Monday, April 30, 2012

A Response from Bob Lyons, TRS Trustee, Regarding Pension Fees

You may have seen the Better Government Association (BGA) story in the Chicago Sun-Times and on CBS local television regarding the TRS pension fund’s exorbitant fees and poor investment returns. While I do not generally believe that conspiracies are the hidden explanation for what goes on, I think that this expose was simply part of the ongoing attacks on public employee unions and their pensions. My reason for saying this is one paragraph that we sent to the BGA should have ended their story, but not only did it not stop them, they didn’t even include it as part of their story – for obvious reasons. Leaving out the math that justified the conclusion, here is the key paragraph:

TRS’s investment management fees are competitive, and often superior, to public pension plans of a similar size. In the 10-year period being studied by the BGA, TRS assets available for investment averaged $33.6 billion per year. A total of $1.3 billion in fees equates to an average annual fee of 39 basis points over the period. For comparison, the average public pension fund paid fees of 48.5 basis points in fiscal year 2010. Pension systems with more than $20 billion in assets had average investment manager fees of 55.2 basis points in fiscal year 2009. TRS paid fees to “hundreds of money management and brokerage firms” during the period because all assets are externally managed. A “basis point” is a standard measurement in investing - one-hundredth of 1 percent.

Certainly 1.3 billion in fees is a lot of money, but it is over ten years where TRS made over $10 billion dollars; it was paid to the companies that managed our money and the brokerages that bought and sold the investments. Our fees are low compared to other funds. If you go through the investment records, records that were available to the BGA, we report our returns for any period “gross of fees” (without the fees being subtracted) and then “net of fees” (after the fees are subtracted) and the difference will be around .04 of a percent.  Nevertheless, they ran the story probably just as it had been written before their investigative reporting.

People have asked me how we have done so far this year with our investing since the start of the new fiscal year. As you may recall, we made over 26% last year in what was an excellent year for the market. This year has been up and down and back up again. Here are the numbers we have for the fund through the end of March, though some assets classes, such as private equity and real estate, do not report for some weeks after a given date, even a month after the numbers are still not final. Keep in mind, that while the state was to make monthly payment of approximately $200 million to TRS, the state is running $280 million behind, though we have been told the payment will be made by the end of June.

Assets $37.0 billion - preliminary
Net of fee returns (preliminary) as of 3/31/12:

Quarter 8.05%
FYTD 2.67%
1 Year 5.00% - all these numbers are annual averages
3 Year 14.79%
5 Year 2.27%
10 Year 6.39%
20 Year 7.84%

The difference between total contributions for FY 2012 (not counting investment returns) and benefits to be paid out is a negative $1.1 billion for the year. The number is the same as last year’s and, at least for now, what the difference for next year is expected to be. TRS’ assets at the end of March were almost what we had when we started the year.

Sunday, April 29, 2012

Assumptions, Concerns and Questions Regarding the Illinois Teachers Retirement System and the So-Called "New Reality"

Executive Director Dick Ingram of the Teachers Retirement System of Illinois (TRS) included a foreboding slide in his power-point presentation recently for his Naperville audience on April 26th.  It specified (in case of the pension system’s default): “Bondholders come first, [and] then pension system members.  [For] example: In New Hampshire, funding is guaranteed in the state constitution, not the benefit (TRS Town Hall Meeting). Two: Enact a permanent pension funding guarantee into state law,” (slide 17).  In Illinois, however, it is the benefit that is guaranteed in the state constitution, not the funding.

As many of us are aware, there are three antedated court cases that have ruled the Illinois General Assembly cannot be forced to fund the pension systems at a specific percentage: 1) People ex Rel. Illinois Federation of Teachers v. Lindberg in 1975; 2) McNamee v. State in 1996: the second vested case issue declares an employee acquires a “vested” right when he or she enters the pension system.  The court case also asked the question whether “the Pension Clause mandates that the pension system be funded at a particular funding percentage or according to a funding schedule” (Eric M. Madiar, "Is Welching on Public Pension Promises an Option for Illinois?" An Analysis of Article XIII, Section 5 of the Illinois Constitution 38).   

The Pension Clause “creates an enforceable contractual relationship that protects only the right to receive benefits.  A cause of action would exist if legislation diminished a person’s right to receive benefits or place the pension system on the verge of default or imminent bankruptcy” (39); and 3) People ex. Rel. Sklodowski v. State in 1998: the third vested case issue affirms that an employee acquires a “vested” right when he or she enters the pension system. The court, however, “reaffirmed the holdings of both cases [Lindberg and McNamee] that the Clause does not create a contractual basis for participants to expect a particular level of funding, but only a contractual right that they would receive the money due them at the time of their retirement” (40).   

According to Chief Legal Counsel to Illinois Senate President John Cullerton and Parliamentarian of the Illinois Senate Eric Madiar, “the Clause was ‘intended to force the funding of pensions indirectly, by putting the state and municipal governments on notice that they are responsible for those benefits…’ The Clause makes participation in a public pension plan an enforceable contractual relationship and also demands that the ‘benefits of that relationship’ not be diminished or impaired. And, the contractual relationship is governed by the actual terms of the Pension Code at the time the employee becomes a member of the pension system. It is for this reason that both the [Illinois] Supreme Court and Appellate Court have invalidated changes to the Pension Code that would diminish or impair a current participant’s pension benefit rights.  Finally, the [Illinois] Supreme Court has recognized that while a beneficiary of a pension system need not wait until his or her benefits are actually diminished to bring suit in circuit court under the Clause, a beneficiary could only do so if the complaint contained factual allegations that the relevant pension fund was in default or on the verge of default. The court again found support for this position in Delegate Helen Kinney’s statement at the [1970] Convention” (41). 

Note: if the teachers’ pension system becomes insolvent in the future, as predicted by Buck Consultants’ actuaries and their hypothetical insolvencies scenarios (“New Reality” Stress Test, slide 13), public employees would be paid from the state’s General Revenue Funds.
After reading Madiar’s 76-page document, it is evident that the “new reality” is unconstitutional but leaves us with a few questions:  Are Ingram and some of the Teachers’ Retirement System’s trustees, the Illinois General Assembly, and the Civic Committee of the Commercial Club of Chicago proposing that current teachers’ “benefits” can be reduced as a result of this “new reality?”  And what would be the questionably-unlawful impact on any current teacher retirees; furthermore, who is authorized to negotiate on behalf of the retired teachers in Illinois?

Despite the aforementioned legal analysis by Chief Legal Counsel Madiar, it appears Ingram is “softening the ground” for teachers to get ready for the so-called “new reality.” In the "new reality," the teachers “guaranteed pension” is considered a “benefit” that can be bargained, and not a “contractual obligation.”  

The Civic Committee of the Commercial Club of Chicago with its skewed obverse website, Illinois Is Broke, has already “softened the ground” for the general public in Illinois. President Ty Fahner of the Civic Committee has undoubtedly influenced impressionable citizens regarding the notion that the public pension systems, particularly the teachers’ pension system, are to blame for the state’s budget deficits and the reduction and displacement of the state’s decreasing revenue funds.    

Though many of us realize some of the past Illinois General Assemblies, governors, and union leaders have not safeguarded the state’s public pension systems, many of us also know the antiquated revenue system in Illinois is overdrawn. The general populace is not aware of the “real” issues or problems in Illinois: the state's lack of revenue growth and pension debt, and the attacks on public employees' pensions by the Civic Committee, Sidley Austin LLP, Civic Federation, Illinois Policy Institute, Chicago Tribune and Chicago Sun-Times, et al.

So who else is providing this new version of the Pension Clause to Governor Quinn and others besides the Civic Committee, et al.?  If funding could be deemed a “benefit,” and this seems to be the case considering the TRS Trustees’ Resolution and their shrill silence (with the exception of Bob Lyons), is the Illinois Education Association also in agreement with this perception and willing to negotiate current teachers’ (and eventually the retirees’) benefits? Remember: the notion of benefit reductions was reiterated by Ingram recently while answering a question at the Naperville Town Hall meeting.

Furthermore, consider the fact that Cinda Klickna is both president of IEA and a TRS trustee and, thus, a conflicting and disadvantageous set of circumstances exists not only for herself, but for members of both the IEA and TRS: “[It has been said] the primary duties in Illinois law that apply to pension fund trustees are prudence, loyalty, and avoiding conflicts of interests. The prudence and loyalty standards are taken directly from the Federal Employee Retirement Income Security Act statute. These standards establish that trustees must ‘protect the overall actuarial soundness of the fund,’ but do not extend to a protection of particular benefits for members.

"Trustees owe no duty to the legislature, organized labor, the governor, retired teacher associations or contributing employers… While trustees are entitled to fill multiple roles, they ‘cannot wear more than one hat when sitting at the table as a trustee…’ A trustee’s fiduciary duty does not require opposing benefit reductions… Trustees must keep in mind that benefit reductions improve the fiscal soundness of a fund. This fact highlights the potential conflict of interest for a trustee who is also a member…” (Ian Lanoff, fiduciary counsel for Groom Law Group in Washington, DC, “Comments on Fiduciary Duty,” Illinois TRS Board Meeting, August 4, 2011).

Though we hope the leaders of the IEA and IFT are protecting our legitimate constitutional benefits, some of us are apprehensive that the IEA and IFT have done nothing to confute the Civic Committee’s and other continuous onslaughts against teachers in the past several months, especially the recent position of the executive director of TRS.

One might ask who are the genuine spokespersons for the IEA and IFT membership? Though Anders Lindall, spokesman for the American Federation of State County and Municipal Employees (AFSCME) Council 31, recently disputed Fahner on WTTW five days ago; Michael Carrigan, Illinois AFL-CIO president, delivered his “We Are One Illinois statement” on pensions in response to Governor Quinn’s proposals for pension reform on April 20th; and Henry Bayer, executive director of AFSCME, defended public employees at the Better Government Association forum on April 9th, teachers and other public employees should be quite concerned about any deals the unions might make with the Civic Committee's Illinois General Assembly.
-Glen Brown

Thursday, April 26, 2012

The Old Reality versus the New Illinois Pension Reality

“Payment of the required State contributions and of all pensions, retirement annuities, death benefits, refunds, and other benefits granted under or assumed by this [Teachers Retirement] System and all expenses in connection with the administration and operation thereof are obligations of the State.  In addition, Article XIII, section 5 of the Illinois Constitution states, 'membership' in any state pension system is an 'enforceable contractual relationship' (TRS Issues Update, February 2011).

“Pensions will not run out of money… [That] assumes that at a future date, state pensions will just cease and all outstanding financial obligations will come due… Unlike a corporation, a state government cannot go out of business… [Accordingly], state law empowers TRS (40 ILCS 5/16-158c)… The State has waved its sovereign immunity in regard to the teachers’ pension because TRS is a qualified pension plan under the tax-deferred provisions of the IRS code.  Federal law would protect all claims… Pensions [are not] the problem [or] why Illinois has been unable to pay its bills.  The reason is a dramatic fall-off in State revenues over the last [five] years…” (TRS Public Information Officer Dave Urbanek).

That was then, and this is now: “Where you are headed is more important than where you are… Pension costs are growing faster than revenue… The unfunded liability of $44 billion is bigger than the state’s general funds budget of $33 billion… TRS can no longer rely on old assumptions” (TRS).

“To be clear: Neither I nor Teachers’ Retirement System is proposing any changes in member benefits, especially a reduction in the current annual cost-of-living adjustment… It is not our role at TRS to suggest a solution to this problem… New revenues must be generated, and if they are not, benefits may have to be reduced… There are only a few options available and none is very pleasant to discuss – changes in the cost-of-living adjustment; in member contributions; in retirement age, and in the benefit formula; as well as increased revenues through new taxes” (Executive Director Dick Ingram, Chicago Tribune April 10, 2012).

Apparently, according to Ingram, the “new reality” for public employees is a constitutionally-guaranteed pension can now be considered a “benefit” that can be bargained through unfair consideration and is not necessarily a “contractual obligation.”   Indeed, this “new reality” is about destroying the public employees’ only lifetime income or guaranteed defined-benefit pension plan.  It is about the belief that public employees do not deserve their deferred benefits that they earned, even though they have sacrificed wages during their career. It is about distorting the issues and blaming the state’s budget deficits on teachers, firemen, policemen, and other state workers. It is about perpetuating the notion that the public pension systems are unaffordable and, therefore, unsustainable. 

This “new reality” is about warping the debate regarding who is entitled to a pension and twisting the logic. It is about Ty Fahner of the Civic Committee of the Commercial Club of Chicago and members of other wealthy federations and institutes calling for a theft of the public employees' pensions and distracting the public’s attention away from policy making that will yield exorbitant business revenues while essential services are cut for the vast majority of people. It is about anger over public employees that are living longer and; thus, the absurd idea that they should be working longer. It is about envy for those who still have a belief in a promised future, while others have been robbed of their financial future because of arrogance, corruption and greed in Illinois politics and the financial sector.

This “new reality” is about the financial industry where a large percentage of members of the Civic Committee want to maximize their self-interests, thereby diverting the state’s obligatory payment to public employees and cashing in on the diminishment of assured benefits.  It is about reducing wages for public employees to increase profits elsewhere.  It is about exacerbating income and wealth inequity; about shifting the state’s financial responsibility (its normal costs of pensions) to school districts and universities, regardless of the consequences.

This “new reality” is about reneging on promises and responsibilities, increasing contributions and cutting and freezing benefits, such as the cost-of-living adjustment, for public employees – proposals concocted by those who will never be affected by them. It is about coercing public employees to make an unconstitutional choice, or lose the state’s health insurance subsidy and creditable earnings in retirement. 

This “new reality” is about creating disposable public employees and ignoring the decline of middle-class income.  It is about a disregard for an active teacher’s and retired teacher’s dignity; about betrayal and indifference and not honoring the legal and moral commitment to proceed ethically in their proposals because what really matters for policymakers and wealthy business people is eliminating the state’s pension payments at any cost and ignoring the state’s antiquated revenue system and flawed Pension Ramp.

This “new reality” is about a state pension policy that is biased toward the inefficient, inadequate and inequitable defined-contribution savings (401 k) plan, because this savings scheme is profitable for pension consulting companies and bankers, contract and pension lawyers and actuaries and will enhance the bias toward tax breaks for the privileged class.

This “new reality” is also about falsely convincing a public employee to believe that he or she can possibly save enough retirement income in a 401 (k) plan or defined-contribution savings plan without having a defined-benefit pension or any Social Security income, It is about appealing to a public employee who believes that he or she can invest wisely and accumulate enough assets for a secure retirement and also understands how to distribute those assets to avoid longevity, inflationary and health care risks. It is about ignoring the fact that with a 401 (k),  there will also be administrative and investment fees that will substantially reduce the value of a defined-contribution, 401 (k) savings plan.

What if this “new reality” creates public school teachers who are willing to stop teaching in the public school classrooms across Illinois, and firemen who are willing to stop extinguishing fires in their towns and cities, and policemen who are willing to stop protecting peoples’ homes and their communities, and other state employees who are willing to stop working for the municipal and state governments? Perhaps then the citizens of Illinois would recognize the value and service that public employees of Illinois provide; perhaps the citizens of Illinois would realize that the state employees’ retirement plan is worth protecting and preserving just like the lives that these public employees have been safeguarding, supporting or assisting all along.  Dick Ingram is wrong and so are his cohorts. 

-Glen Brown

Wednesday, April 25, 2012

The Blunder that Just Keeps on Giving

“I am honored to have been selected to lead The Teachers’ Retirement System (TRS),” [the new executive director of TRS Dick Ingram said in January, 2011]. “My work thus far with the Board and the staff has made plain the many strengths of the System. I look forward to getting started and to learning something new every day as we continue to provide important services for teachers and their families across Illinois” (TRS).

According to TRS, “the Executive Director serves as the Secretary of the Board and the System’s chief executive officer and is responsible for the detailed day-to-day administration of the System. The Executive Director shall perform all duties prescribed by the Illinois Pension Code or by rule, order, or resolu­tion of the Board. The Executive Director’s perfor­mance review is conducted annually.”

When Dave Madsen, Todd Mertz, John Dillon and I attended the “Fixing Illinois Public Pensions” forum, sponsored by the Better Government Association on April 9, Ty Fahner, president of the Civic Committee of the Commercial Club of Chicago, told the audience that Executive Director Dick Ingram had said that the “TRS pension system will be insolvent [by 2030].” Ingram also attended this meeting and raised no objections to Fahner’s comment.

On April 10, the Chicago Tribune printed this statement sent by Ingram to Voice of the People, “To be clear: Neither I nor Teachers’ Retirement System is proposing any changes in member benefits, especially a reduction in the current annual cost-of-living adjustment… It is not our role at TRS to suggest a solution to this problem…” Ingram then proceeded to say, “New revenues must be generated, and if they are not, benefits may have to be reduced… There are only a few options available and none is very pleasant to discuss – changes in the cost-of-living adjustment; in member contributions; in retirement age and in the benefit formula; as well as increased revenues through new taxes.”

On April 23, Merle Taber, John Dillon and I were invited to attend an editorial board meeting at the Chicago Tribune. One of several of the Board’s main substantiations of proof used for pension reform was Ingram’s statement regarding “TRS’ [inevitable] insolvency.” That same evening, on WTTW, Chicago Tonight, Fahner reiterated that “Ingram said, guess what? We’re going to go broke – that’s for the teachers, the IEA and IFT – in a very short period of time.”

(Incidentally, Fahner, “a rich white guy,” likes to also say that it’s not fair for the 95 percent who are not public sector union members to pay for the five percent. Perhaps Fahner should ask whether the 99 percent want to suffer even more cuts to education and health care funding and other essential services because of the one percent (the Civic Committee and other wealthy groups) that does not pay a fair share of taxes).

For Ingram to suggest unconstitutional alternatives for solving the state’s budget problems is to also not focus on the essential cause of the state’s deficit: revenue funding.  Regardless of whether Ingram assumed a "worst-case scenario,” in other words, if the General Assembly “[did] not continue to provide all of the funding called for in state law,” he still provided endorsement of the Civic Committee’s (Illinois Is Broke) and the Chicago Tribune's exhortation for pension reform as the only solution for the state’s “budget mess.”

It is not one of the executive director’s duties to make self-contradictory statements that jeopardize the TRS members’ benefits and rights guaranteed by the Illinois Constitution.  It is not “prescribed by the Illinois Pension Code” that the executive director’s role is to also validate a fallacious and illegal argument “where lawmakers [the Civic Committee and the Chicago Tribune also perpetuate] a [certain] solution.”  

Surely, it wasn’t the March 30th resolution of the TRS board (of which the IEA president is a member) that may have incited Ingram to speak so irrationally?

Consider the Board of Trustees’ Resolution stated on March 30: “Having heard the report of the Executive Director describing the analysis performed by TRS staff and actuaries evaluating the State of Illinois’ ability to meet its existing future funding obligations, the Board of Trustees hereby resolves that the fiscal situation of the State has deteriorated to the point that the Board no longer has confidence that the State will be able to meet its existing funding obligations to TRS. As a result, the Board believes that action must be taken now to ensure the continued solvency and viability of the plan. This action must be based on the following principles:

“The impact of any proposal, and all future contributions to the plan, must be determined using generally-accepted actuarial principles and standards and not the funding scheme and pension bond limits currently in Illinois law.  All future contributions must be guaranteed by statutory language substantially similar to that presented to the Governor’s pension assembly in February.  Any changes to the Pension Code must first correct the existing inequities and funding flaws created with the enactment of Tier II and, any changes to the Pension Code must be based on the simplest and most straightforward changes possible.

“Further, the Board resolves that it will only certify future contributions that are calculated based on generally accepted actuarial principles and standards. The Board further resolves to continue to commit the time and expertise of its staff and actuaries as necessary to ensure the accurate analysis of any and all proposals for changes to the Pension Code.  Passed Unanimously” (TRS).

Also read “Message from Cinda Klickna, president of the IEA” (April 12):

“Poisoning the Pension Well: TRS Executive Director Dick Ingram’s Shift in Position” (April 2):

“TRS Executive Director Richard Ingram’s Address to Delegates at the IEA Representative Assembly” (March 27):

Friday, April 20, 2012

A Short Summary of Governor Quinn’s “Bold [Pension Reform] Plan”

The “plan calls for a 100-percent funding of the retirement systems by 2042” (to “save Illinois taxpayers billions of dollars”). To accomplish this goal, there will be

·         A 3-percent increase in contributions for all current public employees;

·         A reduced Cost-of-Living Adjustment (COLA) to lesser of 3 percent or ½ of the Consumer Price Index, whatever is less; the COLA will use a simple interest and not a compounded interest calculation;

·         A delay of receiving a COLA until the age of 67 or five years after an earlier retirement;

·         An increased retirement age to 67, phased in over several years;

·         An establishment of a 30-year actuarially-required contribution funding schedule (according to the Governmental Accounting Standards Board).

According to Governor Quinn, “[the State of Illinois will] make sure that the public sector pensions go to [only] public sector employees… [This plan will] maintain the defined-benefit plan that exists today… Those who work for the state… and for local units of government, school districts, will have an opportunity to choose this new plan… Their pay raises will continue to be counted in the calculation of their pension benefits if they choose the plan that [Quinn has] outlined. They also will continue to receive a subsidy for their health care in retirement. If they choose not to accept the changes [that Quinn has] outlined…and continue in the current system… they will not have their future pay increases included in their pension calculation, and they will not have the subsidy that goes with respect to health care in retirement. The bottom line is that this saves between $65 – 85 billion for the people of Illinois through the period of time that we are talking about…”

Quinn is worried about a “double downgrade” in the state’s bond rating if the pensions’ unfunded liabilities are not addressed. His main concerns appear to be the business community and the Standard & Poor's rating agency, and not current public employees. Quinn believes that [his "bold"] plan is “constitutional” because the employee has an opportunity to choose either this proposed plan or to remain in his or her current defined-benefit plan. He said that the State of Illinois is “not under a constitutional obligation to offer subsidies for those who have retired in respect to their health care,” and he reiterated that the employee will give up health care if he or she does not choose the proposed plan as outlined.

According to Illinois AFL-CIO President Michael Carrigan, “Forcing public servants to choose between two sharply diminished pension plans is no choice at all. It is a clearly illegal attempt to solve the problem caused by past governors and the legislature solely on the backs of teachers, caregivers and other public workers.”

Quinn said that this 30-year plan “will be written into law in plain language,” and the State of Illinois will be held accountable to make its payment to the systems. However, it is possible that the State's current responsibility for payment of the "normal costs" to the pension systems will be phased out over the next several years and be shifted to local school districts, community colleges and public universities. Quinn believes that this will not raise property taxes. Though Quinn stated “if already retired, this particular plan will not affect you,” this plan will affect all of us, retired or currently working! Moreover, let all of us be aware of HB 4513 and HJRCA 49. These bills will be the next assault on all of us.

IEA Pension Update (April 19, 2012)


The fiscal situation of the State has deteriorated to the point that the Board no longer has confidence that the State will be able to meet its existing funding obligations to TRS.  As a result, the Board believes that action must be taken now to ensure the continued solvency and viability of the plan. This action must be based on the following principles:

·         The impact of any proposal, and all future contributions to the plan, must be determined using generally-accepted actuarial principles and standards and not the funding scheme and pension bond limits currently in Illinois law
·         All future contributions must be guaranteed by statutory language substantially similar to that presented to the Governor’s pension assembly in February
·         Any changes to the Pension Code must first correct the existing inequities and funding flaws created with the enactment of Tier II and,
·         Any changes to the Pension Code must be based on the simplest and most straightforward changes possible
·         Further, the Board resolves that it will only certify future contributions that are calculated based on generally accepted actuarial principles and standards

II. Governor Quinn’s Pension Working Group’s Proposal
Governor Quinn would like to move every active teacher into Tier Two without any changes to Tier Two.  However, most likely that will not happen.  Here is the proposal as it will probably be presented.  Springfield is forever changing; thus, these details may be different when released to the press:
·         Increase active teacher contributions by 3% 
·         COLA adjustment for Tier One – simple ½ of CPI or 3%, whichever is less
·         COLA begins 5 years after retirement or at 67, whichever comes first
·         Retirement age increase (62?  67?)
·         Transfer normal cost of pensions to local school districts
·         Address pension abuses
·         Choice between a COLA or healthcare

Meetings between all parties will continue next week.  Quinn’s goal is to reach an agreement by May 31st.

III. IEA’s Proposal

This is an issue about funding.  The union coalition’s proposal is to create a strong contractual agreement that will guarantee the State of Illinois will make its annual pension payments going forward.

Other options:

·         Close corporate loopholes
·         Gaming revenue
·         Graduated income tax

IV. Member Survey
In February, 600 IEA members were surveyed across the state.  Thirty-five percent said we should fight any changes to our pension benefits.  Sixty-five percent said we should negotiate.

V.  Lobbying
  • Any proposed changes must be legal under the Illinois Constitution:
    “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired” – Article XIII, Section 5
  • After meeting the constitutional requirement, any modifications should be fair to our members
  • Any change must maintain the stability of the state retirement systems
  • The problem is funding, not benefits
  •  Teachers and university staff (TRS and SURS participants) do not receive social security for their years as an educator
  • Teachers, education support professionals, and university staff have always paid their share for their retirement and have never missed a payment
  • Educational employees are not responsible for the current pension problem.  The solution should not rest solely on them

VI. HB 4513 and HJRCA 49
Both of these bills are moving quickly with unanimous support.  HJRCA49 is problematic for a number of reasons, but especially because it would not allow for any resolution for the problems with Tier II.
HB4513 was NOT negotiated by the local unions as had been falsely reported to the legislators!  Local unions were NOT on board with this House Bill.  This is “probably” a constitutional test case according to Jim Reed and (Representative Michael Connelly).  (The bill affects the Water Reclamation District Pension, increasing member contributions 3% over the next three years).

VII. Other Information Gained During the Question-and-Answer Session
·         According to Mitch Roth, IEA General Counsel, increases in a member's contributions can be considered constitutional IF there is a benefit that comes with it.  In negotiating changes to benefits, one needs to ask:  Does a change only diminish, or does it coincide with a benefit?

·         The IEA is opposed to shifting regular costs to local school districts

·         You can be assured that legal action will be taken by the IEA if an unconstitutional bill is signed by Governor Quinn.  The IEA is prepared

·         According to President Cinda Klickna, many items under discussion are unconstitutional.  “If we are talking about a topic, it doesn’t mean we agree to it.”

 These notes may be subject to change -- Dave Madsen

Thursday, April 19, 2012

A Foreshadowing of Illinois Pension Reform: An Analysis

Before becoming the controversial General Treasurer of Rhode Island, Gino Raimondo ran a venture-capital firm in Providence, Rhode Island.  Recently, Raimondo’s remedies for her state pensions were echoed at the “Fixing Illinois’ Public Pensions” forum in Chicago on April 9, 2012, by two of the four panelists.   

A few of Raimondo’s assertions that are widely publicized in her online interviews were paraphrased– “the way to solve fiscal problems is to leave politics aside; we must focus on the math of the problem; truth is in the numbers; the passage of pension reform is a great step forward as we continue to work to put our state on a secure path toward growth and prosperity.”  Most of us realize these assertions have also been parroted by Illinois policymakers as well.

Raimondo’s solutions for Rhode Island’s shortfall of $7 billion can be summed up rather simply: suspend the cost-of-living increases and offer the state’s public employees a 401 (k) savings plan; raise the minimum retirement age (for full benefits) to 67 years old; increase public employee contributions, and press for a cut in the assured return on pension investments.  

The latter would open an even wider deficit if benefits shrink or payments into the fund do not rise because of a 7.5 percent anticipated return instead of an 8.5 percent return.  According to Steve Stanek of The Heartland Institute (a conservative think tank), this is essentially a re-amortization of the “pension system debt to lower and to smooth future payments.” Indeed, it is. 

The State of Rhode Island does not provide accrued benefits or contract rights’ protection either by constitutional provision or statute as in Illinois.  Governor Lincoln Chafee of Rhode Island said after signing pension reform into law: “I take no joy in the pain this will cause for thousands of Rhode Islanders.”  Really? Are we to believe Raimondo also cares about retirees' pensions? What she wants is more money for hedge fund investments. 

What about her so-called reforms? As stated by the Mercatus Center at George Mason University (another conservative think tank), “the Rhode Island Retirement Security Act of 2011, proposed by Governor Chafee in October 2011, contain[ed] two significant reforms of the state’s pension systems –the creation of a hybrid pension plan and the suspension of the Cost-of-Living Adjustment (COLA) contribution—which would have the effect of reducing the state’s unfunded liability…”  Thus, COLA payments have been suspended “until the system reaches 80 percent funding.” 

“State workers enrolled in the current state pension systems [have now] shifted to a combined defined benefit/defined contribution plan integrated with Social Security. State workers and teachers [are] required to contribute 8.75 percent of their paychecks toward retirement. The contribution [also] represents a decrease for teachers who had currently contributed 9.5 percent. Of the 8.75 percent contribution, 3.75 percent [is] put toward the defined benefit pension, which vests after five years of service (lowered from the current vesting period of 10 years). The remaining five percent of the employees’ contributions [are] invested in the retirees’ personal accounts. The employer [matches] this contribution with an additional one percent” (Mercatus Center). 

In Illinois, every one percent increase in membership contribution equals $100 million. How much is that unfunded liability again? Are you wondering why these conservative groups like Heartland and Mercatus are so interested in public employees' retirement money?

In a recent correspondence, Amanda Kass, research and policy specialist for pensions and local government at the Center for Tax and Budget Accountability stated it was “interesting that this legislation applied to Rhode Island’s municipal retirement fund because it was in decent financial shape. Data (from the Center for Retirement Research) shows that the municipal system had a funded ratio of 73.55 percent for FY 2010. In comparison, the Rhode Island Employees’ Retirement System (for teachers, judges, employees, etc.) was only at 48.38 percent.”  

So they can't touch money protected by state constitutions, right? According to a slide presentation entitled, “Pension Reform Legal Principles and Considerations” from the Office of the General Treasurer in Rhode Island (April 10, 2012), the Federal Statutory Law, ERISA, 29 USC 1054 (g) (1) claimed that “the accrued benefit of a participant under a plan may not be decreased by an amendment of the plan…”   

The presentation revealed that out of the 50 states, 10 states have constitutional provisions that specifically protect public pension benefits. They include Michigan, Texas, Louisiana, Arkansas, Hawaii, New Mexico, Arizona, New York, California, and Illinois. The last four states listed here “provide contract rights to benefits in place on the day of hire.” 

Though the least protected are new employees, non-vested employees, active and vested employees, active/eligible to retire employees, and retired employees– in this order, in the State of Michigan, a recent ruling declared “the legislature cannot expect to balance the budget on the backs of state workers” (State of Michigan in the Supreme Court, August 2011). Another recent ruling, in Arizona, proclaimed “that a law changing the contribution that state employees make to their pension funds [was] unconstitutional” (Arizona pension law ruled unconstitutional, February 2012).  

As divulged in the Pension Reform Legal Principles’ and Considerations’ explanations: “For a statute to constitute a contract for purposes of the Contract Clause, there must be a clear and unequivocal indication that the legislature intended to create contractual rights. The principal function of a legislature is not to make contracts but to make laws establishing the policy of the state that is inherently subject to revision and repeal.  The ‘unmistakability doctrine’ applies equally to state statutes and municipal ordinances.”  

Whether any new piece of legislation is a diminishment of Article XIII, Section 5 of the Illinois Constitution, and is deemed “reasonable and necessary” in order to carry out a “legitimate public purpose,” will first depend upon presentation before the Illinois Appellate Court and its interpretations before it reaches the Illinois Supreme Court. 

“More moderate alternatives that do not violate a constitutional contract,” such as the ability to raise taxes [through revenue reform] or to cut services, must be considered initially, as well as whether a legitimate public purpose is “an exercise of police power for a broad societal issue v. benefits for a special interest” (Pension Reform, Legal Principles and Considerations).  

Despite utilitarian principles that are emblematic of a democracy, can we effectively argue that it is just and ethically and morally right that a minority of people should suffer so that there is a net gain for the majority? Thomas Jefferson once asked this question: “Shouldn’t minorities [public employees in this case] possess their equal rights, which equal law must protect?”   

Martin Luther King eloquently stated 49 years ago that “an unjust law is a code that a numerical or power majority group compels a minority group to obey but does not make binding on itself.” Conversely, the wealthy “power minority group” (the business leaders of Illinois) will not make [an unfair statue] binding on itself.”  

Indeed, “budgetary relief is not a legitimate public purpose; for a severe financial crisis (Great Recession, for instance), courts [have been] split [on the issue]. Courts seem to be in consensus that the long-term fiscal health of a pension plan to assure receipt of future benefits is a legitimate public purpose, [nonetheless]...  If a pension benefit is diminished without ‘offsetting consideration or benefit to plan members,’ courts will typically find ‘substantial impairment’” (Pension Reform, Legal Principles and Consideration).  The plaintiff must prove the unconstitutionality of statute beyond a reasonable doubt. Once offered, historically and legally, promises that were made need to be kept. 

For public employees to believe Senate President John Cullerton’s recent remarks that “the legislature could offer public employees a contractually-binding funding schedule… [In other words,] something of real value” for reductions in public employees’ benefits and rights is to also be fooled by Orwellian gobbledygook.   

The State of Illinois has to pay what it owes to the pension systems by law. “State law empowers the Teachers’ Retirement System (TRS) [40 ILCS 5/16-158c]… Payment of the required state contributions and of all pensions, retirement annuities, death benefits…, all other benefits…, and all expenses are obligations of the State… The State of Illinois has waved its sovereign immunity in regard to the teachers’ pension because TRS is a qualified pension plan under the tax-deferred provisions of the IRS code. Federal law would protect all claims” (TRS Public Information Officer Dave Urbanek).  

What has been disputed in three antedated court cases is the expectation of “a particular funding percentage according to a funding schedule [Public Act 86-273]” (People ex. rel. Illinois Federation of Teachers (IFT) v. Lindberg, 1975; McNamee v. State, 1996; and People ex. rel. Sklodowski v. State, 1998). In 1975, “the Supreme Court concluded that the drafters (Delegates Helen Kinney and Henry Green) did not establish the intent to constitutionally require a specific level of pension appropriations during a fiscal year’… The plaintiffs had no basis to claim that these funding provisions created a contractual obligation on the State to make certain annual contributions to plaintiffs’ pension systems.  For these reasons, the Supreme Court affirmed the trial court decision” (Eric Madiar “Is Welching on Public Pension Promises an Option for Illinois?” 37-8). 

Questions public employees need to ask their union leaders are 1) Why bargain away any of the public employees’ “constitutionally-guaranteed” rights and benefits?  “A public employee obtains ‘vested rights’ in the Pension Code provisions relevant to pension benefits when the employee becomes a member of a pension system by making his or her initial employee contribution to the system. In addition, the Pension Clause protects pension benefit rights as an enforceable contractual relationship” (Madiar 36).  2) Why modify the “constitutionally-guaranteed” Pension Clause “through contract principles” when Speaker of the House Michael Madigan and others have made it quite clear that they want “the courts to decide” whether Article XIII Section 5 of the constitution will withstand another challenge again?  Besides, Madigan and others want to shift normal costs to the pension systems to school districts and property taxpayers. Doesn't this imply that legislators do not want to fund the public pension systems anymore? 3) If union leaders believe they are compelled to bargain in this so-called “New Reality” with Illinois policymakers, how about challenging the “non-constitutional,” self-proclaimed entitlements and exorbitant benefits of the wealthy elite and their corporations instead?  At least this ethical investigation for justice will not end up in court and waste taxpayers’ money.  4) Better yet, instead of an amendment to create a need for a super majority to increase any benefit for an individual working for the state (such as HJRCA 49), why not create an amendment to move towards a graduated (progressive) tax rate in Illinois that will "reform" the state's revenue system? Perhaps then legislators can pay the public pension systems and uphold the state's constitutional-guarantees contract instead of stealing public employees' and retirees' retirement money to finance Illinois' hedge fund thieves like Rhode Island's Raimondo and others. 

-Glen Brown

For further information regarding these issues, please also read:

“Pension Hybrid Plans, Constitutional Challenges, and the Ethical Path to Take” (November 18, 2011)

“COLA (Cost-of-Living Adjustment): Is It Guaranteed in Illinois?” (March 14, 2012)

“Senator John Cullerton’s Speech” (March 24, 2012)

“An Illinois Legislator Confirmed that This Is the Constitutional Test Case” (April 5, 2012)

“Fixing Illinois’ Public Pensions…” (April 10, 2012)

Monday, April 16, 2012

A View of the Illinois Public Pension Dilemma, Pt. III

According to the Institute on Taxation and Economic Policy (ITEP) and the Center for Tax and Budget Accountability (CTBA), pension reform should not be the focus or the conversation. The dialogue should be about tax reform, where fairness, long-term revenue stability and a graduated tax rate become the State of Illinois’ priorities and solutions for its budget problems.

The State of Illinois is one of a few states that do not tax equitably.  It is in the top 10 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 (ITEP). 

The State of Illinois is one of seven states that use a flat-rate tax. In other words, the income of the wealthiest people is taxed at the same marginal rate as the poorest wage earners; thus, the highest taxes paid are by its poorest citizens at 13 percent (ITEP). 

Furthermore, according to the Institute on Taxation and Economic Policy, the top five percent of income earners in Illinois pay the least amount of sales, excise, property and income taxes because of federal deduction offsets or substantial tax savings (regressive tax loopholes) from itemized deductions, such as capital gains tax breaks and deduction for federal income taxes paid that are coupled with a flat-rate tax structure. “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor rarely save at all – the taxes are inherently regressive” (ITEP).  

“At the core of the budget crisis facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy…  [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy).  

The wealthiest people should pay tax rates commensurate with their incomes, but they do not in Illinois. Attempting to balance the state’s budget by scapegoating public employees and "impairing" their pension plans ignores the fact that Illinois has an inequitable tax structure. Close the corporate tax holes and direct that money to public school districts and their communities so our schools and our neighborhoods will not be deprived of the essential resources they need. 

As stated by the National Council of State Legislatures, “a high-quality revenue system relies on a diverse and balanced range of sources.”  Furthermore, the Chicago Metropolitan Agency for Planning also asserts that the “Illinois tax system does not reflect today’s economic realities… Changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures.” 

As said by the Center on Budget and Policy Priorities (CBPP), “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… States that do not tax services [Illinois] probably could increase their sales tax revenue by more than one-third if they tax services purchased by households comprehensively.”  Increasing the individual’s state income tax was not the correct solution for increasing revenue in Illinois.  

There needs to be a modernization of state and local budgets and their revenue systems. “The structural problems that have built up over time in these systems need to be addressed” (CBPP).  According to the Center for Tax and Budget Accountability, policymakers need to “consider implementing a new revenue source targeted to repaying pension liabilities that is independent of base revenue streams from income, sales, and excise and utility taxes.”  

What also needs to be considered? “The State of Illinois does not raise enough General Funds revenue to fund critical public services. Its rate of growth is lower than what is needed to simply maintain existing levels of services after accounting for inflation and population growth” (CTBA).   

Because the State of Illinois cannot evade its unfunded debt, policymakers need to create a graduated tax rate that 43 other states in this country now utilize; they also need to design a broad-base tax base and a better timing of tax payments. The State of Illinois needs to increase taxation on the wealthy and put an end to their “corporate welfare,” in particular, their extortive tax breaks and loopholes. Moreover, the State of Illinois needs to recognize that “the pension ramp was designed in such a way that it’s unfeasible” (CTBA).   

Hence, there needs to be a required annual payment from the state to the pension systems; the debt needs to be amortized for a longer frame of time just like a home loan that is amortized (CTBA). According to the National Association of State Retirement Administrators, policymakers must also “keep in mind that state and local pensions accumulate and pay out assets over decades. They have an extended investment horizon.”  Therefore, the focus should be on revenue and not pension reform!  

It is absurd and deleterious to eliminate a teacher's compounded Cost-of-Living Adjustment (COLA) “meant to reduce inflationary erosion of the purchasing power of retirement benefits” (National Council of State Legislatures),  or to extend a teacher’s years of employment, or to cap salary on the amount of money earned for a teacher’s retirement, or to shift the state’s normal costs to school districts as an exchange for a “contractually-binding funding schedule.”  It is preposterous and irresponsible that Illinois policymakers have not fully funded the pension systems for decades, and that they have continuously attempted to violate the constitutional guarantee of public employees and retirees as well.

Maybe we should call our mortgage loan officers and ask them to help us pay down our mortgage “going forward” as a “shared sacrifice!”  Maybe we should ask them to cap their salaries too, work longer hours and more years before they retire, and reduce their own cost-of-living adjustments! While we're at it, let's ask the General Assembly and members of the Civic Committee of the Commercial Club of Chicago and Civic Federation to eliminate their Social Security COLAs, extend their retirement ages, cap their exorbitant pensionable salaries, and pay the unfunded liability instead.  

-Glen Brown

References used for this post and for more information, please read:

“Plain and Simple” (February 15, 2012)