Friday, July 29, 2011

Selected data from the Comprehensive Annual Financial Report for Illinois, Fiscal Year 2010

 For FY 2010, Illinois received $3.781 billion via the American Recovery and Reinvestment Act
 The State also received $3.581 billion from the Unemployment Compensation Trust Fund
 There are six major revenue funds in Illinois: the federal government, income taxes, sales taxes, licenses and fees, miscellaneous taxes, and public utility taxes
 Total revenues from all governmental funds: approximately $50.603 billion
 There are six major expenditures in Illinois: health and social services, education, intergovernmental, transportation, public protection and justice, and capital outlays
 Total expenditures: approximately $58.224 billion
 As of June 30, 2010, the excess (deficiency) of revenues over (under) expenditures was approximately $7.622 billion
 Other fund deficits: $4.243 billion
 Governmental and fiduciary fund deficits: the State’s General Fund ($9.239 billion), the Personal Property Tax Replacement Fund ($226.359 million), the Local Government Tax Fund of the Department of Revenue ($7.035 million), the Community College Health Insurance Security Fund of the Department of Healthcare and Family Services ($6.688 million) and the SBE Federal Department of Education Fund ($106 thousand)
 In January 2010, general obligation bonds were issued to make the required 2010 pension contributions to the State’s retirement systems for a total of $3.466 billion
 In February 2011, general obligation bonds were issued to make the required 2011 pension contributions for a total of $3.700 billion

Some specific conclusions from the report:

 FY June 30, 2010 “reveals continuing underlying financial weaknesses which significantly impact the State’s overall fiscal health in regards to deferred liabilities, ongoing operational concerns related to cash management and long-term concerns related to pension and other post-employment obligations…
 “Cash flow continues to be an issue, as Illinois has had a running General Revenue Fund deficit… since November 2000…
 “Cash management practices are greatly affected by budgetary practices in relation to deferred liabilities which place additional pressures particularly in the first and second quarters of the year to pay those expenses. [Timing of tax payments affects the State’s cash flow]
 “The State of Illinois is legally mandated to make contributions to the Teacher s’ Retirement System and State University Retirement System… The TRS and SURS are governed by articles 16 and 15, respectively, of the Illinois Pension Code
 “The five State-funded retirement systems were at a 45.4% funded ratio, using a five-year ‘smoothing’ valuation of assets with $75.741 billion in unfunded liability
 “In addition to general and special obligation bonds, the primary government had $1.023 billion in revenue bonds and $6.773 billion in non-pension long-term obligations…
 “Besides general and special obligation bond indebtedness, the State’s largest liability is its net pension obligation… at $22.263 billion
 “Actuarial valuations of an ongoing plan involve estimates and calculations on the value of reported amounts and assumptions about the probability of occurrence of events on a long-term perspective. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the retirement systems and the annual required contributions of the State are subject to continual revision as actual results are compared with past expectations, and new estimates are made about the future…
 “The State’s 50-year funding plan does not meet the more stringent 30-year maximum amortization parameters required to be reported in the State’s financial statements in accordance with the Government Accounting Standards Board…”
 The average Illinois unemployment rate was 10.9%

Wednesday, July 27, 2011

The Running of the Bulls Festival

Pamplona, Spain— Two bulls broke from the pack
and gored a man and a woman on the second day
of the annual running of the bulls festival… —from a news story

There must have been a moment

just before the bulls began their turbo-charging,

and right after Urban Troll and Anne Ruan


were tossed in the air—their bodies

bursting like piñatas—when they thought

about the hugeness of their mistake,

about the bulls’ blind desire to run

and maim anything that got in their way –

their horns hooking into flesh and bone,


leaving eight-inch gashes for exits,

while the sangria-soaked crowd

danced and sang in the streets


among the red bandanas, fireworks

and papier-mâché. It must have been a time

when they felt like deer


running ahead of Weimaraners,

when the four-leaf clover also lost its luck,

and the rabbit gave up another foot.

"The Running of the Bulls Festival" was originally published with a different title in American Goat, 1992.

Monday, July 25, 2011

Spread the Burden of Taxes and Address Tax Inequities in Illinois…

“Everyone is concerned about the state’s ability to pay its unfunded pension liability over time. The truth is that when compared to the state’s projected revenue growth, the state’s required pension contribution may be more manageable than many believe” (Illinois Retirement Security Initiative, a Project of the Center for Tax and Budget Accountability 2011).

We know that the state’s revenue already includes various types of taxes, such as property, sales, excise, individual income and corporate income. Illinois’ revenue system also receives federal aid and other miscellaneous sources of income, to name just a few.

“Even Illinois, [with] the most underfunded pension plans in the country, would only have to boost tax revenue by less than 0.2 percent over the next 30 years to meet its projected shortfalls” (Dean Baker, Co-Director at the Center for Economic Policy and Research).

How might this be accomplished? According to the National Conference of State Legislatures (June 2007), “A high-quality revenue system relies on a diverse and balanced range of sources… If reliance is divided among numerous sources and their tax bases are broad, rates can be made low in order to minimize the impact on behavior. A broad base itself helps meet the goal of diversification since it spreads the burden of the tax among more payers than a narrow basis does. And the low rates that broad bases make possible can improve a state’s competitive position relative to other states.”

Consistent with this understanding, the Chicago Metropolitan Agency for Planning (CMAP July 2011) argues that the tax system in Illinois and most other states do not reflect today’s economic realities. In the last several decades, the U.S. economy has slowly shifted from manufacturing industries to a “services and information-based economy... Since the early 1970s, spending on services has exceeded spending on goods. In 2010, consumers spent twice as much on services (66.9 percent of total personal consumption expenditures) as on goods (33.1 percent of total personal consumption expenditures). This shift in the fundamentals of the economy has changed the relationship between consumption and tax revenue… Changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures.”

In accordance with these statistics, the Center on Budget and Policy Priorities (July 2009) proclaims that “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services. Five of the 45 states with sales taxes impose them on fewer than 20 services… Research finds that purchases of some services do not fall as precipitously as durable goods purchases do when the economy slows nor rise as rapidly when the economy is booming” (Federation of Tax Administrators). States that do not tax services, such as Illinois, “probably could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively.”

The tax system in Illinois is inefficient. “The tax system itself is influencing economic activity” (CMAP) by taxing goods that are consumed rather than the consumption of resources. Furthermore, the tax system is also inequitable because “lower-income taxpayers typically spend a higher percentage of their income on tangible goods than higher-income people.”

Illinois income tax uses a single rate structure that results in low-income wage earners paying more taxes than the wealthy. As stated by the Institute of Taxation and Economic Policy (ITEP November 2009), Illinois is among ten states in the nation with the highest taxes paid by its poorest citizens at 13 percent.

In 2007, the top one percent of wage earners in the U.S. (with an average income of just under $2 million a year) paid 6.4 percent in total taxes while the bottom 20 percent of wage earners (with an average income of just under $11 thousand a year) paid 10.9 percent in taxes (ITEP).

Creating a progressive tax structure and taxing services would help rectify the tax inequities in Illinois. They would provide needed revenue to balance the State’s budget and the resources to reduce the unfunded liabilities created by past General Assemblies. 

-Glen Brown

Friday, July 22, 2011

Dillinger, Alias Jimmy Lawrence

June 22, 1903 - July 22, 1934

He walked out into a night
delirious with moonshine,
the woman’s perfume suddenly lifting
from his arms – all sure signs of death.
What seemed like a good idea
rewound his brief life’s history.

This time he had no wooden gun for escape,
no forceps to flip his tongue,
to bring him back from the dead
like a gangster Lazarus.
Only Anna Sage knew who he was. He told her
his Depression-day Robin Hood stories,
but she preferred Indiana to Rumania.

Not until the moment he left the Biograph theatre,
right after Melvin Pelvis lit a cigar,
called out his real name,
did a kind of alley loneliness
rise like a red skirt of darkness
then exit his right eye for good.

“Dillinger, Alias Jimmy Lawrence” was originally published in The Illinois Review, 1993.

Sunday, July 17, 2011

A Call for Caution for This Fall’s Veto Session in Illinois

Who are the “experts” on pensions? Is it the Commission on Government Forecasting and Accountability or the Center for Retirement Research at Boston College? Is it the Buck Consultant Reports or the National Association of State Retirement Administrators? Is it the Pew Center on the States or Fitch Ratings? Is it the Government Finance Officers Association or the Center for State and Local Government Excellence? Is it the National Institute on Retirement Security or the National Conference on Public Employee Retirement Systems? Is it the Center on Budget and Policy Priorities or the Illinois Retirement Security Initiative? Is it the Economic Policy Institute or the Teachers’ Retirement System? Indeed, there are many “experts” on defined-benefit pensions and their sustainability, and these organizations are just a few of them.

Is it possible then that we can draw different conclusions using the same or different sort of evidence provided by such groups? The answer is yes. Are all the “experts” in agreement? The answer is no. Should they be? It is quite impossible. Then how do we come to know matters of fact, and what is the distinction between relationships among beliefs and questions of fact?

When we begin to realize how uncertain and unreliable data-driven opinions sometimes are and that what we believe is true is often either indefensible or contradicted, especially when using various data grounded in a state of flux, we discover the elusiveness of the truth we seek.

Contemplate these variables: the State of Illinois’ current tax system and budget practices, revenue growth and long-term costs of benefits, methods for determining accrued liabilities and actuarial value of assets, unfunded liabilities and funded ratio, the historical rates of return and actuarially-required contributions, discount rates and asset smoothing, to name just a few.

Moreover, examine these considerations: the fact that pensions carry liabilities into perpetuity deserves special attention; long-term consequences of legislative policy decisions will be based on particular, changeable data; the immediate effects of any legislation passed will affect primarily middle-class citizens who are dependent upon an imperfect fact-finding and decision-making process; there must be a fair balance between the immediate financial losses incurred and the proposed long-term gains of any legislation imposed upon public employees and their families; the wealthy and corporations must pay their fair share of taxes, and the State must end their tax breaks, tax shelters, government subsidies, and out-sourcing of American jobs if it is truly going to be a “shared sacrifice.”

Claims are considered effective when supported by evidence that is sufficient, accurate, and relevant. Will all the stakeholders (legislators, union leaders, public employees and retirees) agree about the evidence and resolution for the public pensions’ unfunded and future liabilities? Probably not, because disagreements about claims and their outcomes are generally about framed and selected evidence or underlying values and beliefs. Nonetheless, the aim of a consensual argument is to find common ground on an issue and a solution on which most everyone can reasonably agree.

Do we agree that outside, impartial “experts” or actuaries should be present at these summer and fall discussions? At best, final decisions made by all of the stakeholders (“non-experts”) are judgments based upon pension “experts” that can provide clarity of inquiry and logic of its reasons and support through research while appealing to shared values, ethical beliefs and realistic assumptions of the principal decision makers. All stakeholders need to ask of their own and of others’ arguments and discourse: what is being emphasized, and what is being omitted? What are the unanswered and unstated questions? Who is using what data and for what purpose? Are all debates without bias, rationalizations, wishful thinking, causal over-simplifications, hasty generalizations, faulty analogies, tautologies, non sequitur, begging the question, and appeal to ignorance and fear?

It is equally essential to guard against questions that demand a choice between two answers which are, in fact, not exclusive or not exhaustive, (just read a few recent legislators’ letters to the editor). Questions about data should be open-ended and dictate the kinds of facts which will serve to solve the problem, without dictating the solution itself. Most noteworthy, the best answers to any questions we can ask about pension statistics and the concept of sustainability must be equitable and empirically verifiable, though these indicators remain invariably challenging. Finally, and most importantly, consider that there is not enough time in a short veto session to address these vital issues and to pass such significant pension legislation that will affect hundreds of thousands of people in Illinois. Perhaps a call for continued prudence by all of those involved in this dialogue is something that we might all agree to and, thus, create a more secure and desirable outcome for everyone next spring.

-Glen Brown

Thursday, July 14, 2011

What else do defined-benefit pension plans do for many Americans?

Diane Oakley, the Executive Director of the National Institute on Retirement Security (NIRS), states in her testimony to the U.S. Senate Committee on Health, Education, Labor and Pensions (July 12, 2011) that defined-benefit pension plans ensure self-support and independence for middle-class Americans in retirement “while simultaneously fueling the economy, providing capital to the financial markets, and reducing government expenditures… Pensions can deliver the same level of retirement income as an individual 401(k) type savings account at half the cost” as a result of their professional asset management and better long-term investment strategies, particularly during challenging economic times. Her data include the effects of defined-benefit pension plans on local, state, and federal economies and on retirees’ self-sufficiency.

NIRS estimated that public and private sector pension plans in 2009
* provided a total economic impact of $756 billion;
* supported more than 5.3 million American jobs;
* contributed more than $121.5 billion in annual local, state, and federal revenue.

NIRS calculated that benefits in 2006 supported economic activity which
* had a total economic impact of more than $358 billion;
* supported more than 2.5 million American jobs that paid more than $92 billion in total compensation to American workers;
* contributed more than $57 billion in local, state, and federal tax revenue.

NIRS assessed that pension income received by nearly half of older American households in 2006 was associated with
* 1.72 million fewer underprivileged households and 2.97 million fewer nearly-poor households
* 560,000 fewer households experiencing a food privation
* 380,000 fewer households experiencing a shelter adversity
* 320,000 fewer households experiencing a health care hardship.

In light of today’s economic problems, defined-benefit pension plans provide a bastion of hope and financial stability for the American people.

Monday, July 11, 2011

What Will Be Illinois' Next Move Regarding Its Public Pensions' Liabilities?

Public Act 88-593 (the 1995 Funding Law) requires the state-funded retirement systems in Illinois to attain a 90-percent funding ratio by Fiscal Year 2045, and the Commission on Government Forecasting and Accountability (CoGFA, March 2011) claims that “any decrease in the 90-percent funding ratio would adversely impact both the State’s credit rating (resulting in higher costs to the State) and the State’s ultimate ability to adequately fund its pension obligations.” (It is important to note that last May, only 15 states had a funded ratio over 70 percent; the average funding ratio overall was 63 percent; the highest funding rate belonged to Wisconsin at 88 percent) (Barclays Capital, May 2011).

Funded ratios measure the portion of a retirement plan’s liabilities covered by assets. According to the Center for Retirement Research at Boston College (CRR, July 2011), “the funded ratio – plan assets divided by the actuarial accrued liability – is a snapshot of the plan’s funding status at a given moment in time.” To look at this in another way, it would mean that a fully-funded retirement system would have enough assets to pay all benefits earned to date to all of its members, both current and retired.

Nevertheless, CoGFA argues that a 90-percent funding ratio is necessary even though an analysis of U.S. state and local government pension obligations from Fitch Ratings (February, 2011) states that a 70-percent funding ratio is adequate when based on a “rolling five-year average of market value of assets,” and one CRR report (May, 2011) finds that on average state and local funded ratios are approximately 77 percent; an earlier CRR report (March 2011) claims that most retirement systems will remain sustainable until 2041, given a rate of return at eight percent and consistent, actuarial-required contributions from both state and public employees. In view of these aforementioned funding-ratio paradoxes, should the State of Illinois decrease its discount rate and, therefore, its funding ratio?

To decrease the funding ratio would mean the State’s contribution would increase to the pension system’s plans. Furthermore, the State believes that its recent pension reform, Public Act 96-0889 or Senate Bill 1946 (the Two-Tier System for new hires in 2011), will enable the State to reduce its contribution “by $71 billion” (CoGFA). (SB 1946 passed on March 24, 2010 to prevent Illinois from being “viewed negatively by the ratings agencies and the market as a whole,” which would have resulted in lowered credit ratings and increased borrowing costs. The State of Illinois needed $100 billion to avoid undesirable ratings and projected that SB 1946 would allow the State to save $100 billion by 2045. Governor Quinn signed the bill into law on April 14th).

Now consider that CoGFA remarks that “adhering to the pension funding schedule set forth by Public Act 88-593 will continue to remain the most significant fiscal challenge for the State of Illinois… The single largest driver of the growth in the unfunded liabilities has been insufficient employer contributions…, insufficient investment returns [and inflation], benefit increases, changes in actuarial assumptions, and other miscellaneous demographic factors” such as salary growth, retiree longevity, and the length of employee service.

Even so, ponder further that in determining actuarial accrued liability, the majority of states use an entry-age method. As stated by the Center for State and Local Government Excellence (May 2008), “the entry-age method recognizes a larger accumulated pension obligation for active employees than the projected-unit credit and generally requires larger annual contributions… Sponsors that opt for the ‘cheaper’ funding regime – namely the projected-unit credit – may be less committed to funding their plans and, therefore, less likely to make the full annual-required contribution.”  Yes, the State of Illinois uses the projected-unit credit actuarial cost method.

Add to this realization that Illinois has adopted asset smoothing (Senate Bill 1292) to determine the actuarial value of its plan assets. (The asset smoothing method uses expected returns on the asset mix and averages both past and anticipated asset values, generally over a period of five years). Now add to this combination the 2008-09 market collapse that significantly reduced the value of all retirement systems’ assets across the country and decades of not fully funding the Illinois pension systems, and one can easily see that the past five years would include profound, negative returns in the State’s assessment of its retirement systems.

The solutions for the current economic situation in Illinois, according to CoGFA, include lowering the assumed rate of investment return and keeping the funding ratio at 90 percent, nevertheless; moreover, this Commission maintains that unfunded plans “require contributions to pay for benefits that are currently being accrued as well as to eliminate the shortfall between assets and accrued liabilities.”

Questions need to be forwarded. Besides Tyrone Fahner and the Civic Committees’ (Illinois Is Broke) recent attempt to compel all current employees into a tier-three defined-contribution plan (and perhaps reap the resultant financial gains) and the State’s attempt to offer tier-two and tier-three systems that would increase the retirement age and cap the maximum salary for benefit calculation for current teachers, will these optional tier systems and the increased contributions for public employees in tier one continue to be the legislative-funding strategy? Will this stratagem entail not only raising the active employees’ contribution rate but adjudicating that the State’s actuarial-required contribution becomes a “statutory” payment each year?

All the same, two important inquiries need to be answered: will any of these changes and contribution increases eliminate the pension debt or unfunded liability, and can the public trust legislators who can easily change the laws that they enact? The answer to both questions is "No."

Finally, two other critical uncertainties remain: will the state's policymakers eventually attempt to reduce or eradicate compounding the annual cost-of-living adjustments and, in the final analysis, will Illinois legislators forsake their sworn oaths to the State and U.S. constitutions and “let the courts decide” whether Article XIII, section 5 of the Constitution of the State of Illinois can be challenged once again? The answer to these questions is more than likely.

-Glen Brown

For further information and opinions regarding these issues, please also read the following posts: "Unfunded Liability and Sustainability of a Pension" (July 5); “SB 512, Illinois Is Broke, and the Chicago Tribune, et al. vs. Your Financial Security” (June 20); “What We Believe We know about the Sustainability of the TRS Pension” (June 10); “Sustainability of the Teachers’ Pension” (June 5); “Defined-Contribution Plan vs. Defined-Benefit Plan” (May 25); “Antedated Court Cases: Challenging the Pension Clause” (May 18); “The public pensions’ funding gap: three questions/three solutions” (May 14); and “Pensions: an Argument Regarding Sustainability” (April 28).

Tuesday, July 5, 2011

Unfunded Liability and Sustainability of a Pension

Two solutions from The National Institute on Retirement Security (June 2011) that will address a pension plan’s affordability and sustainability are changes to benefits should be actuarially valued and properly funded and annual, required employer pension contributions must be paid in full each year.

The Center for State and Local Government Excellence (April 2008) adds that a payment to amortize a pension plan’s unfunded actuarial liability must also be made and that the amount of money that a state needs to put aside each year depends on the actuarial cost method adopted.

According to Pew Center on the States (June 2011), the Governmental Accounting Standards Board is going to adopt new regulations to ensure that all states use the same method for calculating their pension liabilities. “The new systems would take an ‘accounting-based’ approach that employs a longer-term view to ensure that the overall costs of providing benefits are accounted for,” instead of using a yearly “funding-based” approach. The new rules will also calculate investment returns by smoothing investment gains and losses over a five-year period.

Furthermore, state governments would no longer “use historical rates of return to determine long-term liabilities if they haven’t set aside enough money to pay retirees. Instead, they’ll have to use a combination of a historical rate of return and a lower rate pegged to the municipal bond market, which will make their long-term liabilities appear larger.”

Indeed, new rules for calculations will provide more reasons to fret or not to fret. For instance, determining public pension costs or projecting benefits to be paid out have depended upon the value of benefits earned by retirees, the value of pension obligations to active employees (based on their current salaries and years of experience), the effect of future salary increases on the value of pension rights already earned by active employees, and the benefits that will be earned by current employees over the remainder of their working lives (The Center for State and Local Government Excellence). Undeniably, the slightest change to these actuarial suppositions could have a significant impact on the amount of required contributions needed or the amount of the pension benefit.

Dave Urbanek, TRS Public Information Officer, states that the “Teachers Retirement System (TRS) does not calculate ‘what if’ scenarios…, [for] an endless number of outcomes can be derived through use of statistical data. The numbers can be manipulated in innumerable ways…, using those calculations to accomplish a partisan political or policy goal…

“[Unfortunately, some] pension critics have done a great job of convincing a lot of people that the [State’s] unfunded liability must be paid off all at once at some point in the future, [but] the unfunded liability really has little to do with the practical sustainability of the system…

“In fact, even under the accounting and actuarial definition of ‘full funding,’ (70 percent or 80 percent of total long-term liabilities, depending on who you ask), the [TRS] system would still carry a real unfunded liability of several billion dollars… Full funding would be necessary if, at some point in time, TRS needed to pay everyone it owed all the money due them. But that can’t happen under the way the System is structured [because] TRS is a perpetual government agency…

“Private plans can cease to exist and must plan for a time when they must pay out all obligations at the same time. Many times, pension critics believe that a public plan, like TRS, should operate and be treated like a private plan. But it’s really apples and oranges…

“TRS has survived for more than 70 years – because over the long term, the System’s income and accumulated assets continue to be greater than what are required to pay out in any given year… The only way TRS [will run] out of money is if income from all sources – teachers, school districts, investments and the State – dries up for a lengthy period of time. Not just one or two sources, but all sources.”

Legislators can change the funding date (Public Act 88-0593 requires that the State of Illinois to bring total assets to 90% funding by 2045 for all five pension systems), the assumed rate of return (currently at 8.5 percent), “or lower the definition of ‘full funding’ if they want… Either of those moves would cut the state’s annual contribution and help ease the cash flow problem, [but] doing that would not really change the current fiscal health of TRS” (Dave Urbanek).