue appears drastic. The Illinois Statehouse News (internet) reports: “Illinois’ 12 percent increase in higher education spending this year isn’t going to benefit students. Instead, the additional funding for fiscal 2012 is going into the State Universities Retirement System, or SURS, to address its underfunded pension program.” The over 600 local, county and state employee pension plans in Illinois are exerting enormous fiscal pressure most everywhere, diverting needed services from the most desparate people statewide. The Federal Reserve indicates that it will keep interest rates low through 2014, which is a good indication that some sort of economic boom is not in the near future, which could help bail out the plans.
We need reliable, verified,detailed numbers from all the 600 plus employee pension plans in Illinois which will permit forecasts on needed cashflow out for 20 years performed by an independent agency, if such a thing is possible here. The benefit details also should be disclosed so citizens can make their own choice on whether their elected officials have breached their fiduciary obligations over decades by granting unrealistic benefits at the expense of hard working, private sector taxpayors. Why throw more money into a system which is actuarily destined to collapse unless state and local govs must impose more onerous taxes in 5-10 years? At least, let’s get some legitimate, unassailable info on the extent of the problem statewide before we throw good money after bad.
Comment by Cook County Commoner Wednesday, Jan 25, 12 @ 1:26 pm
Servicing the the state’s pension debt in not “higher education spending”. Furthermore, university employees ARE state employees.
Comment by Bill Wednesday, Jan 25, 12 @ 1:29 pm
2 or 3 things. In my first “not too scary” comment, I did fail to alert everyone, that approaching it that way, year 31 would be a SOB.
Second, the question of 70,80, 85, 90 % isn’t what looms largest. It isn’t even how we would stay there if we got there. If we were 70% funded today, our this years payment to stay there would be a little over $5.5B (back of the envelope).
The problem that looms largest, and by far most difficult, isn’t “where should we go?”, it’s “how do we get there from here?” The cheapest scenario I can think of to get us to that 70% would add another $3B + to our current cost.
And nothing I’ve said above counts repayment of the earlier POBs. I reiterate, I don’t believe there is any “inside the box” solution do-able.
Comment by steve schnorf Wednesday, Jan 25, 12 @ 1:45 pm
I believe the state needs to issue no end of career pay bumps immediately or districts will pay a penalty. That is a big part of the problem. I also believe they need to go back to when the 20 20 20 was implemented, declare it illegal / as with the 6, 6, 6, 6 and not fund that portion of the pension. What it did was pump up a salary for last 3 or 4 years so that when retirement came, they would get 75% of the end salary in retirement. Makes one a little nuts don’t you think?
Comment by Mary Fioretti Wednesday, Jan 25, 12 @ 2:05 pm
Bill, but CCs aren’t, and they are in SURS
Comment by steve schnorf Wednesday, Jan 25, 12 @ 2:14 pm
No, I think the State should strive to finance it at some lower level guaranteed to sustain the funds over the next 40 or 50 years. While I had spending money on studies to tell us what we already know, the State should contract with several reputable non-political firms to set a consensus target level based on today’s conditions. Then the exercise would be repeated every 3 to 5 years.
Steve suggested thinking outside the box. This is probably just on the edge, not totally outside.
The way I see it, the whole pension ‘problem’ comes down to two related items:
1) past underfunding
2) public perception
When Illinois went on their continued spending spree for (pick your laundry list of programs) the past 20/30/40/50 years, taxes should have been raised to pay for it. They weren’t; instead the pension funds were shorted.
If we are ever going to correct this, someone needs to commit political suicide, stand up publicly and say:
“We didn’t over promise, we underfunded the pensions because we diverted the money to other spending we thought you, the taxpayer, wanted. We were wrong. We got some perceived benefits from doing so but that money’s gone; we will never get it back. There is no simple, painless solution to the problem today. The least painless (in terms of overall social impact) is a massive tax hike so we can pay what we should have paid all along. The most painful is massive service cuts in health / eduction / welfare. Even with all those cuts or even totally eliminating non-federally mandated state programs, you still won’t save enough and you will still have to have a big tax hike. These are your choices: (a) Massive tax hike with minimal cuts or (b) Massive service cuts with a big tax hike. Pick one. And, oh yeah, I know you won’t re-elect me after we do this … but it still needs to be done.”
Illinois has had very few past politicians who would would be willing to give the above speech. In the past half century history, Richard Olgivie is the only one who actually did so.
Two people who might be able to do it today: Madigan IF he had decided it would be his final term or Quinn if he also recognized he was in his final term and truly wanted to do the right thing for all the citizens of the State. Both would be reviled for the first 5 or 10 years after doing so … but future historians would probably judge them as doing the right thing.
Comment by Retired Non-Union Guy Wednesday, Jan 25, 12 @ 2:22 pm
It should be 100%, because the state shouldn’t have any wiggle room at all.
Comment by Cheryl44 Wednesday, Jan 25, 12 @ 2:24 pm
I agree that 90% might be aiming high (even though the GASB standard is 100% in 30 years) but if you lower the targer (or extend the date) the short term savings won’t justify the long-term costs (add to unfunded liability). This would be just another way for the state to kick the can down the road. We can’t escape this unfunded liability. Also credit agencies will take notice if the state continues to alter and/or deviate from the funding plan.
Comment by Dirt Diver Wednesday, Jan 25, 12 @ 2:32 pm
Cheryl44, I hope you misunderstand the question. The state is/should be responsible for 100% of its obligations to its employees. But what level of funds should it have IN THE BANK in order to meet that. Having 100% in the bank is just stupid, unless you think there’s the possibility of every single person retiring the next day or the state going bankrupt. Neither are remotely likely, so taxing everyone to fill it up to 100% makes no sense.
Comment by Anonymous Wednesday, Jan 25, 12 @ 2:37 pm
No, we simply can not afford it. To me this is not a question of should we or should we not, it’s a question of can we. We can not unless we are willing to raise taxes another 2% or make drastric cuts to Medicaid and Education.
Comment by Ahoy Wednesday, Jan 25, 12 @ 2:39 pm
OK, stupid question, unless it’s at 100 percent, won’t there always be an unfunded liability hanging over the system and incurring interest?
Comment by Michelle Flaherty Wednesday, Jan 25, 12 @ 2:45 pm
MF, at least under current thinking, yes
Comment by steve schnorf Wednesday, Jan 25, 12 @ 2:47 pm
===won’t there always be an unfunded liability hanging over the system and incurring interest? ===
It depends on how you define unfunded liability. Use word’s mortgage analogy. Should you have 15 years’ cash on hand to pay a 15-year mortgage, or 30 for a 30?
Comment by Rich Miller Wednesday, Jan 25, 12 @ 2:52 pm
Retired N-U Guy
I like your imaginary speech. The Speaker has never been known to take such big political risks, however.
Comment by reformer Wednesday, Jan 25, 12 @ 3:52 pm
That 8% return figure has popped up in multiple discussions. What large group (anywhere in the country) is currently making 8% average returns over a multi-year run? The report on CALPERS had investments dropping from 12.5% (2010) to 1.1% (2011) in one year.
Comment by zatoichi Wednesday, Jan 25, 12 @ 4:28 pm
Sue - ISBI and the pension plans do use professional investment managers for all of their investments. They (the investment managers) extract a huge amount of fees from Illinois taxpayers for the priviledge as well.
The 90% rate is way too high. Not only is it unnecessary to have that much cash on hand at once, it’s also just an estimate. What matters is that the state is putting more money into the pension systems than is being paid out in benefits. As long as they’re doing that, they’re saving for the future. Actuarial figures are not the gospel, they’re not perfect, they’re no where near perfect, actually.
They’re guesses. Yeah, there’s a lot of fancy stats and math behind them, but they’re essentially guesses. This isn’t like a bond payable or a mortgage payable. With bonds and mortgages, you know what your debt is. You may have a variable interest rate, but you know what your long term obligations are to a pretty high degree, moreso if you have a fixed rate of interest.
With long-term pension liabilities, you don’t. It’s an estimate. A shot in the dark. Comparing it to a mortgage is false. There’s really no good analogy for it. It’s an attempt at figuring out the grand total of what the state’s expenses are going to be for one particular obligation for a very long period of time, and (simultaneously) an attempt at figuring out what the state’s revenues that will be pledged to pay that obligatoin will be for a very long period of time. Is an 8% rate of return reasonable? Maybe. You could earn more than that. If you do, then your unfunded pension liability is overstated (the actuary calculated that you’ll need to kick more in than you need to this year). But if it’s less, well then your liability is understated.
At the same time, actuaries make certain assumptions about how many people in the current workforce are going to retire at what level, how long they’ll live, what kind of spousal benefits they’ll use, etc.
It’s all a shot in the dark. There is a long term liability, the State has made certain promises, but the actual amount of the liability can’t be known with any certainty.
And, for the record, the Illinois State Board of Investments had a rate of return of 9.1% in fiscal 2010. FY 2011’s was probably double that seeing as how total investment income in fiscal 2011 was more than double 2010 ($2 billion in 2011, $880 million in 2010).
http://www.auditor.illinois.gov/Audit-Reports/Compliance-Agency-List/Retirement-Systems/ISBI/FY11-ISBI-Fin-Full.pdf
Comment by jerry 101 Wednesday, Jan 25, 12 @ 5:04 pm
===That 8% return figure has popped up in multiple discussions. What large group (anywhere in the country) is currently making 8% average returns over a multi-year run?===
Read it and weep…From SURS…
“In Fiscal Year 2011, SURS’s Investment Program produced investment returns of 23.8 percent, as the fund grew by $2.3 billion to $14.3 billion. Historically, SURS has achieved enviable investment returns of 6.1 percent for the last ten years and 8.5 percent over the past 20 years.”
I expect to hear an apology from zatochi and others, who think the 8% return on investment figure in unattainable.
Oh and I vote No, Rich.
Comment by PublicServant Wednesday, Jan 25, 12 @ 6:52 pm