Maintaining the Long-Term Viability of TRS Benefits from Dick Ingram, Executive Director

During the first six months of 2012, the General Assembly’s on-going debate over teacher pensions and efforts to preserve the long-term stability of TRS took much of everyone’s attention. While I believe that change is necessary and will happen, it is impossible to know what will happen, or when, over the course of the next six months...

In March the TRS Board of Trustees approved a landmark resolution. It calls for action now to maintain the long term viability of TRS. It acknowledges that due to the state’s overall poor financial condition, TRS cannot count on the General Assembly meeting the statutory funding requirements for your pensions. According to projections, the state’s backlog of unpaid bills is expected to grow from $9.2 billion this year to $34.8 billion by fiscal year 2017. Pension costs are expected to grow by 35 percent during this period of time to $7.8 billion. The new revenues required to close the gap just for TRS over the next three decades number in the tens of billions of dollars.

This harsh reality is putting real pressure on legislators to make substantial cuts in the state’s budget, now and in the future. One of the single largest line items in the budget is the state appropriation for TRS and the other public pension systems. If the state cuts or freezes its contribution to TRS next year and in subsequent years, our calculations show that under the worst scenarios TRS could become insolvent between 2030 and 2049.

Many of you have heard me speak about the simple equation that we have to keep in balance, C+I=B. Contributions (C) plus investment earnings (I) have to equal benefits (B) over time. That equation is too far out of balance to ignore any longer. In order to keep TRS solvent over the long-term, meaningful changes in the Pension Code must be enacted to better balance expected revenues and anticipated benefit costs. With an understanding that changes to the Pension Code are a highly volatile subject, the trustees identified five key elements that must serve as the foundation for pension change:

1.      Use only actuarially-based math to determine contributions and liabilities. Illinois pension math dictated by law artificially lowers the state’s cost of funding pensions (by about $1 billion for fiscal year 2013, for example) and makes it difficult to reduce the System’s unfunded liability every year.

2.      Illinois must enact funding guarantees for the pension systems into law. A statutory funding guarantee like those in other states would ensure that all future state government contributions are made in full, so that we never repeat the circumstances we are in now.

3.      Fix the financial inequities of the Tier II funding and benefit structure. Tier II members pay the 9.4 percent payroll contribution like Tier I members, but the value of their benefits is only worth roughly six percent of their pay. This is fundamentally unfair and will create a multi-billion problem within 30 years.

4.      Any solution enacted by the General Assembly must be uncomplicated and easy to understand and administer. 

5.      Any solution must adhere to the Illinois Constitution’s Pension Protection Clause.

To their credit, state officials have recognized the Board’s five key elements as a basis for legislation. But as you can imagine, the debate over solutions that fit within these elements has been wide-ranging and intense. Other than a consensus that changes must be made, an agreement on exactly what should be done has been elusive. State officials and legislators are being pushed and pulled in several directions at the same time.

This is where your activism has been important in shaping the discussion. Legislators recognize that the 362,000 TRS members are scattered throughout Illinois and that educators are politically active and fully understand the issue. Your telephone calls, emails, personal visits and letters will continue to influence the debate.

But legislators also recognize that it will be impossible to produce a solution that secures the long term finances of TRS and keeps the current Pension Code intact. The numbers that define the problem are just too big. Right now, the $44 billion TRS unfunded liability is larger than the state’s entire general fund budget of $33 billion. The TRS portion of the state budget, about 7 percent, totaled approximately $2.4 billion in fiscal year 2012. To simply keep TRS funding level at 7 percent of the budget over the next 30 years would add $64 billion to the unfunded liability. If TRS funding in the budget were to grow by 3 percent annually, the unfunded liability would still grow by $40 billion.

This is why the legislators are centering debate over a solution on changing benefits for active and retired TRS members, specifically the annual cost of living adjustment (COLA). The simple fact is that the COLA is the single largest component – about 21 percent – of the annual cost of TRS benefits. This year the COLA alone increased the cost of TRS retirement benefits by $900 million. That is why pension changes in other states have typically focused on changes to the COLA.

The Constitutional protections for pension benefits have been well reported. It is a certainty that if the General Assembly approves a change in the COLA, their actions will be challenged in court by organized labor and member groups. The outcome of any court case is uncertain. While changes to the COLA have received most of the attention, other changes have been discussed as well. While subject to change and clarification, here is the menu of major proposals:

A Benefit Choice for the Future: COLA and Health Insurance

This proposal calls on all active, inactive and retired TRS members to choose between two options in the make-up of their retirement benefits after July 1, 2013. As currently drafted, this irrevocable, one-time election would have to be made between January 1, 2013 and May 31, 2013. Whether these dates would hold in any final legislation remains to be seen. This proposal would save state government an estimated $33.4 billion to $37 billion over 30 years.

• Option 1: Accept a change in the annual COLA – from 3 percent compounded to a COLA that is capped at 3 percent or one-half of the consumer price index, whichever is less. This COLA would not be compounded. The TRS member retains “access” to state supported health insurance through the Teachers’ Retirement Insurance Program. For active members, all future salary increases will be used to calculate the member’s future pension.

• Option 2: Reject the change in the COLA and it remains at 3 percent compounded annually. The TRS member loses “access” to retiree health insurance through TRIP. For active members, no future salary increases would count when the member’s future pension is calculated.

New Start Date for a COLA

Under this proposal, TRS members agreeing to Option 1 would first see the new COLA on the January 1 in the year after turning age 67 or in the year after the fifth anniversary of the member’s retirement, whichever is earlier.

Cash Balance Plan

This proposal creates a new “Tier III” that is commonly referred to as a “cash balance plan.” All new TRS members hired after July 1, 2013 would automatically be in Tier III. Existing Tier II members could elect to join Tier III.

• TRS members would pay a 9 percent annual contribution, and school districts would pay a 3.4 percent contribution. TRS would annually credit investment earnings to each member’s account.

• Upon retirement, TRS would calculate a guaranteed life-time annuity based solely on the nominal balance in the account that reflects contributions credited to each member and adjusted for estimated future investment earnings and the member’s anticipated lifespan.

Requiring State to Pay TRS Annual Contribution

Under this proposal, if the state fails to pay any monthly share of its legally-required contribution to TRS within 90 days, the TRS Board would have the right to seek a court order commanding the comptroller to pay TRS. Similar to other states, the goal of this provision is to guard against future underfunding that threatens the System’s ability to meet its obligations to members.

Shifting the Annual Cost of Pensions to Local School District

While not addressing pension costs, this proposal would make school districts responsible for paying an increased share of the annual costs of TRS pensions, and the state would pay less toward these costs. Eventually, school districts would be responsible for paying the entire annual cost of benefits being earned every year.

Under one plan, between 2014 and 2019 the share of the annual pension cost paid by local school districts would increase by 1 percent of payroll each year and then by 0.5 percent in each year after 2019 until the total annual pension cost is paid by the districts.

Under a second plan, school districts immediately would have to pay the added pension costs of any and all raises granted by school boards to TRS members. Current state law requires all school districts to pay an additional contribution to TRS to cover the increased pension cost for any raise used in a final average salary calculation that exceeds 6 percent in any one year. This proposal would lower the 6 percent threshold to zero percent.

I continue to believe that the central question surrounding changes in the Pension Code is “when,” not “if.” Discussions over potential legislation will continue. Governor Pat Quinn has discussed the possibility of a special legislative session this summer or fall to address the pension issue. If legislators are not called back to Springfield during the summer, the next opportunity for any action on pensions will be in November – after the election. The TRS Web site will continue to be a good source of information that can help you better understand what’s going on. TRS will remain closely involved in all discussions. I urge you to remain aware, informed and active as the future unfolds. Your voices do make a difference. (This article is from http://trs.illinois.gov/subsections/pubs/topics/summer12.pdf)

For perspectives on some of the aforementioned proposals,

PLEASE READ THE FOLLOWING POSTS AND BECOME "INFORMED" THEN "ACTIVE":

“Illinois Pension Reform, Senate Bill 1673, Is Without Legal and Moral Justification”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/05/sb-1673-is-without-legal-and-moral.html

“Dear Illinois Policymaker: It's a State Revenue Problem, Indeed, Plain and Simple. So Raise the Money and Pay the Debts”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/02/plain-and-simple.html

“Why Are We Still Focusing on the Wrong Issues”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/why-are-we-focusing-on-wrong-issue.html

“Assumptions, Concerns and Questions Regarding TRS Insolvency…”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/04/assumptions-concerns-and-questions.html

“A Foreshadowing of Illinois Pension Reform: An Analysis”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/04/foreshadowing-of-illinois-pension.html

“TRS Executive Director Dick Ingram’s Address…”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/trs-executive-director-richard-ingrams.html

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

“A View of the Illinois Public Pension Dilemma, Pt. I”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/04/view-of-illinois-pension-dilemma-pt-i.html

“A View of the Illinois Public Pension Dilemma, Pt. II”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/04/view-of-illinois-public-pension-dilemma.html

“A View of the Illinois Public Pension Dilemma, Pt. III”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/04/view-of-illinois-public-pension-dilemma_16.html

“COLA (Cost-of-Living Adjustment): Is It Guaranteed in Illinois”: http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/cola-cost-of-living-adjustment-is-it.html

Pension Vocabulary, June 10, 2012, “Cash Balance Plan”:  https://sites.google.com/site/pensioneducationsite/pension-powerpoint/pension-word-of-the-week

Transferring the State’s “Normal Costs” to the Pension Systems to Illinois School Districts Will Have Consequences: https://sites.google.com/site/pensioneducationsite/updates-in-pension-education-1/normalcostsorthestatesfiscaltarbabybyjohndillon