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