Thursday, November 10, 2011

Sustainability, Affordability and Constitutionality: Are They Compatible?

How do we balance sustainability of the public pension system, affordability for the State of Illinois, and constitutionality (Bob Lyons, TRS Trustee)?

Illinois legislators realize that the cost of ramping up payments to address the unfunded liability is unaffordable based upon today’s depressing revenue projections. “In 1995, Illinois passed a pension-ramp bill requiring significant, annual increases in the state's contribution to its public employee retirement systems, to make up for a decades long practice of failing to make the full, employer contributions into the system. That is why the pension contribution escalates… each year. It is also why Illinois has a [total] unfunded liability in excess of $83 billion today [for all five public pensions]” (Center for Tax and Budget Accountability, CTBA).

What can any union leader or anyone else, for that matter, offer the state that will address the increasing service debt and decrease school district contributions and the required state contributions through 2045? According to Buck Consultants (June 2010), total school district contributions will not begin to decrease until 2043, and combined state and federal funds that are required will continue to increase until 2046.

How much do we need to pay of the service debt to keep the teachers’ retirement pension plan and the other four public pension plans solvent, even though the plans have always had an unfunded liability with fluctuating funding ratios that will never come due all at once? What proposals are there besides the Civic Committee’s flawed SB 512? Why would some legislators vote for a bill that has both obvious and unforeseen consequences for everyone “unless something better comes along?”

Why aren’t there any Nobel-prize winning economists of Illinois in this discussion? Where are the most prominent Illinois lawyers, and why aren't their opinions being solicited regarding legal ramifications? Why are we hearing only from the Civic Committee of the Commercial Club of Chicago that has much to gain from the passing of SB 512?

Should the IEA negotiate and "impair" the 1970 pension clause (Article XIII, Section 5)? Did SB 7 ruin any possibility for good-faith negotiations with state legislators (remember what Jonah Edelman revealed)? Is it because of the belief that once one side gives up something inviolable, the other side will insist for more concessions? How will any negotiation affect union members who pay their dues consistently to ensure that their hard-earned benefits are not decreased because public employees, such as teachers, only have one retirement pension and not Social Security to rely upon?

Can the IEA and other unions offer anything by way of negotiation on the issue that “something must be done” about the unfunded liability and the increasing state payments? What should teachers give up to solve the financial problems of this state that are the resultant causes of past-and-present greed, corruption and incompetence?

Moreover, is it fair that teachers and other public employees remain scapegoats for the problems that they did not cause? Indeed, few people care about the legal, moral and ethical appeals that are grounded in such an argument. However, why didn’t the state “consider implementing a new revenue source targeted to repaying pension liabilities that is independent of base revenue streams from income, sales, excise and utility taxes” (CTBA, 2006)? Why didn’t the state also consider a broader tax base and/or taxation of services instead of an increase in income taxes?

The passing of SB 1946 last April of 2010 (the current Tier-Two plan that began in January 2011) will most likely assure the demise of the Tier-One defined-benefit plan. Consider that the current proposed and amended SB 512 by freezing benefits in the Tier-One defined-benefit plan (for those who choose a Tier-Two option for its six percent contribution rate, capped final salary, reduced Cost of Living Adjustment (COLA) and full retirement benefits at the age of 67) will also hasten the demise of the Tier-One defined benefit plan. Consider the inevitability that members who choose the Tier-Three defined-contribution plan (401K) will also hasten the demise of the Tier-One benefit plan, and this will do nothing to eliminate the unfunded liability that the state is required to pay.

One thing seems certain: both current and retired teachers and their families have the most to lose by passing the amended SB 512. Consider that the Tier-One defined-benefit plan depends upon membership contributions for its sustainability, precarious contributions from the State of Illinois, and volatile Market investment returns.

According to the IEA president, Cinda Klickna, "We need to develop a plan that is constitutional, fair to the participants and will ensure the systems will, for many decades to come, continue to deliver the benefits earned by the participants and retirees. The pension systems must be sustainable." The teachers of Illinois are anxiously waiting for that plan.

So what might follow SB 512? Imagine an amendment to the state constitution that challenges Article XIII, Section 5, or a reduction or elimination of the retirees’ COLA and the taxation of their annuity, or the shifting of the state's pension costs to school districts...? What about state bankruptcy as an option? Just ask our U.S. Senator from Illinois, Mark Kirk, about this absurd possibility.

-Glen Brown

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