Dire pension news from TRS trustee Bob Lyons

31 Mar

Up until now, “Insolvency” has been the mantra of the Civic Committee, Illinois is Broke, and our state legislators. “The pension funds are going to run out of money and thus the pensions will not be paid.” It has served as a powerful argument as to why something must be done. Of course “something” has been defined as reducing the cost of the pensions. And we are told that the result of pension reduction will be the pension funds will be saved, and that even if we get less, at least we will have a pension. Our argument in response has been that the pension funds will not go insolvent as long as the active teachers, the school districts and the state make their payments. Those waving the banner of imminent insolvency responded, “Yes, you have just made our argument. The state cannot continue to make their payments.”

This has been an ongoing topic at TRS meetings and one that I have reported on for the last couple of years. The TRS board finished a three day retreat in Oak Brook yesterday at mid-day. Your pension board made the decision to face up to reality. We are looking at insolvency, not imminent, but it is clear that the state is not going to make its payments going forward. As you know this is the first year in three years that Illinois did not borrow to fund the pensions and, while they are running about $280 million behind in their monthly installments for the year so far, it is expected they will complete the full payment of $2.4 billion by the end of June. Not counting debt service, the state payments to the three systems and five pension funds for this fiscal year is $5.1 billion and the projected payment for next year is an increase of $800 million to $5.9 billion. The budget passed in the House on Thursday put aside $5.1 billion for the pension. Are they already assuming that they are going to cut the payment? Senator Bill Brady, a member of the Governor’s working group on pensions, has argued that any solution to the pensions must be based on the understanding that the temporary 5% state income tax will go to 3.75% in tax year 2015 and that will reduce the state’s new revenue by several billion dollars. The pension reducers are going to use the argument that since the state will have less money, the state can only pay less, so change the cost of pension benefits – a lot!

Our executive director, Richard Ingram, reported to the board, “The evidence has mounted to the point that it is prudent to assume that we will not be funded at the levels provided in statue. Leading members of the General Assembly have all but said as much, and in the final analysis that is what really matters.” Do any of you want to make the opposite argument that the state will continue to follow the mandates of the ‘95 law? Not knowing at what percentage we may be funded we can not say how long it would take for us to run out of money. Our actuaries tell us that if the state just give us $2.4 billion a year for every year going forward in one scenario that we would be insolvent by June, 2038. Given my age at 73 I could live with that, but we are guardians for everyone in the system including those young people that just started teaching. Assuming the state can increase the funding but only at 3% per year and we can make it to 2049, but we still run out of money.

If we are looking at insolvency, we need to make it work for us. Future insolvency is a powerful argument for the state of Illinois to face the reality that the current temporary tax must be made permanent. Illinois cannot afford austerity. The state can not afford to cut education, human services, public safety, economic development, and pension benefits. Illinois has a revenue problem – not enough revenue. Our whole tax structure needs to be restructured. But that is not pervue of the TRS pension board.

What is our responsibility is to make our polices fit the new reality and we voted to do so yesterday, March 30, 2012.

Briefly this is what we are going to do

  1. Use only actuarially-based math to determine contributions and liabilities. The Illinois pension math dictated in the pension code artificially lowers the state’s cost of funding pensions. These laws supersede the true calculation of the state’s annual pension contribution. We need to calculate the cost in the way the rest of the world does it. Here is a breakdown of the differences: Illinois Political Math · The state’s goal would be to have only 90 percent of the assets on hand to pay all future obligations and maintain a 10 percent unfunded liability · The state’s annual contribution is reduced each year by the amount of debt service needed to pay off the bonds sold over the course of the last decade to finance the state’s annual contribution · The state’s goal is to reach 90 percent funding in 50 years · Future savings over several decades from reform measures are counted now before they are actually realized · Total price tag for fiscal year 2013: $2.7 billion Standard Actuarial Math · The state’s goal would be to retire the unfunded liability and have 100 percent of the assets on hand to pay all future obligations · The state’s annual contribution is not reduced each year by the amount of debt service needed to pay off the bonds sold over the course of the last decade to finance the state’s annual contribution · Obligations are amortized over a 30 year period · The annual cost of pensions to the state is based on what is needed to fund pensions now · Total price tag for fiscal year 2013: $3.8 billion
  2. Illinois must enact funding guarantees for the pension systems into law. A statutory funding guarantee would ensure that all future state government contributions are made in full when they are due. Most other states operate with these guarantees and in Illinois the Illinois Municipal Retirement Fund benefits from this type of mandated payments.
  3. The financial inequities of the Tier II funding and benefit structure must be fixed. Current law requires Tier II members to pay 9.4 percent of salary and that subsidizes both Tier I and Tier II benefits. The Tier II contribution is 50 percent higher than the benefit’s value, which is 6 percent of their pay. In 20 years, when Tier II members are a significant majority in TRS, the subsidy they pay will cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. This is fundamentally unfair to Tier II members.

These new positions will cost the state more money with an increase of the FY 13 contribution and a reduction of contributions from tier II teachers. We believe that a funding requirement can be written that will make the payment guarantee a benefit that can be protected by the constitution and that too will cost the state money. As you can well imagine these steps that will not be popular. We have already heard from critics about accepting the reality of future insolvency. Our fiduciary responsibility to the fund and to each of you requires us to take steps now to protect the pensions in the future. We are doing what we are required to do and what we feel is right.

The Springfield State Journal-Register will have a story on our new direction Sunday and you can expect considerable follow-up in the Illinois press to follow. Executive Director Ingram will be continuing his Four Corner Tour of the state in Elizabeth and Freeport on the Wednesday, April 4th and this will be his topic. Ask questions.

Bob Lyons, TRS Board

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