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.  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, TRS 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 needed resources for more revenue and the unfunded liability or 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 may be wishful thinking. 

-Glen Brown


2 comments:

  1. What we do know today: Across the United States and elsewhere in the world, there still is an unprecedented attack on public employees’ rights and benefits, especially teachers’ pensions. Those of us in Illinois have felt, as has the nation, the impact of the 2008-09 financial crises. State policymakers have responded to this catastrophe, not by addressing the structural deficits that are resultant of the lack of revenue growth needed to meet the increased cost of services, but by irrational public ‘pension reform.” In one particular state, however, its economic austerities have also been intensified by decades of legislative irresponsibility and deceptiveness. The results are the unconscionable, unfunded liabilities of the Illinois public pension systems and an attempt to break a constitutional contract with public servants.

    Since 1953, Illinois policymakers have consistently failed to make the annual required contributions to the state’s pension systems, primarily because they could then pay for services and their “pet projects” without raising taxes; they have bargained with previous union leaders and allowed for enhancements of pension benefits without fully funding the public pension systems; moreover, they created a flawed re-funding schedule (a "pension ramp" in 1995), and they have refused to correctly amortize the pension systems’ unfunded liabilities. In short, they have favored corporate interests rather than the interests of their citizenry and; thus, they have seriously sabotaged the public employees’ retirement plans and the State of Illinois’ future economic solvency through calculated mismanagement and fiscal irresponsibility. Past state policymakers left us with this fiscal debacle.

    Current Illinois policymakers are equally as reckless in employing the old cost-avoiding tactics as their predecessors. They continue to use an ineffective and “cheaper” actuarial cost method (a projected-unit credit which back loads required contributions) instead of an entry-age normal cost method for determining pension funding and benefits earned; they continue to issue obligation bonds with the assumption that they will reap high investment returns, and they continue to be concerned more about Bond-Rating organizations than the protections of their public employees’ guarantees and security. They prefer to jeopardize the public employees’ retirement plans through “pension reform” by contesting teachers’ constitutional rights and cutting their benefits, even though revenue and pension debt reform is the legal and moral solution.

    Instead of protecting public pension rights and benefits, which have a legal basis under Illinois State and U.S. Laws; instead of restructuring the state’s revenue base to pay for the state’s growth in expenditures and its injudiciously-accumulated debts and obligations, there are policymakers who have chosen to challenge the Illinois constitutional provision (Article XIII, Section 5) and diminish (and predictably destroy) the public employees’ defined-benefit pension plan, their health care benefits, and their cost-of-living adjustments. These policymakers are liars and thieves.

    From http://teacherpoetmusicianglenbrown.blogspot.com/2012/10/dear-diane-ravitch-teachers-need-your.html

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  2. "Since 1953" should actually be "since 1917," according to Eric M. Madiar, previous Chief Legal Counsel to Illinois Senate President John J. Cullerton and Parliamentarian of the Illinois Senate.

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