Insolvency by Cinda Klickna, IEA President

We are likely to see an increase in the level of news coverage about the Teacher's Retirement System (TRS).  News coverage is expected to result from this week’s meeting of the Teachers’ Retirement System (TRS) Board of Trustees. That meeting concluded March 30th. 

The TRS executive director, Richard Ingram, reported to the board that the failure of the state to make its required pension payments has created a situation that, unless it is addressed, could result in TRS becoming insolvent years from now.

In the recent TRS meeting Ingram told the board that, “The evidence has mounted to the point that it is prudent to assume that we will not be funded at the levels provided in statute.  Leading members of the General Assembly have all but said as much, and in the final analysis that is what really matters.”

The TRS actuaries have run figures that show decreases in State funding could lead to insolvency.  These are realities that the TRS Board feels must be shared with members and discussed with legislators. IEA will continue in our ongoing efforts to find solutions.

Ingram’s point is that the pension issue needs to be addressed. Continuing to underfund the pension systems is not acceptable.

You can expect to see news stories about this report, though it’s really a restatement of what Ingram has been saying for some time. In fact, much of what is likely to be reported will seem familiar to those who heard Ingram’s remarks at the IEA Representative Assembly in March.

IEA is part of the labor coalition that is focused on making sure that our members get the pensions they have paid for. IEA is also part of Gov. Quinn’s workgroup that has been meeting to discuss ideas for addressing the pension issue.

IEA’s participation in negotiations on pension policy is guided by the principle that we will only consider proposals that are constitutional and will help stabilize the systems and ensure that members get the pensions they have paid for.  Please check the IEA Website regularly for updates on pensions.

Insolvency by Bob Lyons, TRS Board

Up until now, “Insolvency” has been the mantra of the Civic Committee (Illinois is Broke) and our state legislators. “The pension funds are going to run out of money and, thus, the pensions will not be paid.” It has served as a powerful argument as to why something must be done. Of course, “something” has been defined as reducing the cost of the pensions. And we are told that the result of pension reduction will be the pension funds will be saved, and that even if we get less, at least we will have a pension. Our argument in response has been that the pension funds will not go insolvent as long as the active teachers, the school districts and the state make their payments. Those waving the banner of imminent insolvency have responded, “Yes, you have just made our argument. The state cannot continue to make its payments.”

This has been an ongoing topic at TRS meetings and one that I have reported on for the last couple of years. The TRS board finished a three-day retreat in Oak Brook yesterday at mid-day. Your pension board made the decision to face up to reality. We are looking at insolvency and, though not imminent, it is clear that the state is not going to make its payments going forward.

As you know this is the first year in three years that Illinois did not borrow to fund the pensions and, while they are running about $280 million behind in their monthly installments for the year so far, it is expected that the State of Illinois will complete the full payment of $2.4 billion by the end of June. Not counting the debt service, the state payments to the three systems and five pension funds for this fiscal year is $5.1 billion, and the projected payment for next year is an increase of $800 million to $5.9 billion.  

The budget passed in the House on Thursday and put aside $5.1 billion for the pension. Are the [legislators] already assuming that they are going to cut the payment? Senator Bill Brady, a member of the Governor’s working group on pensions, has argued that any solution to the pensions must be based on the understanding that the temporary 5% state income tax will go to 3.75% in tax year 2015 and that will reduce the state’s new revenue by several billion dollars. The "pension reducers" are going to use the argument that since the state will have less money, the state can only pay less, so change the cost of pension benefits – a lot!

Our executive director, Richard Ingram, reported to the board, “The evidence has mounted to the point that it is prudent to assume that we will not be funded at the levels provided in statue. Leading members of the General Assembly have all but said as much, and in the final analysis that is what really matters.” Do any of you want to make the opposite argument that the state will continue to follow the mandates of the ‘95 law? Not knowing at what percentage we may be funded, we cannot say how long it would take for us to run out of money. Our actuaries tell us that if the state just gives us $2.4 billion a year every year going forward…, we would be insolvent by June, 2038. Given my age at 73, I could live with that, but we are guardians for everyone in the system including those young people who just started teaching. Assuming the state can increase the funding… at 3% per year and make it to 2049, we would still run out of money.

If we are looking at insolvency, we need to make it work for us. Future insolvency is a powerful argument for the State of Illinois to face a reality where the current temporary tax must be made permanent. Illinois cannot afford austerity. The state cannot afford to cut education, human services, public safety, economic development, and pension benefits. Illinois has a revenue problem – and there is not enough revenue. Our whole tax structure needs to be restructured. But that is not purview of the TRS pension board. Our responsibility is to make our policies fit the new reality, and we voted to do so yesterday on March 30, 2012.

This is what we are going to do:

1) Use only actuarially-based math to determine contributions and liabilities.

The Illinois pension math dictated in the pension code artificially lowers the state’s cost of funding pensions. These laws supersede the true calculation of the state’s annual pension contribution. We need to calculate the cost the way the rest of the world does it. Here is a breakdown of the differences:

Illinois Political Math:

· The state’s goal would be to have only 90 percent of the assets on hand to pay all future obligations and maintain a 10 percent unfunded liability;

· The state’s annual contribution is reduced each year by the amount of debt service needed to pay off the bonds sold over the course of the last decade to finance the state’s annual contribution;

· The state’s goal is to reach 90 percent funding in 50 years;

· Future savings over several decades from reform measures are counted now before they are actually realized;

· Total price tag for fiscal year 2013: $2.7 billion.

Standard Actuarial Math:

· The state’s goal would be to retire the unfunded liability and have 100 percent of the assets on hand to pay all future obligations;

· The state’s annual contribution is not reduced each year by the amount of debt service needed to pay off the bonds sold over the course of the last decade to finance the state’s annual contribution;

· Obligations are amortized over a 30 year period;

· The annual cost of pensions to the state is based on what is needed to fund pensions now;

· Total price tag for fiscal year 2013: $3.8 billion.

2) Illinois must enact funding guarantees for the pension systems into law.

A statutory funding guarantee would ensure that all future state government contributions are made in full when they are due. Most other states operate with these guarantees and, in Illinois, the Illinois Municipal Retirement Fund benefits from this type of mandated payment.

3) The financial inequities of the Tier II funding and benefit structure must be fixed.

Current law requires Tier II members to pay 9.4 percent of their salary and that subsidizes both Tier I and Tier II benefits. The Tier II contribution is 50 percent higher than the benefit’s value, which is 6 percent of their pay.

In 20 years, when Tier II members are a significant majority in TRS, the subsidy they pay will cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. This is fundamentally unfair to Tier II members.

These new positions will cost the state more money with an increase of the FY 13 contribution and a reduction of contributions from Tier II teachers. We believe that a funding requirement can be written that will make the payment guarantee a benefit that can be protected by the constitution, and that too will cost the state money.

As you can well imagine, these steps will not be popular. We have already heard from critics about accepting the reality of future insolvency. Our fiduciary responsibility to the fund and to all of you requires us to take steps now to protect the pensions in the future. We are doing what we are required to do and what we feel is right.

The Springfield State Journal-Register will have a story on our new direction Sunday, and you can expect considerable follow-up in the Illinois press to follow. TRS Executive Director Ingram will be continuing his Four-Corner Tour of the state in Elizabeth and Freeport on Wednesday, April 4th, and this will be his topic. As questions.

Scroll down and read "Why Are We Still Focusing on the Wrong Issues?" (March 30th)

Why Are Legislators Still Focusing on the Wrong Issues?

As a young man, I was taught to “pay my debts” and to “keep promises” that I made to others. I was taught to “face the consequences” of my actions.  I was taught to “work hard” and “never give up.”  Both of my parents never finished high school because they needed to find jobs to support themselves.  They were uneducated, but they knew a lot about instilling responsibility, integrity, courage, discipline, and perseverance.  I wish these values were evident in our Illinois policymakers today: to work hard to find the ethical solution for funding the public pension systems, to become morally intrepid without abdication, and to raise the needed revenue to pay the state’s debts instead of reneging on a constitutionally-guaranteed contract made to public employees who have certainly kept their promise to pay their "fair share." The following points are the issues and solutions regardless of what some legislators, the Civic Committee, the Civic Federation, the Chicago Tribune, and others propagate otherwise:

·         “Illinois does not raise enough General Funds revenue to fund critical public services.  Its rate of growth is lower than that what is needed to simply maintain existing levels of services after accounting for inflation and population growth” (The Center for Tax and Budget Accountability).

·         “Given an appropriately designed graduated-rate structure, Illinois could cut the overall state income tax burden for 94 percent of all taxpayers—on average providing a tax cut to every taxpayer with less than $150,000 in base income annually, raise at least $2.4 billion more in revenue, and keep the effective individual income tax rate for millionaires well below five percent…  Illinois taxpayers with the bottom 94 percent of base income collectively would receive an annual tax cut of $1.06 billion… [T]he combined effect of this policy would be a stimulus to the economy from tax cuts and additional state spending (assuming that the additional revenue is used to fund current public services that would otherwise not be funded) that would create at least 36,000 private sector jobs in communities across Illinois…” (The Center for Tax and Budget Accountability).

·         Tax services. Illinois is one of five states with sales taxes on fewer than 20 services (The Center on Budget and Policy Priorities);

·         “Broaden the sales tax base to include selected consumer services for an estimated new revenue of $550 million a year” (IEA);

·         Increase taxation on the wealthy: Illinois 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 (The Institute on Taxation and Economic Policy);

·         Close tax loopholes for corporations, especially oil companies and their offshore drilling “for an estimated new revenue of $75 million a year” (IEA);

·         Eliminate the tax loophole for “Tax Increment Financing Districts” and save “$1.2 billion a year” (Greg Leroy, GoodJobsFirst.org);

·         Eliminate “Edge Tax Credits” for large corporations and save “$347 million a year” (Leroy);

·         Eliminate “Accelerated Depreciation” or “write offs” of all assets and save “$333 million a year” (Leroy);

·         Eliminate “Single Sales Factor” that “allows large corporations to cut their taxes 80-90% and save "$96-217 million a year" (Leroy);

·         Eliminate “Vendor Discounts” that allow companies “to keep an uncapped part of their state taxes as a ‘processing’ fee” and save “$126 million a year” (Leroy);

·         Raise the cigarette tax “for an estimated new revenue of $300 million a year” (IEA);

·         Reinstitute “fund sweeps”: surplus revenue should be added to the General Revenue Fund “for an estimated new revenue of $300 million a year” (IEA);

·         Add “exceeded revenue” from the Road Fund (motor vehicle and driver’s license fees) to the General Revenue Fund “for an estimated new revenue of $250 million a year” (IEA);

·         Reduce aggregate transfers/eliminate “some statutory transfers” from the General Revenue Fund “for an estimated new revenue of $200 million a year” (IEA);

·         Eliminate or cap the “retailers’ discount” that businesses keep: 1.75% of sales taxes paid for by the rest of us “for an estimated new revenue of $100 million a year” (IEA);

·         Increase taxation on gambling and alcohol;

·         Implement a more timely system of payments (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 also affects the state's cash flow and should be adjusted accordingly);

·         Examine and improve the efficiency of the state’s government;

·         Focus on increasing the state’s revenue to pay the state’s debts without scapegoating public employees!

Nevertheless, the Pension Protection Clause (Article XIII, Section 5 of the Illinois Constitution) ensures that pensions will be paid even if a pension system defaults or is on the verge of default.

--glen brown

Read “Understanding Illinois’ Budget Deficit and Solutions” http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/solutions-for-illinois-budget-deficit.html

The Iceman Cometh No More

He was snatched from death in 1991 completely outfitted
with the implements of everyday existence 5300 years ago
on the border between Austria and Italy...
except for penis and scrotum.       
--from a news story

Had the sloe berry and mushroom eater
arisen from his carved stillness
amid an ejaculation of protests
over custody rights in a room too bright to focus,

he may have groped for his lucky charm
to uncast the spell;
he might have known what to barter:
copper ax and rucksack for tissue and pouch.

But curiosity erected a jackhammer’s sadness,
a refrigerator’s hum,
and a table souvenir like a displaced part of desire
found at the edge of a melting glacier—
the leather quiver without an arrow.

“The Iceman Cometh No More” was originally published by Thorntree Press in Troika IV, 1994.

Why Are Legislators Still Focusing on the Wrong Issues?

As a young man, I was taught to “pay my debts” and to “keep promises” that I made to others. I was taught to “face the consequences” of my actions.  I was taught to “work hard” and “never give up.”  Both of my parents never finished high school because they needed to find jobs to support themselves.  They were uneducated, but they knew a lot about instilling responsibility, integrity, courage, discipline, and perseverance.  I wish these values were evident in our Illinois policymakers today: to work hard to find the ethical solution for funding the public pension systems, to become morally intrepid without abdication, and to raise the needed revenue to pay the state’s debts instead of reneging on a constitutionally-guaranteed contract made to public employees who have certainly kept their promise to pay their "fair share." These are the issues regardless of what some legislators, the Civic Committee, the Civic Federation, the Chicago Tribune, and others propagate:

·         “Illinois does not raise enough General Funds revenue to fund critical public services.  Its rate of growth is lower than that what is needed to simply maintain existing levels of services after accounting for inflation and population growth” (The Center for Tax and Budget Accountability).

·         “Given an appropriately designed graduated-rate structure, Illinois could cut the overall state income tax burden for 94 percent of all taxpayers—on average providing a tax cut to every taxpayer with less than $150,000 in base income annually, raise at least $2.4 billion more in revenue, and keep the effective individual income tax rate for millionaires well below five percent…  Illinois taxpayers with the bottom 94 percent of base income collectively would receive an annual tax cut of $1.06 billion… [T]he combined effect of this policy would be a stimulus to the economy from tax cuts and additional state spending (assuming that the additional revenue is used to fund current public services that would otherwise not be funded) that would create at least 36,000 private sector jobs in communities across Illinois…” (The Center for Tax and Budget Accountability).

·         Tax services. Illinois is one of five states with sales taxes on fewer than 20 services (The Center on Budget and Policy Priorities);

·         “Broaden the sales tax base to include selected consumer services for an estimated new revenue of $550 million a year” (IEA);

·         Increase taxation on the wealthy: Illinois 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 (The Institute on Taxation and Economic Policy);

·         Close tax loopholes for corporations, especially oil companies and their offshore drilling “for an estimated new revenue of $75 million a year” (IEA);

·         Eliminate the tax loophole for “Tax Increment Financing Districts” and save “$1.2 billion a year” (Greg Leroy, GoodJobsFirst.org);

·         Eliminate “Edge Tax Credits” for large corporations and save “$347 million a year” (Leroy);

·         Eliminate “Accelerated Depreciation” or “write offs” of all assets and save “$333 million a year” (Leroy);

·         Eliminate “Single Sales Factor” that “allows large corporations to cut their taxes 80-90% and save "$96-217 million a year" (Leroy);

·         Eliminate “Vendor Discounts” that allow companies “to keep an uncapped part of their state taxes as a ‘processing’ fee” and save “$126 million a year” (Leroy);

·         Raise the cigarette tax “for an estimated new revenue of $300 million a year” (IEA);

·         Reinstitute “fund sweeps”: surplus revenue should be added to the General Revenue Fund “for an estimated new revenue of $300 million a year” (IEA);

·         Add “exceeded revenue” from the Road Fund (motor vehicle and driver’s license fees) to the General Revenue Fund “for an estimated new revenue of $250 million a year” (IEA);

·         Reduce aggregate transfers/eliminate “some statutory transfers” from the General Revenue Fund “for an estimated new revenue of $200 million a year” (IEA);

·         Eliminate or cap the “retailers’ discount” that businesses keep: 1.75% of sales taxes paid for by the rest of us “for an estimated new revenue of $100 million a year” (IEA);

·         Increase taxation on gambling and alcohol;

·         Implement a more timely system of payments (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 also affects the state's cash flow and should be adjusted accordingly);

·         Examine and improve the efficiency of the state’s government;

·         Focus on increasing the state’s revenue to pay the state’s debts without scapegoating public employees!

-Glen Brown

Read “Understanding Illinois’ Budget Deficit and Solutions” http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/solutions-for-illinois-budget-deficit.html

A Response to TRS Executive Director Dick Ingram’s Address to Delegates at the IEA Representative Assembly

“We cannot invest our way out of the funding circumstances that have been created over the last three, four, five decades… We can no longer rely on the old assumptions… We need to address the new funding realities… The constitutional protections that we focus on, very appropriately here, create a different kind of challenge for us.” –Dick Ingram

About eight months ago, many of the following questions were posted on this blog: who are the “experts” on public pensions?  Is it the Civic Federation or should it be the Center for Economic and Policy Research, the National Institute on Retirement Security, and the National Conference on Public Employee Retirement Systems?  Is it the Civic Committee of the Commercial Club of Chicago or should it be the National Association of State Retirement Administrators and the Center for State and Local Government Excellence? Is it the state legislators’ Commission on Government Forecasting and Accountability or should it be the Center for Tax and Budget Accountability and the Center on Budget and Policy Priorities?  Is it the Buck Consultant Reports or should it be the Center for Retirement Research at Boston College, the Government Finance Officers Association, and the Economic Policy Institute? Indeed, there are many “experts” on defined-benefit public pensions and their sustainability, some of them are conspicuously more reliable than others.  Take your choice.  

Is it possible that we can draw different conclusions using the same or different sort of evidence provided by the above-mentioned groups?   The answer, of course, is yes.  Are all the professed “experts” in agreement?  The answer is no.  Should they be?  It seems quite impossible given the partiality of a few of them.  Then how do we come to know matters of fact, and what is the distinction between relationships among genuine beliefs and questions of fact?   When we begin to realize how uncertain and unreliable data-driven opinions usually are and that what we believe is true is often either indefensible or easily contradicted, especially when using various (actuarial) data grounded in a continual state of flux, we discover the elusiveness of the facts we seek. 

Consider these variables: the State of Illinois’ consistent underfunding of its annually-required contributions to the pension plans, its current flat-rate tax system and budget practices, the inadequate revenue growth for the long-term costs of public pension benefits, a method used for determining accrued liabilities (projected unit credit*) and for actuarial value of assets, unfunded pension liabilities and “agreed-upon” funded ratios, the historical rates of return, amortization periods, asset smoothing, discount rates, and inflation rates, to name just a few.  They all need to be addressed.

Furthermore, consider that the long-term consequences of legislative policy decisions are based upon preferred and changeable data, that public pensions carry liabilities into perpetuity, and that the immediate effects of any legislation passed will affect primarily middle-class citizens who are victims of an imperfect fact-finding and decision-making processes.

We might agree that claims are considered effective when supported by sufficient, accurate, and relevant evidence; however, will the decision makers (and though it should include all of us by definition, it’s primarily legislators) agree about the evidence and solution for the state’s public pensions’ unfunded and future liabilities?   Probably not, because disagreements about claims and their outcomes are generally about framed and selected evidence that is established by an individual’s underlying values and opinions.  Decisions about "pension reform" are judgments based upon conflicting data, and not on any resolutions for the state's chronic pension debt and revenue problems.
 

Since policymakers of the State of Illinois will not be focused upon solving the state’s revenue and debt problems so that they can decisively commit to a responsible funding for all of the state’s debts, decision makers need to ask of their own and of others’ arguments and rebuttals:  what is being emphasized in these discussions, and what is being omitted?  What are the unanswered and unstated questions, especially questions that can falsely demand a choice between answers which are, most likely, not exclusive or exhaustive?  The best questions that can be asked about pension data and the concept of sustainability must be open-ended and nonpartisan within a context of mutability; moreover, they must dictate the kinds of facts which will address the causes of the state's pension debt and revenue problems and not their symptoms. 

*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, “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.”  Unfortunately, the State of Illinois uses the projected-unit-credit method.  

-Glen Brown

For past discussions on this topic, also read:
 
"Something Wicked This Way Comes" (or "What, Me Worry about What Ingram Said?")

“Sustainability of the Teachers’ Pension

“What We Believe We Know about the Sustainability of the TRS Pension”

“Unfunded Liability & Sustainability of a Pension”

“What Will Be Illinois’ Next Move Regarding Its Public Pension Liabilities?”

 

Senator John Cullerton's Speech

Have you watched Illinois Senator John Cullerton’s rather cavalier speech given to the Chicago City’s Club on March 19^th regarding the reduction of the state’s “substantial retirement costs” (http://www.senatedem.ilga.gov/index.php/features/2595-senate-president-talks-pensions-with-city-club-of-chicago-video)?   Did it also “keep you on the edge of your seat?” 
 

According to Cullerton, “rights are contractual in nature, so pension benefit rights can be changed IF the General Assembly offers public employees [in other words, the IEA/IFT leadership] something of real value, and public employees [the IEA/IFT leadership] accept [the state’s] offer… The proposition is, is [sic] you’re going to get something for giving up your future pension benefit.”

In exchange for eliminating the compounded COLA for current teachers and converting their cost-of-living adjustment to a “simple” one, in exchange for shifting the state’s normal pension costs to school districts (“having skin in the game”), and in exchange for extending a teacher’s years of employment  and having a salary cap in place before a teacher can retire with a pension, “the legislature could offer public employees a contractually-binding funding schedule…  So we’re asking the unions… to accept [our offer]… so we put incentives in there like our guarantee [sic] that we’re going to fund these pension systems in the future and, if we don’t, you could sue us…”(Cullerton).

As stated by Eric M. Madiar, Chief Legal Counsel to Illinois Senate President Cullerton and Parliamentarian of the Illinois Senate, “legislation enacted to unilaterally reduce the pension benefits of current employees would violate the Pension Clause based on the Clause’s text and origins, constitutional convention debates revealing the framer’s intent, contemporaneous news articles demonstrating voters’ understanding of the Clause, and a host of court decisions construing the Clause… While the Clause bars the General Assembly from adversely changing the benefit rights of current employees via unilateral action, these rights are ‘contractual’ in nature and may be modified through contractual principles. In sum, while welching on public pension promises is not an option for Illinois as some legal and civic commentators have suggested, legitimate contract principles provide a solution to mitigate this crisis” (Is Welching on Public Pension Promises an Option for Illinois? An Analysis of Article XIII, Section 5 of the Illinois Constitution 2011).

So what can the IEA and IFT offer by way of "legitimate" negotiation this spring on the issue that, according to Cullerton, “in order to make up this [continuing] funding shortfall, [the state is] obligated to pay more money into the pension systems, and that is having an effect on [the state’s] ability to balance the budget?” What can current and retired teachers (and other public employees) surrender that will pay off the state’s self-imposed debt to the pension systems and also diminish the state’s self-inflicted colossal financial liability that was the result of past greed, corruption, arrogance, incompetence and self-interest as evidenced by governors Thompson and Blagojevich, to name just a few?  We can only hope that the IEA and IFT leadership has an incomparable “plan” to offer in the remaining legislative sessions, and one that does not agree with Cullerton’s insouciant perspective to “welch on promises.”

See COLA (Cost-of-Living Adjustment): Is It Guaranteed in Illinois (March 14)

See also Illinois “Pension Reform” Mania (January 13)http://teacherpoetmusicianglenbrown.blogspot.com/2012/01/pension-reform-mania.html

“We have to do something [about the public pension systems in Illinois]”

Will Illinois policymakers consider a graduated income tax that has been recommended by the Center for Tax and Budget Accountability, the Center on Budget and Policy Priorities, the Center for Economic Policy and Research, the Institute on Taxation and Economic Policy, the National Conference of State Legislatures, the Chicago Metropolitan Agency for Planning, and United for a Fair Economy, et al. for solving a state’s financial difficulties? The answer is an emphatic “No.”

Will our policymakers consider the establishment of a broader tax base so rates are “lower in order to minimize the impact…” and because a broader tax base offers “diversification since it spreads the burden of taxation among more payers than a narrow basis does” (National Conference of State Legislatures)?  The answer is an emphatic “No.”

Will our policymakers consider the taxation of services to increase needed revenue since “the tax system in the State of Illinois does not reflect today’s economic realities” (Chicago Metropolitan Agency for Planning) and because the State of Illinois taxes less than one-third of the 168 potentially-taxable services (Center on Budget and Policy Priorities)?  The answer is an emphatic “No.” 

Will our policymakers consider the elimination of welfare for the rich since “the State of Illinois is among 10 states in the nation with the highest taxes paid by its poorest citizens at 13 percent” (the Institute on Taxation and Economic Policy), and one of the few states where the top five percent of income earners pay the least amount of sales, excise, property and income taxes because of federal deduction offsets or 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 (the Institute on Taxation and Economic Policy)? The answer is an emphatic “No.” Then will they at least consider the elimination of some tax breaks and tax loopholes for all corporations? The answer is still an emphatic “No.”  

Will our policymakers consider a reduced calculation of the anticipated average of the TRS investment returns, the shifting and “phasing in” of the state's “normal payment costs” to the TRS pension to local school districts, the reduction of the current and retired teachers' “compounded” COLA, the formation of a “capped salary” with an attached “hybrid plan for current teachers,” an “increase in the current teachers' contributions” to the Tier 1 defined-benefit pension plan, but a decrease in contributions and a refund for teachers that were hired after January 1, 2011 (because they have been overpaying into their Tier 2 defined-benefit pension plan)? Moreover, will our policymakers also consider a separate, irrevocable savings option – a non-guaranteed defined-contribution plan, such as a 401 (k) – for all current teachers?

Two more questions: will some of the above proposals in the previous paragraph violate Article I, Section 10 of the Constitution of the United States; Article XIII, Section 5 and Article I, Section 16 of the Constitution of the State of Illinois? Will some of the effects of these proposals create an unreasonable hardship and inequity for Illinois teachers and their families, for other property taxpayers, and for public school districts and their students?  The answer is...

COLA (Cost-of-Living Adjustment): Is It Guaranteed in Illinois?

“The post-retirement increase, commonly known as a COLA, became effective July 1, 1969. The COLA was a set 1.5 percent of the member’s original annuity. At the same time, active member contributions were increased 0.5 percent to help defray the cost of the COLA.  The following improvements were made to the program: January 1, 1972 – 2 percent COLA (with no increase in contributions); January 1, 1978 – 3 percent COLA (with no increase in contributions); and January 1, 1990 – post retirement increase, compounded (with no increase in contributions)” (Rich Frankenfeld, TRS Director of Outreach).

“Current law provides an annual 3 percent increase for SERS and TRS, compounded. For members of the General Assembly plan and judges, the annual post-retirement increase will be at full CPI” (National Conference of State Legislatures November 2010).

According to the National Conference of State Legislatures (January 2011), “In 2011, 10 states revised their provisions for automatic cost-of-living adjustments, as eight other states had done in 2010. An automatic COLA is one that is made annually, usually pinned to a measure of inflation like the Consumer Price Index. Its purpose is to reduce inflationary erosion of the purchasing power of retirement benefits.

“In all cases in 2011, as in 2010, state action reduced future commitments. State actions in 2011 affect current benefit recipients in three states, but [they] were designed to affect people who will retire in the future or, in six states, only people who will be hired in the future.”

As stated by Illinois Issues Statehouse Bureau (January 2012), “according to the National Conference of State Legislatures, 17 states have taken actions in the last two years that would reduce COLA benefits. Most states making such changes, including Illinois, have reduced COLAs for future employees. However, in 2010, Colorado, Minnesota and South Dakota all reduced the cost-of-living increases given to current retirees, and other states are taking notice… Since then, New Jersey and Rhode Island have both put a freeze on COLA benefits until their pension systems get on sound financial footing.

“Last summer [2011], judges in Colorado and Minnesota tossed out court challenges from retired state workers, allowing the COLA reductions to stand. The states said that the COLAs were not part of contractually-guaranteed benefits, while workers argued that reducing them would violate both state and federal protections for contracts. ‘The big legal question that has resulted in these court cases is to what extent are future COLAs … promised and protected benefits,’ said David Draine, senior researcher for Pew Center on the States…

“The rulings in Colorado and Minnesota do not apply to other states and judges elsewhere, including California and West Virginia [where they] have ruled that COLAs cannot be reduced. However, Keith Brainard [Research Director for the National Association of State Retirement Administrators] said the rulings do indicate that some judges are willing to take into consideration the dire situation that some pension systems are in and may allow lawmakers to use more discretion if they are ‘making a reasonable effort to share the burden equally – that is [they are] not taking it out on only one group.’ In the case of Denver, [for example], the money saved from COLA reductions is slated to go back into the pension system to help shore it up, instead of being spent in areas that lawmakers might consider more popular with voters.”

In Illinois, these questions and others are being discussed: Can legislators legally change the COLA for both current and retired teachers? Is there a contractual right to a teacher’s COLA based upon statutory language? Would the compounded TRS COLA be constitutionally protected because eliminating or reducing this COLA would diminish "vested" pension benefits for an active teacher and retiree?

Dave Urbanek, Public Information Officer for TRS, states that “it is an open question whether the COLA granted in Illinois law is protected by the Illinois Constitution, either by the pension protection clause or by provisions guaranteeing contracts. It is one of the few areas of the state pension code that has not been tested in court.” 

Cinda Klickna, President of the IEA, maintains that “there is some belief that a flat COLA tied to CPI may not be unconstitutional, but of course that hasn’t been tested. As for a change in a COLA, it might depend on whether there is a corresponding benefit enhancement.”

According to Rich Frankenfeld, TRS Director of Outreach, “the attorneys of the IEA, IFT and school management have said for years that pension benefits for current and retired teachers cannot be changed. For them, this includes the 3% post-retirement increase (what most members call the COLA). Last year, the chief legal counsel [Eric Madiar] to the Illinois Senate Democrats issued a comprehensive analysis of these issues, basically supporting their position.”

It appears that legislators will steamroll ahead with what is most self-serving, regardless of the effects that a COLA reduction will have on Illinois teachers and their families. What seems blatantly obvious is that a COLA reduction for teachers will not be made compulsory on the legislators who pass such a bill, nor will it affect the legislators’ other guaranteed and unimpeded benefits, pensions and their social security. In this regard, to reduce the teachers’ COLA, whether it is deemed legal or not, will unquestionably diminish the teachers’ “promised” benefits.

It will affect the retired teachers’ financial security in an uncertain future, and it will most likely be challenged in the courts if it occurs. Creating and passing any bill that diminishes “promised” benefits, such as the compounded TRS COLA that is already in place for current and retired teachers, is a breach of trust.  It’s discriminating. In fact, it's emblematic of a continued unjust forfeiture and a theft to one particular group of people in Illinois, and it’s wrong.

For an Update, Click Here: COLA: a Guarantee for Illinois Judges (What about Public Employees?)