Tuesday, March 27, 2012

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

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