Monday, May 9, 2011

A Response to a Legislator's Echoing Pension Reform

Pension reform could alleviate cuts by Darlene Senger
"As we approach the end-of-session crunch, many tough decisions will be necessary to balance the state’s budget and bring spending under control; regardless of how much effort is put into prioritizing our spending, many cuts will still be necessary.
"However, please consider this: The majority of these cuts would not be necessary had years of poor decisions not been made in regard to our state’s pension system. We currently have $85 billion in unfunded liabilities, and that number is increasing exponentially. So while revenue is indeed up this year, thanks in large part to a 67 percent tax increase passed against the strenuous objection of most Republicans, cuts will still be necessary to vital state services because our state’s pension payments and debt services are growing so quickly.
"This year alone, $4 billion of the state’s estimated $33 billion will be going to the pension system. It ranks third in expenditures, behind only health care and education.
"This number will only double over the next decade, putting us in a position where it is likely that upward of 40 percent of our state’s revenue will be heading to retirees by the year 2045. The system is insolvent.
"Without overhauling the state’s unsustainable pension system, less and less of our revenue will be going toward day to day functions. If we act now, more and more of our hard-earned tax dollars can go to education, the infrastructure that we depend on and the other vital services that our state provides."

Dear Representative Senger:
The teachers’ pension is sustainable.
The size of unfunded liabilities that you refer to in your recent letter in the Daily Herald “does not give a full view” of the State’s pension fund. Unfunded liabilities are amortized over 40 years in Illinois; using a “riskless rate” to calculate fund liabilities does not reflect the amount that the State and local governments need to deposit in their pension funds (Center on Budget and Policy Priorities).

Moreover, as markets and economy improve, so do the assets in the pension funds.  “Since June 30, 2009, a date in which many recent studies on the financial condition of State pension trusts are based, investment returns have rebounded sharply – nearly 25% higher since then” (National Association of State Retirement Administrators, NASRA).  

It is also important to note that “State and local government pensions are not paid from general operating revenues but, rather, from trusts to which retirees and their employers contributed” (NASRA).

Legislators who claim that the pension system is “unsustainable” most likely use outdated information, “particularly at the low-point of the market recovery [June 2009]” (NASRA).

If we look at the Teachers’ Retirement System (TRS), for instance, the numbers to focus on are the amounts TRS pays out in pensions and benefits in a year. During the last fiscal year, TRS paid out $3.9 billion in benefits, but collected $6.8 billion in revenue, more than enough to meet current obligations (Illinois Education Association, IEA).   Furthermore, the total value of TRS assets continues to improve. At the end of FY 2009, the TRS fund held $28.5 billion. At the end of FY 2010, the TRS fund held $31.3 billion. It currently holds $37.3 billion. That’s a 23.6 percent increase in less than two years (IEA).  While the media fret about the unfunded liability, the total amount is never due all at once.

What could be done about the State’s budget crisis:
You and other legislators need to "generate enough revenue growth to both maintain service levels from one year to the next and cover the state’s actuarially-required employer contribution to its five pension systems."  How can you and other legislators do this?
1.    Restructure the current debt to a lower interest rate.
2.    Expand the sales tax to include services.
3.    Tax corporations -- “state and local governments gave nearly $70 billion to corporations,” and most of these corporations are not creating jobs or putting money back into the States’ economy.
4.    Tax high-income people, including retirees who make more than $100,000.
5.    Create a progressive income tax in Illinois.
6.    Cut wasteful spending.
7.    Stop giving money to special-interest groups and tax breaks to those who supported your and other legislators’ election.
8.    Enact structural-spending reforms that do not "diminish or impair" the public employees’ constitutional rights to a pension (Article XIII, Section 5 of the Constitution of the State of Illinois).
9.    Do not attempt to pass a “law impairing the obligations of contracts” (Article I, Section 16, of the Constitution of the State of Illinois).
10.  Do not pass any law “impairing the obligations of contracts” (Article I, Section 10, of the Constitution of the United States of America).

11.  Hire an "impartial and independent" legislative analyst not paid for by the Civic Committee of the Commercial Club of Chicago.
12.  Bankruptcy is not an option, even though Senator Mark Kirk might think so.

Why should you and other legislators consider these suggestions:
To let the courts decide is a reckless disregard of your duty to uphold the State of Illinois and the United States Constitutions. There will be costly lawsuits at the taxpayers’ expense. Moreover, it’s reprehensible to set public and private employees in opposition by claiming that the funding of public pensions will take money away from education and other programs. It’s scheming to shift the burden of responsibility of the State to local taxpayers; it’s conspiratorial to allow Big Businesses to drive legislation in their favor.
If you believe changing the current teachers’ pension system is the answer to the problem that legislators have created, then all of you are ultimately going to destroy the pension system (Is this is your and other legislators’ unstated objective?).
What could be the effects if bills such as Senate Bill 105 proposed by Senator Chris Lauzen and HB 149 proposed by Representative Tom Cross are passed this May or in the future?  Presumably, many young teachers will not continue to work in Illinois and roll over their pensions when the opportunity arises.   Furthermore, the “best and brightest” college candidates will either not become teachers, or these young aspirants will find teaching positions in other states, where the education of children and their teachers are valued.  Thus, current teachers and retirees with a Tier-One pension plan will lose an essential financial resource needed for pension sustainability.
What other consequences are there for creating the worst teachers’ pension plan in the country? Students across Illinois will be deprived of receiving an excellent education from the best teachers available, and they will all become the unintended victims of this injustice and charade.
-Glen Brown

1 comment:

  1. Three additional questions:
    Who is going to pay the costs for three, simultaneous retirement plans?
    How is each plan going to maintain adequate and consistent funding?
    Who is going to pay the Social Security tax for the Defined-Contribution Plan?