Saturday, April 7, 2012

The Escalation of Attacks on the Illinois Public Pension Systems

·         The best funded system is the Illinois Municipal Retirement Fund (IMRF). IMRF uses the actuarial cost method called “entry-age.” For calculation of assets, IMRF uses “smoothing”: a practice that averages the market gains and losses over a five-year period; furthermore, IMRF guarantees payments to its pension system. The five state-sponsored retirement systems use the projected unit method

·         The current “Ramp” does not work for the five public pension systems. The “Ramp” entails larger payments today as a result of the 1995 funding law – Public Act 88-593 – to pay the pensions systems what the state owes.  According to Amanda Kass, Research and Policy Specialist for Pensions and Local Government of the Center for Tax and Budget Accountability, (April 2012) “the issue is that Illinois lawmakers designed a system -- the way the employer cost is calculated (or what the state pays) -- [that is] inconsistent with rules set by the Government Accounting Standards Board (the rules are non-binding and are for reporting; public retirement systems can fund themselves however they so choose). The way GASB specifies that systems should be funded is generally referred to as the ARC (annual required contribution). According to GASB, the employer’s ARC should be the normal cost (which is calculated using the cost method) plus an amount to amortize an unfunded liability over 30 years. The 30-year time period is an open system, [in other words] those 30 years don’t count down. In systems in which there is no unfunded liability, the employer's ARC would just be the normal cost. In Illinois, what the state has historically paid was less than the employer's ARC (as calculated according to GASB rules). Then there were years like 2006 and 2007 in which lawmakers passed legislation that lowered the contributions for those years to an amount that was below the pension ramp (those amounts were already less than the employer's ARC).  In addition to a revenue problem, the pension ramp was designed in such a way that it’s unfeasible. Even if Illinois’ revenue issue was addressed, the pension ramp would still likely be an issue”

·         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 (a flat payment) just like a home loan that is amortized; though the initial payment will be more painful in the beginning, over the long term it will become  a reduced cost and a smaller percentage of the overall Illinois budget as it is paid off throughout the years

·         A compounded COLA (Cost-of Living-Adjustment) is a constitutional benefit (Madiar) that must be protected for both current employees and retirees; there is no corresponding benefit enhancement as important as a COLA for ensuring the individual employee’s sound financial future

·         The state must continue to pay both the “normal costs” to the pension systems as well as the service debt

·         The state’s debt problem is not a pension problem. It is a revenue problem, and this needs to become the focus and conversation in the legislative sessions

·         Because the state cannot evade its unfunded debt, the state needs a progressive tax rate

·         Though we might assume that the state already has the votes to pass the “normal costs” to the school districts in Illinois, policymakers will probably delay the passing of this legislation until shortly after the elections in November in the fall veto session before shifting this consequential financial burden to the school districts

·         “[However], property tax bases would not be sufficient to absorb any shift in the employer normal cost for teacher pensions… School districts are demographically and financially varied, and it would be difficult to impose a uniform normal cost shift on them… Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes… While shifting the state’s normal cost obligations onto school districts may provide some relief to the state’s budget, it will not mitigate these financial obligations and will instead push them onto school districts that, on average, already derive the majority of their revenue from local sources” (The Center for Tax and Budget Accountability March 2012)

·         The defined-contribution option recommended by policymakers will incur expensive costs for the State of Illinois while jeopardizing not only the pension systems’ funding, but the individual’s financial security (HB 5754)

·         The unfunded liability in Illinois is a unique problem and should not be “lumped together with other states’ financial problems” (General Treasurer Gina Raimondo’s state of Rhode Island, is not comparable to Illinois!).  Illinois has a structural revenue problem (and not a pension problem that the Civic Committee of the Commercial Club/Illinois Is Broke has maliciously perpetuated).  The Illinois citizenry has been brainwashed to believe that the public pension systems are contributing factors to the state’s deficits, and public employees and their leadership have not effectively addressed this disastrous prevarication.  If there is a call for a constitutional convention to amend the state’s constitution, consider that most voters are already convinced that the public employees’ benefits are the sole cause of the state’s debt “crisis”

·         Regarding recent remarks attributed to the TRS Executive Director Dick Ingram, though these “worst-case” scenarios speculated by the Buck Consultants may have been taken out of context and are misleading and hyperbolic, they have successfully fomented panic and inadvertently supported the continual vitriolic diatribes of Illinois Is Broke (their often heard commercials on radio stations, et al); these “worst-case”  possibilities have also incited more distorted “yellow” commentary from the Chicago Tribune.  Rebuttals need to be written by Ingram, our leadership, and us and disseminated in our defense against the Civic Committee’s and Tribune’s relentless, fallacious tirades

·         Governor Quinn has unilaterally proposed to “zero out” the state’s contribution to the Teachers’ Retired Insurance Program. This effrontery needs our continuous attention

·         There is a current piece of legislation that has unanimously passed the House. It is a test case that will challenge the public employees’ constitutional guarantees (HB 4513). Take notice of this potential threat to all of us

·         “[Our] indifference is not a response. Indifference is not a beginning. It is an end. And therefore, indifference is always the friend of the enemy” (Elie Wiesel).  We are responsible for not only our future but for the future of others.  Become informed, unite and protest against these injustices.


Please read the comments below for information regarding the actuarial costs methods: "entry-age" and "projected-unit."

For further explanations, read: “An Illinois Legislator Confirmed that HB 4513 is a Constitutional Test Case” (April 5, 2012) http://teacherpoetmusicianglenbrown.blogspot.com/2012/04/illinois-legislator-confirmed-that-this.html;
“Poisoning the Pension Well: TRS Executive Director Dick Ingram’s Shift in Position” (April 2, 2012) http://teacherpoetmusicianglenbrown.blogspot.com/2012/04/poisoning-pension-well-trs-executive.html;
“Why Are We Still Focusing on the Wrong Issues?” (March 30, 2012) http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/why-are-we-focusing-on-wrong-issue.html;
“TRS Executive Director Richard Ingram’s Address to Delegates at the IEA Representative Assembly” (March 27, 2012) http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/trs-executive-director-richard-ingrams.html;
“COLA (Cost-of-Living Adjustment): Is It Guaranteed in Illinois?” (March 14, 2012) http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/cola-cost-of-living-adjustment-is-it.html;
“HB 5754 by Representative Mike Fortner (a Rebuttal)” (March 13, 2012) http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/hb-5754-by-representative-mike-fortner.html;
“The Effects of HB 5754 and HB 1325 on the Teachers’ Defined-Benefit Pension Plan” (March 9, 2012) http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/effects-of-hb-5754-and-hb-1325-on.html;
“Governor Quinn’s Proposal Will Somersault TRIP” (March 5, 2012) http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/governor-quinns-proposal-will.html


2 comments:

  1. Age-Entry Normal Actuarial Cost Method: This pension funding method recognizes “a larger accumulated pension obligation for active employees and generally requires larger annual contributions.” Like the Illinois Municipal Retirement Fund, an age-entry actuarial payment means that the cost of the benefit earned in that particular year is recognized and funded at the time the worker performs the service, not (later) when the pension is paid in retirement. In short, it is a more expensive but a more accurate estimate of present and future costs. The State of Illinois does not use this method. It uses the projected-unit credit actuarial cost method. In addition, Illinois also uses the practice of smoothing market gains and losses over a five-year period since 2009.

    Projected-Unit Credit Actuarial Cost Method: “…plans that use a projected-unit credit costing method are 28 percentage points more likely to miss their ARC payment” (Center for State and Local Government Excellence, Why Don’t Some States and Localities Pay Their Required Pension Contributions? May 2008). Why? “…up to the point of retirement, the entry-age method recognizes a larger accumulated pension obligation for active employees and requires a larger contribution than the projected-unit credit. Thus, given comparable funding ratios, plans using the entry-age normal method have recognized more liabilities and accumulated more assets than those using the projected-unit credit” (Center for State and Local Government Excellence, The Funding of State and Local Pensions: 2009 – 2013, April 2010).

    Read December 11, 2011 Pension Vocabulary of the Week “ARC” by John Dillon:
    https://sites.google.com/site/pensioneducationsite/pension-powerpoint/pension-word-of-the-week

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  2. Regarding the entry-age normal cost method, according to Amanda Kass, research and policy specialist for pensions and local government from the Center for Tax and Budget Accountability, “the normal cost contributions during an individual’s employment may be higher than normal costs calculated using the projected-unit credit method. The projected-unit credit method means that the normal cost increases according to employment length (the longer a person is employed, the higher the normal cost). So, for people who are early in their career, the entry-age method would produce a higher normal cost than the projected-unit credit method. However, with the entry-age method, if you haven’t adequately funded a person’s retirement, you end up with an unfunded liability, which still has to be paid…

    Currently the Governmental Accounting Standards Board (GASB) recognizes the projected-unit credit method as one of six acceptable actuarial cost methods; however, GASB is revising its standards. GASB has proposed revisions, and one of them would be that only the entry-age normal cost method would be acceptable. GASB rulings do not impact, however, how Illinois actually funds its systems. The rulings only impact reporting.”

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