Thursday, June 30, 2011

Authorized Theft and Greed in Corporate America

Of course, powerful, wealthy businessmen are behind the outrageous and erroneous messages of Illinois Is Broke, the obverse group of the Civic Committee of the Commercial Club of Chicago.  We can assume that some of their power is maintained by the vast majority of ignorance or indifference of the public at large and by a manipulation of legislators, via corporate legislation to redistribute exorbitant amounts of money to their businesses and to themselves.

The current message of the Civic Committee is diversionary in its attempt to shift blame for the financial woes of this State to the public employees' pensions.  It is the way of thieves “to deflect attention from the theft of some $17 billion in wages, savings and earnings among American workers… from speculators on Wall Street who looted the U.S. Treasury…, [who] stymied any kind of regulation… and [who] avoided criminal charges” (Chris Hedges, from The Promotion of Liberty).

What the executives of wealthy corporate organizations, such as the Civic Committee, do not publicize to the populace is that they often pass on the burden of most of their taxes onto the average citizen, via an exploitation of governmental policies that ironically create a “corporate welfare.”

What they also do not publicize is their vast amounts of corporate money in offshore bank accounts to avoid taxation and increase their excessive profiteering – paid for by the rest of us.  Another secret of the wealthy elite is to reduce commercial accountability while increasing the average taxpayer’s responsibility to fund their multi-million-dollar businesses that are already subsidized by state and federal governments.

Is it possible to measure just how much money some corporations are pocketing or to calculate how much of their profits are the result of such “subsidy economics?”  Could it be more than the fabricated, absurd, and unproven assertion of “$30,000 per household” that Illinois Is Broke claims the public pension systems in Illinois cost taxpayers?   What is ironic about this allegation is that Illinois politicians and the wealthy elite created the State's financial debacle.

Though it is impossible to provide any meaningful and reliable figure, it is well-substantiated that the corporate shift of burden of payment to the public and the State’s lost revenue are based upon promises that conglomerates will create more jobs, even though their outsourcing of American jobs disguised as “free trade” has eliminated hundreds of thousands of jobs in this country and has eroded the tax base of the State of Illinois. 

Should state governments continue to allow certain businesses to become ridiculously rich while the rest of us become poorer and are forced to go without needed services?   The answer is an emphatic No!  Should we passively watch while services are cut and deferred earned-income in our pension plans is threatened and diminished? The answer is another emphatic No!

Pulitzer prize-winning journalist, David Clay Johnston proclaims “that any American who forgoes wages today for the promise of a pension tomorrow is not paid in full is a scandal.  He has been robbed as surely as if a burglar broke into his or her home…  

“All [the State of Illinois] needs to do to correct this problem is require sound financing of [the pension plans].   That means setting aside enough money each year for the benefit each worker earned and then [guaranteeing the funding for the pension system through legislation. Moreover, contributions and liabilities must be analyzed using correct actuarial principles]. The problem for Illinois representatives and senators is that the simplicity of sound financing would mean a loss of fees for investment advisers and others who get rich off the current system.  In turn, that would mean a reduction in the flow of campaign contributions…

“To business owners and executives, the cost of campaign contributions is chump change to the benefits of shortchanging pension plans.  Government rules permit and encourage a vicious cycle.  To the extent that pensions are not fully funded, that their true costs are not paid each year, it means that corporate profits are inflated.  Inflated profits mean that share prices for company stock are inflated because they should represent the profitability of companies.  And inflated stock prices mean, in turn, that executives cash in their options for more than they should get. [To not fully fund the pensions  also means that legislators are stealing money from public employees and retirees so they do not have to raise taxes and cut needed services].

“Many hundreds of billions of tax dollars [across the country] have been diverted to the rich, leaving our schools, parks, and local government services starved for funds.  Jobs and assets are going offshore, sometimes to the detriment of not just the economy but to national security… 

“It is the rich who are gorging themselves on the government with giveaways, favors, contracts, rules that rig the economy, tax breaks, and secret deals [and not the majority of citizens in Illinois, many of whom are public employees with hard-earned pension plans]” (Free Lunch, How the Wealthiest Americans Enrich Themselves at Government Expense and Stick You with the Bill).

-Glen Brown


Wednesday, June 22, 2011

RESOLUTION 2010-01 - Guiding Principles for Retirement Security and Plan Sustainability from the National Association of State Retirement Administrators

WHEREAS, state and local government employee retirement systems have demonstrated the ability to thrive in highly volatile market environments; and 
WHEREAS, the resilience of public plans during periodic market declines is sustained through long-term investment and financing strategies; statutory, contractual, moral, and in some cases constitutional benefit protections; as well as the ability to adjust plan designs, financing structures, and governing statutes to accommodate changing needs and fiscal realities; and
WHEREAS, needed periodic modifications, which have a history in state and local government retirement plans, require an open public legislative and regulatory process involving all stakeholders - governments, their plans, their employees (who typically share in the financing of their pension), and other taxpayers; and
WHEREAS, this open public process requires honest, unbiased and relevant information on public financing and long-term retirement policy objectives that should not be unduly influenced by projections that include unrelated healthcare liabilities or irrelevant corporate sector metrics, or that exclude relevant data regarding the inefficiencies and steep transition costs of closing, rather than adjusting existing plans; and
WHEREAS, differing plan designs, financial conditions, and fiscal frameworks across the country do not lend themselves to one-size-fits all solutions, but rather, require a range of tailored approaches, agreed to by the relevant stakeholders, in order to best secure the viability of each state and local retirement system for the very long-term; and
WHEREAS, core elements of public pension plan design – which include mandatory participation, benefit adequacy, shared financial responsibility, pooled assets invested by professionals over long time frames, and benefits that cannot be outlived – are the most reliable and economical means of providing retirement security, while also assisting in the retention of qualified workers needed to perform essential public services and providing economic stability to local communities; and
WHEREAS, these core components of public pension plan design are indispensable to sound retirement policy and not only should be retained in current and future benefit designs in the public sector, but also should be cultivated in the design of retirement plans for employees outside the public sector; and
WHEREAS, federal policy should be supportive of these central features of public pension design and the flexibility of state and local governments to meet local needs and concerns, and should also encourage the development of similar design characteristics in retirement plans beyond the public sector;
NOW, THEREFORE, BE IT RESOLVED, that the National Association of State Retirement Administrators supports the following guiding principles to retirement security and public plan sustainability:
  • Participation of all relevant stakeholders, including government employers, their plans, their employees, plan beneficiaries and retirees, and other taxpayers in discussions and processes pertaining to the design and financing arrangements of public retirement plans
  • Policy-driven decision making based on objective and pertinent information that fairly reflects the long-term time horizon and economic effects of public plan financing, benefit adequacy and benefit distributions
  • Tailored solutions, achieved by affected stakeholders working through the state and local legislative and regulatory processes
  • Retention of core, indispensable elements of public plan design, namely mandatory participation, shared financing, benefit adequacy, pooled investment and longevity risks, and lifetime benefit payouts
  • Removal of federal policy barriers to the preservation of these central retirement plan design features in the public sector and adoption of federal policies that encourage their inclusion in the private sector.
Adopted August 11, 2010

Monday, June 20, 2011

Pension Reform, the Civic Committee, and the Chicago Tribune, et al. vs. Your Financial Security

First, let us not forget that one of the main causes of the budget crisis and lack of revenue in Illinois is the State’s erratic and irresponsible annual contribution payments to the public pension plans (National Institute on Retirement, May 2011).  Add wide-spread corporate financial corruption that created the financial crisis of 2007-09 and; thus, there are rampant foreclosures, stagnant unemployment, and the outsourcing of jobs while tax breaks for the wealthy persists.

According to Time (June, 2011), “There may be $2 trillion sitting on the balance sheets of American corporations globally, but firms show no signs of wanting to spend it in order to hire workers at home… The companies that [do] business in global markets, including manufacturers, banks, exporters, energy firms and financial services, contribute almost nothing to overall American job growth… There is a fundamental disconnect between the fortunes of American companies, which are doing quite well, and American workers…” 
Now add to this calamity corporate-owned media and their attacks on public sector’s pension plans and media's attempts to shift the blame for today’s financial problems on public sector workers and retirees, and we have a distortion of cause-and-effect reasoning with malicious intent.  

Combine corporate-backed legislators that use selected instances of doom and gloom forecasts to seek radical changes to the defined-benefit pension plan in Illinois, and the deceitful practice of corporate financial firms that attempt to peddle a defined-contribution savings plan (or 401(k)) as the panacea for the State’s budget deficit so that corporations and investment firms can continue to profit from this predicament, and we have a even larger injustice to address.
According to Communications Workers of America, we cannot afford to sit back and allow this to happen.  What needs to be done is to maintain, enlarge and support a state-wide coalition and solidarity (such as We Are One), and to protect our defined-benefit pension plans against opportunistic legislators and wealthy interest groups such as the Civic Committee of the Commercial Club of Chicago (Illinois Is Broke), the Civic Federation, Illinois Policy Institute, National Taxpayers United of Illinois, the Chicago Tribune and their ilk.  

The State’s focus should be on the “fundamental disconnect” and a long-term economic policy by promoting structural reforms (American Enterprise Institute, June 2011) and not on any unwarranted modification or elimination of pension benefits perpetuated through corporate, fallacious deflection and blame.
Consider that increasing current employee contributions and reducing benefits for future employees do not address the current unfunded liabilities in Illinois. Why? Because the State has revenue and debt problems. Furthermore, the issuance of bonds to reduce the pension system’s unfunded liability “assumes that the State will earn a higher return on the bond proceeds than the cost of borrowing” (Barclays Capital, May 2011).  It is estimated that “pension contributions and debt service on pension obligation bonds will account for more than 20% of the State’s FY12 general funds’ tax revenues” (Barclays Capital).  
Although only 15 states have a funded ratio over 70% (Barclays Capital), funded ratios are, nevertheless, unpredictable, and long-term liabilities are subject to changing variables.  Moreover, investment returns can overstate or understate liabilities.  What may be closer to anything resembling truth is that the State has control over its revenue and spending and can improve funding instead of lowering benefits (Fitch Report, January 2011). 
Unfortunately, we have to trust that summer legislative meetings in Springfield include not only intelligent and competent worker representation at the “negotiation” table but non-partial, independent professional finance analysts, such as Ralph Martire from the Center of Budget and Tax Accountability, who can competently scrutinize the State’s “unsustainable” fiscal problems. We have to insist that honest lawyers, such as Eric M. Madiar or others like him, are also present to safeguard the public employees’ contractual relationship with the State and to protect teachers, retirees, and other public employees against unnecessary and unreasonable changes to pension benefits. Finally, we have to believe that long-term retirement income security will never be “constitutionally” compromised but preserved.
It is imperative for all of us to inform our neighbors, friends, and legislators about the injustices perpetrated by prejudicial, wealthy organizations in Illinois and to educate our neighbors, friends, and legislators about the conflicting data regarding sustainability of defined-benefit pension plans.  

What continues to be at stake is the protection of the financial future of the majority of citizens not only in Illinois but in this entire country. 

Corporate/legislative attempts to shift the blame and the burden of financial deficits to the middle-class by eliminating fundamental state services and diminishing crucial retirement securities while CEOs and wealthy Americans continue to not pay their fair share create a travesty of justice (Communications Workers of America, 2010).  

-Glen Brown

Wednesday, June 15, 2011

"The Devil's Whore"

(Mantis Religiosa)

Nothing could have prepared us
for that first day of class:
our libidos impaled suddenly
by a film of copulating mantises
behind a Chinese elm,

the female’s slender body
with wings like leaves,
rotating head and bulging eyes.
We soon discovered the thorax of love,
how her posture of praying

and quivering foreplay
turned to a quick thrust of spiny forelegs,
locking him in a cloak of bug lust.
We could not help but wonder
what drew him to her

for his one flight of ecstasy,
how he could continue to mate
long after his head was devoured
by her biting mandibles.
The Devil’s Whore, the teacher called her.

No one asked the question,
and we filed quietly out of the room.
The girls, whispering,
appeared to sway down the hall
while we quickly passed them, bug-eyed.

“The Devil's Whore” was originally published in Great River Review, 1994.

Friday, June 10, 2011

What We Believe We Know about the SUSTAINABILITY of the TRS PENSION

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.  --Donald Rumsfeld
The Economic Policy Institute in Washington D.C. states in their report (April 2011) that shortfalls in state public pensions ignore returns on assets.  Reading many conflicting reports on the issue of pensions and sustainability, there are many important questions to ask. Here are two of them: how do we know which projections are accurate and which ones are not, and how do we know which ones are inflated to “stoke fears that future taxpayers will inherit large unfunded pension liabilities absent some sort of intervention?”  

To foment apprehension in the public at large will have underlying, political repercussions. Using funding ratios from selected sources, causal oversimplifications, wishful thinking and begging the question will reinforce public bias regarding the sustainability of the state's pension systems.
Let's consider an interesting rebuttal from the Economic Policy Institute: “There is no need for pension funds to closely match assets and liabilities, though some boutique investment firms earn high fees advocating this approach… [Moreover,] taxpayers may prefer to underfund pensions, since most taxpayers are borrowers and their borrowing costs are higher than the expected return on pension fund assets; that is, they are better off paying higher taxes in the future than borrowing more to pay taxes now, since the interest on public debt is lower than the interest on credit card debt or home mortgages.”  

We might agree that there is no certitude in comparing pension assets and liabilities in the future; nor is there an absolute way to determine anticipated returns. Likewise, there is no certainty that future legislators and taxpayers will inherit exorbitant, unfunded pension liabilities because these calculations will confront a future of “unknown” factors (though to not fully fund the pension systems will undoubtedly increase their unfunded liabilities!).  Nonetheless, we must remember public pensions do not have to be fully funded ever!
We hope that we can accurately predict what the Teachers’ Retirement System’s (TRS) annual payroll will be and what the employees’, school districts’, federal and State’s contributions will be; and what the accrued liabilities, actuarial value of assets, unfunded liabilities and the funded ratio will be without depending upon an Orwellian analysis filled with political opportunism and gobbledygook.  
Though the Buck Consultants’ report on the “Actuarial Valuation of Pension Benefits” (June 2010) and the Commission on Government Forecasting and Accountability’s “A Report on the Financial Condition of the IL State Retirement Systems” (March 2011) slightly disagree with their projections about the State’s budget problems, they do agree that the State’s contribution to the pension systems will increase.  State contributions will increase because of the unfunded liability that was mostly caused by past Illinois State legislatures and the so-called flawed Pension Ramp of 1995.
According to the Illinois Retirement Security Initiative, a Project of the Center for Tax and Budget Accountability (February 2011): “When compared to the State’s projected revenue growth, the State’s required pension contribution may be more manageable than many believe… assuming revenues grow at 2.8 percent per year, and the State maintains its personal income tax rate at five percent and its corporate income tax rate at seven percent.”  In line with this thinking, we may assume that the State’s revenues and budget, along with anticipated assets in the pension systems, will also increase proportionately in the future. 
An important digression: One “doomsday scenario” to mention regarding the TRS pension plan is Joshua Rauh’s and Robert Novy-Marx’s report entitled, “The Crisis in Local Government Pensions in the United States,” (October 2010).  Though it is not the purpose of this essay to discuss this report (or any other), a well-known rebuttal of their projections is Eric M. Madiar’s “Is Welching on Public Pension Promises an Option for Illinois, an Analysis of Article XIII, Section 5 of the Illinois Constitution.”
For our purposes, however, consider what the TRS Public Information Officer, Dave Urbanek, has to say about the “doomsday” allusion.  After all, he should have a relevant and significant understanding of this pressing concern.  Urbanek declares that “the fog of uncertainty that surrounds teacher pensions lifts when teachers [and legislators] get the facts – both good and bad.  Teachers will see a situation that is far from perfect but also a retirement fund that is far from collapse.” 
According to Urbanek, Rauh’s and Novy-Marx’s prediction was predicated upon no contributions and an anticipated two-percent investment rate, (which is a much lower estimation of TRS’s investment return over the last 28 years at 9.83 percent); it was also grounded upon “a calculation that was not based on historical revenue data but on selected variables chosen specifically in order to reach a certain conclusion.”
Furthermore, and more significantly, Urbanek states: “Pensions will not run out of money… [That] assumes that at a future date, state pensions will just cease and all outstanding financial obligations will come due… Unlike a corporation, a state government cannot go out of business…[Accordingly,] state law empowers TRS (40 ILCS 5/16-158c)… Payment of the required State contributions and of all pensions, retirement annuities, death benefits…, all other benefits…, and all expenses are obligations of the State… The State has waved its sovereign immunity in regard to the teachers’ pension because TRS is a qualified pension plan under the tax-deferred provisions of the IRS code.  Federal law would protect all claims… Pensions [are not] the problem [or] why Illinois has not been able to pay its bills.  The reason is a dramatic fall-off in State revenues over the last four years, costing the State $4.4 billion.”
Thus, besides the State of Illinois consistently defaulting on its actuarially-required contributions and its recently lost revenue, two other causes of the budget deficit appears to be the budget practices of Illinois and its flat-rate tax system; nonetheless, everyone’s focus has been on what teachers and other public employees must do (or sacrifice) and not on what the State of Illinois must do which is to fund the long-term costs of benefits promised to the plan’s participants and address the causes of the State's budget problems: the creation of needed resources for more revenue and the restructuring or reamortizing of the unfunded liability/pension debt. 
Other important questions remain: how is the State going to maintain a fair and competitive pension benefit to attract and retain teachers?  Expressed differently, if the State and other essential stakeholders and actuaries believe that they must reform the teachers’ pension (because the 9.4 percent contribution rate for teachers is not enough), will it be a “one-time” reasonable increase?  What other concessions will have to be made by public employees? Will agreed-upon pension reform also reflect the realities of the teaching profession which include the unique difficulties and sometimes extraordinary challenges that teachers confront each day, thereby considering a realistic retirement age? 

Most importantly, will the State, through transparency and an act of good will, finally keep its long-overdue promise to fully-fund the pension systems every year, and how will that be guaranteed? How can we trust Illinois policymakers based upon past history and the wealthy and powerful organizations that influence them? We can't.
As a final note, sometimes when in search for truth and for the resolution of a manufactured political dilemma (and when presented with new, carefully-analyzed and substantiated information), it might be necessary to change an entrenched point of view.  This is not a contradiction; nor is it hypocrisy.  To re-examine impartial evidence is a hallmark of skilled leadership, and it is what must be done for sound decision-making and just results for all involved. We can only hope that Illinois legislators (and union leadership) will fight to protect the constitutionally-guaranteed rights and benefits of public employees; however, this is probably wishful thinking. 

-Glen Brown

Wednesday, June 8, 2011

How about Tax Reform? the Most Important Issue in Illinois

Why didn’t past Illinois legislators properly fund the public pension systems? Because it was for their benefit to steal money from public employees and retirees to pay for the state's services than to raise taxes. In effect, the public employees’ pension plans have become everyone’s personal credit card”; however, now that legislators have amply contributed to the State’s unfunded liabilities, most legislators (and many Illinois businessmen) want the public employees and retirees to pay off that "credit card" or exorbitant service debt bill.

Why might the Civic Committee of the Commercial Club of Chicago be involved in this flagrant theft?  Perhaps if the State can default on its contractual obligations to the public pension systems and shift the financial burden to public employees and retirees, then the State can continue to give even more outrageous tax breaks to wealthy corporations, such as Motorola Mobility, Chrysler, Navistar International, U.S. Cellular, Mitsubishi Motors, Sears and Roebuck, et al. (Bloomberg Business Week, May 20).  Though Tyrone Fahner of the Civic Committee wants us to believe that his goal is to balance the State’s budget through so-called pension reform, perhaps his real motive is to redirect monies owed yearly to the public pension plans to private corporations.
Pension reform should not be the focus in Springfield.  The focus should be tax reform, where fairness, long-term revenue stability and a progressive tax rate become the State’s priorities and solutions for the budget crisis.  As determined by the Institute on Taxation and Economic Policy (ITEP, November 2009), the State of Illinois does not tax equitably, and it is in the top 10 of regressive state tax systems where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners.   
Consider, for example, that “sales and excise taxes are the most regressive element in most state and local tax systems.  Because sales taxes are levied at a flat-rate, and because spending as a share of income falls as income rises, sales taxes inevitably take a larger share of income from low-and middle-income families than they take from the rich” (ITEP). The State of Illinois is one of the few states that uses a “flat-rate tax.” In other words, the income of the wealthiest people is taxed at the same marginal rate as the poorest wage earners.
The Institute on Taxation and Economic Policy maintains that the top five percent of income earners in Illinois pay the least amount of sales, excise, property, and income taxes because of federal deduction offsets or substantial tax savings (regressive tax loopholes) from itemized deductions, such as capital gains tax breaks and deductions for federal income taxes paid that are coupled with a flat-rate structure.  “[Thus], since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor rarely save at all – the taxes are inherently regressive” (ITEP).
The wealthiest people should pay tax rates commensurate with their incomes, but they do not in Illinois.  The continued attempt to balance the State’s budget by scapegoating public employees' and retirees' pension plans ignores the fact that Illinois has an inequitable tax structure.  A progressive tax reform, or a more effective means of income redistribution where individuals who earn more would pay higher taxes in addition to a low-income tax credit for low-wage earners, would make the State and local taxes fairer and address the most important reform issue in Illinois.
Furthermore, enacting additional structural-spending reforms that do not blatantly “diminish and impair” the public employees’ and retirees' constitutional guarantee to a secure pension (such as restructuring the current pension debt to a lower interest rate, expanding the sales tax to include services, using gaming proceeds, and cutting wasteful spending through “impartial and independent” legislative analysts) would not “impair the obligations of contracts.” 

-Glen Brown

Sunday, June 5, 2011

Sustainability of the Teachers' Pensions

Lately, I have been asking questions related to the so-called “unsustainability” of the teachers’ pensions and its conjoined twin, “unfunded liability.”  What is an unfunded liability?   It’s a “calculation of the current value of future liabilities minus the available value of assets.”  What is the problem or debate regarding sustainability and public pensions?  It’s how the current value of future liabilities should be measured and addressed.  What is also behind the push for a radical, “surgical” pension reform in Illinois besides the Civic Committee of the Commercial Club of Chicago, et al?  It’s HR 567, a federal bill sponsored by U.S. Congressmen Devin Nunes and Paul Ryan that would require the state and local governments to report pension liabilities to the Federal Government using the “riskless rate” (or Treasury-Bond rate at 3-4 percent). 

Even without the passage of such a Bill, some state legislators are using this lower “riskless rate” for purposes of measuring the unfunded liability of pension funds.  According to The Center on Budget and Policy Priorities (May 2011), legislators believe that the amount of money needed for pension plans should be larger than the amounts necessary.  Recently, in Illinois, we have witnessed an insensitive and reactionary attempt to change the teachers’ pension system, as evident in the recent proposed SB 512 by elected Representative Tom Cross and House Speaker Michael Madigan, and the “unelected” Tyrone Fahner of the Civic Committee of the Commercial Club of Chicago.
It‘s true that the State of Illinois confronts a greater challenge than most states because of past-elected officials who had blatantly disregarded their legal and fiduciary responsibilities to fully fund the State’s public pension systems for several decades.  Now add to this fiasco the Market crash of 2008-09, the prior practice of “spiking” public-employees’ salaries in their last four years of service, the previous “special-interest” deals made by both sides, and wealthy businessmen writing and endorsing legislative bills in Illinois and we have a disastrous calculation precipitated by fiscal irresponsibility, incompetence, avarice, corruption, officiousness, and bad luck.   
It seems obvious that many current legislators do not want to uphold the State’s constitution. As a friend of mine said to me, “Legislators do not want to be in the pension-funding business anymore.” Why not?  One answer is that some legislators have used the Commission on Government Forecasting and Accountability report (2010) and the Buck Consultants’ valuation report of pension benefits (June 30, 2010) which predicts that the State contributions to the pension funds will exponentially increase despite an 8.5 percent Market rate of return and; thus, some legislators want to renege on the constitutionally-guaranteed contract (explicitly stated in Article XIII, Section 5 of the Illinois State Constitution) to avoid the anticipated increased payments in the future.

Despite the claim that Illinois is the worst state in the country regarding unfunded liabilities (and we know why it is), an essential question to ask is whether the State is in an imminent danger of a financial collapse?  The answer depends upon which recent analysis is used as proof.  According to the Center for Retirement Research at Boston College (May 2011), “The outlook for pension funding is mixed.  First, one concern is that states and localities are falling behind in their annual required contribution [ARC] payments.  They are generally covering normal costs but are not making the amortization payments required to fully fund their pensions.  Paying 100 percent of the ARC should be a priority for all plan sponsors.”  In Illinois, that also includes payments for an exorbitant debt service to the Teachers’ Retirement System (TRS) that is the result of not fully funding the pension system.
Is the only way to “save the pension system” through pervasive and uncompromising reform such as in destroying the existing defined-benefit plan?  The recent, unprecedented response to the spring legislative session proved enlightening, and perhaps an answer to this question is a perspective from the Center for Retirement Research: since actuaries use “smoothing” or the averaging procedure that includes both gains and losses over a five-year period, to determine funding data, why not wait a few more years before drawing further conclusions about what needs to be done to the teachers’ pension system?  

In other words, allow the State’s revenue to recover from the economic downturn of 2008-09.  After all, Illinois does not face an urgent liquidity crisis (because pension fund liabilities are long-term)!   Why not re-evaluate three or four years from now to see whether the economy and Market have recovered; furthermore, continue to use the accounting methods of the Government Accounting Standards Board (GASB).  The GASB actuarial model uses an eight percent discount rate which is more realistic and comparable to the average return of TRS investments since 1982 (at 9.83 percent).  

Moreover, Fitch Ratings states in its February 2011 report, “Enhancing the Analysis of U.S. State and Local Government Pension Obligations,” that “a funded ratio of 70 percent or above [and not 90 or 100 percent is] adequate” (National Conference on Public Employee Retirement Systems, May 2011).  Incidentally, the funded ratio for TRS has increased since 2010 and is approximately 50 percent.
Most states have enough assets (from investment returns, membership and “fully-funded” state contributions) for at least 30 years according to recent studies. Nevertheless, as stated by a report in March, 2011 from the Center for Retirement Research, “the exhaustion date for the state-local sector as a whole is 2023 with returns of six percent and 2033 with returns of eight percent.”   However, Bob Lyons, a TRS trustee, points out that no one knows with certainty how much the Illinois State budget will be in the future or how easy or difficult it might be to make a payment to the pension funds by the State. Most definitely, analyses must include an estimation of assets from State and federal funds, the State’s debt service on pension obligation bonds, the Market rate of return, membership contributions, and the rate of inflation, to name just a few variables.

It’s unfortunate that the State of Illinois has been pressured to address its more challenging unfunded liabilities ill-advisedly.  Indeed, it’s true that the “Pension Clause” guarantees that “benefits will be paid because they are contractual obligations of the employer,” even if the money must come out of a state’s general revenues.  Though a sobering inference to draw is perhaps that without a more scrupulous and reasonable solution for the problem from our “elected” legislators and the IEA’s and IFT’s leadership and their actuaries, the State’s general revenue fund may become the last source of income for retirees. 
One thing to remind these stakeholders is that it’s dishonest, illegal, and costly to ruthlessly amend an existing defined-benefit plan until it becomes unaffordable. Furthermore, teachers need to understand that switching to a defined-contribution savings plan offers no retirement guarantee and; therefore, it is a foolish and risky choice to make without having the needed pool of “fully-funded” financial resources of both State and employee contributions, professional investment managers, and several decades of the types of diversified investments that are not available for an individual retirement account.

The Center for Retirement Research (April 2011) maintains that “meaningful defined-benefit plans could remain as a secure base for the typical public employee, and defined-contribution [savings] plans could be ‘stacked’ on top to provide additional retirement income for those at the higher end of the pay scale. Such an approach would ensure a more equitable sharing of risks…” Three states already use a capped defined-benefit plan in combination with a defined-contribution savings plan for new employees; however, these states do not have constitutionally-protected pensions.
On a final note, it’s appalling to accuse teachers of not wanting to contribute to their pension fund when they have consistently subsidized it since 1939, despite the fact that annual contributions have increased seven times but not by more than one percent each time.  Yes, teachers have always paid their share and the State has not, and now some of our elected officials (and self-appointed, greedy businessmen) believe that “current contributions don’t cover the costs, [and] they also want to reduce the amount of the state budget that goes to funding pensions” (Chris Wetterich, Gate House News Service, June 3, 2011).  

-Glen Brown