Wednesday, October 31, 2012

Report on the October TRS Board Meeting by TRS Trustee Bob Lyons

Those of you that felt that the only course of action that should be taken by the TRS Board was to ask for the resignation of Executive Director Dick Ingram or, indeed, to fire him will be disappointed. Those of you that wanted an end to the problem of a director even talking about cutting existing benefits in order to save the system will hopefully be satisfied that the TRS Board took steps to accomplish that goal. The steps taken were done in closed session and with the unanimous consent of the Board. In public session, we voted to reaffirm our position that the remedy for underfunding the system was for the State to provide the funding necessary to pay the existing benefits.

TRS Report

Last spring, TRS Executive Director Dick Ingram was quoted in the press as saying that cutting current pension benefits would save the system money. His defense of the remark was that he was not advocating that action, but answering a question. At a special meeting, members of the board conveyed the message to him that he should only be talking about solutions to our system’s underfunding that are constitutional. Since that time, I have heard Dick Ingram speak a number of times and I have been satisfied with his message.

The article that recently appeared in Crain’s Chicago Business titled “Head of teacher pension fund says state will need to cut COLAs” came as a most unhappy surprise to me. Our TRS director had once again made the mistake of talking to a media outlet that had its own agenda. He was quoted as saying that other states had reformed their pensions by cutting the COLA. Ingram said that he was just talking about the subject and not advocating a course of action.

I heard from many of you through phone calls and emails. One email just said, “Fool me once ….” Many members said the director should resign or be fired. While I could certainly understand such sentiment, I was very conscious of the fact that it had taken TRS more than a year and a half and two national searches to find Dick Ingram. I also had no interest in seeing the Chicago Tribune and Mike Madigan make Ingram into a martyr who had been fired because, as they would put it, “He dared to tell the truth.”

Mike Blickhan, President of Adams County RTA, asked a most significant question when he wrote to me, “Has the board lost confidence/trust in Director Ingram? I know as a TRS ANNUITANT I have.” That was one of several questions I had when we started our regular October TRS meeting on the 24th. Each board member found at his/her place a letter from the Executive Board of the IRTA which called on the TRS board to control what our director said to the media and to repudiate his remarks. In the public comments section of our meeting, Janet Kilgus, President of IEA-Retired, spoke about the concerns of her members, and Ed Wollet, President of the DeWitt-Logan Counties RTA and Legislative Representative of his region, expressed the dissatisfaction and anger of those annuitants whom he represented.

The TRS board then went into executive session which lasted more than three hours on Wednesday, October 24th and more than an hour again on Friday, October 26th. What we did as board in executive session will by law stay in executive session. Publicly we reaffirmed our position of last spring:

“The Board of Trustees of the Teachers’ Retirement System reiterates and reaffirms its resolution of March 30, 2012 (as amended on April 30, 2012) declaring that present legislative action is paramount to ensure the continued solvency and viability of the plan, by providing for fairness and equity in benefits, adequate funding and adherence to generally accepted actuarial principles and standards. Additionally, the Board of Trustees underscores its unalterable position that any changes to the Pension Code must adhere to the Pension Protection Clause, Article 13, Section 5, of the Illinois Constitution of 1970.”

To answer Mike Blickhan’s question, the board's confidence in Director Ingram was certainly shaken, but not broken. Someone else sent me an email saying that Ingram has done a terrible job in every respect, but that is simply not true. He has misspoken twice when talking to the press, but in terms of running the system and growing the morale of our staff, he has done an excellent job. Since what was done was done in executive session, I can say no more than the board has now taken steps that give me confidence that going forward, Dick Ingram will convey the message that the state will need to look to increased funding rather than cutting benefits to move our pension fund toward solvency. Jim Bachman, IRTA Executive Director, asked if I was certain last spring that the problem had been solved, and I answered yes. The difference this time is that I am convinced that Dick Ingram truly understands the anger, the concern, and even the fear that many of our annuitants and active teachers felt about his remarks, which could be used in an attempt to take the benefits from them that they have earned.

When the director of a governmental agency speaks, he is speaking for the board. When Director Ingram speaks, he will be speaking for the TRS Board, which is committed to growing and protecting our pensions for the benefit of all of our members, active and retired.

Bob Lyons


Peter Stubbs Packs Up and Flees to Chicago via Time Machine to Escape Bad Press

Pursued by the mob of townspeople
and the shaky glow of their torches,
he finds refuge crouching under a mossy bridge.
                                                        --Billy Collins

Imagine somewhere in Chicago
Stubbs takes out the folded newspaper ad
stuffed loosely in his shrunken trousers
with growling, snarling defiance,
his restless, furtive eyes glowing
under the hazy light of the full moon.
Call a Gregory Clinic today for permanent removal
of unwanted facial and body hair…  It reads.

What could this be? He wonders.
He had petitioned Beelzebub before.
He'd even omitted parsley from his cauldron
of opium, hemlock and henbane,
hoping for smoother, hair-free skin.
Now he was just a phone call away. 

Imagine his brilliant, white teeth flashing
beneath his yellow-green eyes,
dark patches of fur standing on end
as he reads about the International Academy
of Professional Electrologists, modern alchemists
with their new state-of-the-art technology.

More effective than rye, mistletoe and yew,
he muses.  It’s time to escape 
the threat of decapitation that lycanthropy and folklore 
had contrived for more than four hundred years…

Stubbs paces wildly in circles for a few moments;
then he rolls around in the dirt three times
and dusts off his soiled trousers. 

The clouds traverse suddenly, illuminating 
a Hunter’s moon, just as he begins to dial….

“Peter Stubbs...” was originally published in American Goat, 1992.

Tuesday, October 30, 2012

Why Todd Mertz is voting for President Obama

Teachers, Unions…
On average, private school educators make $22,500 less than public school teachers. Governor Mitt Romney and Representative Paul Ryan want to privatize education. In countries known to have the best education (i.e., Finland, Canada, Scotland), teachers are paid much more than here; they are unionized and treated as professionals. Can you imagine the pool of candidates our schools would get if we decreased wages and benefits? Would we be able to attract the best and brightest to the profession? According to the Organization for Economic Cooperation and Development's annual report released two weeks ago:

"Despite the considerable amount of money channeled into education here, teaching jobs in the United States are not as well paid as they are abroad, at least when you consider the other opportunities available to teachers in each country. In most rich countries, teachers earn less, on average, than other workers who have college degrees. However, the gap is much wider in the United States than in most of the developed world. The average primary-school teacher in the United States earns about 67 percent of the average college-educated worker in the United States, and the average high school teacher earns 72% of an average college-educated worker in the United States" (Does It Pay to be a Teacher?).
Romney and Ryan want to privatize education, de-unionize and strip teachers of their rights.

While speaking at his campaign rally in Ames, Iowa on Friday, Romney said, "Training programs will be shaped by the states where people live, and schools will put the interests of our kids, their parents, and their teachers above the interests of the teachers’ unions." You don't have to guess what he would plan on doing to teachers' unions if elected. By the way, that was the second jab at teachers' union in that particular speech.

Just ask my cousin if education in her district in Idaho improved or not. A few years ago when teachers' union rights were stripped in Idaho, where my cousin moved to teach English, class sizes soared, resulting in students having to rotate sitting on the floor because there weren't enough desks. Her good friend was having a miscarriage during class one day and her administrator wouldn't let her go to the hospital because there wasn't a substitute teacher available; thus, she had her miscarriage in her classroom.

Additionally, support for students with special needs were cut and left to fend for themselves. Each teacher's prep period was revoked and replaced with an additional class to teach. They were not paid for their course overload. This left each teacher only 82 minutes of prep time for the entire week. Substitute teachers, when and if available, are now volunteers from the community in her district with no background in education. Many teachers at her school quit in the middle of the year, something very rare in the field. My cousin said it was a miracle that she made it to the end of the school year before she resigned. She moved out of the state--back to Illinois where union rights haven't been stripped as they have been in Idaho, Wisconsin, Ohio, Indiana, and many other states by Republican legislatures.

So, why are Romney and Ryan attacking unions and supporting Walker? It’s simple: unions tend to vote for the democratic candidate. If they can bust the remaining unions in the country, they may get that small margin they need to eventually control the presidency, the House and the Senate.

And what is Romney's plan for education? According to the Center for American Progress Action Fund, "Governor Mitt Romney has been running for president for six years, and he still doesn’t have a detailed education plan. He rarely talks about education on the stump and, when he does, he rails against federal spending rather than discussing ways to improve struggling schools or the lives of disadvantaged students. Governor Romney’s pick of Representative Paul Ryan (R-WI) to be his running mate solidified that his stance on education matches his economic vision: cut programs for the disadvantaged in order to pay for benefits to the wealthy. Governor Romney’s main education idea is to turn federal money for disadvantaged students into vouchers that could be spent in private schools" (Romney's Paltry Education Plan).

Don't get me wrong, Obama has his own flaws in education policy (i.e., support for charter schools, voucher programs, Race to the Top...). However, Romney and Ryan want to strip teachers of their bargaining rights and the right to a fair contract. Teachers lose; kids lose.

Police Officers
Romney doesn't support police officers… Romney refers to Walker's attack on public jobs and says: "He [Obama] wants to hire more government workers. He says we need more firemen, more policemen, and more teachers. Did he not get the message of Wisconsin? The American people did. It’s time for us to cut back on government and help the American people" (
The Real Message behind Mitt Romney’s Anti-Police and Firefighters ‘Gaffe’).  

According to the article, "...if you run a Google search on police layoffs, the results make clear who is being hurt most by Republican opposition to the President’s plans to help states keep policemen on the job. The cities of Camden and Newark, New Jersey, have seen steep rises in crime following deep cuts to their police forces, including a 28% spike in homicides in Camden in 2011. The City of Paterson, New Jersey saw an explosion of gun violence when it shed 20% of its police force. These are not places where Mitt Romney ever hopes to pick up votes."

Social Security and Medicare
My wife and I don't pay the 6.2% of each paycheck into Social Security like most private sector employees (12.4% if you are self-employed), but I would be skeptical about Romney and Ryan's true agenda with Social Security and Medicare… According to 2012 Candidate Comparison, "Governor Romney believes that Social Security must be reformed in order to remain fiscally solvent for the long-term." Reform: I think my wife and I know that word well when it comes to our TRS pension in Illinois. If lawmakers get their way with pension "reform," it means a significant decrease in benefits, a steep increase in contributions, and perhaps working an extra twelve years to age 67, despite the fact that public employees did NOT cause the pension and revenue problems in this state.

Even Romney's biggest allies, supporters, and contributors have given him hell lately about his vague economic plan. I bet I know why--he is going to cut Medicare and Social Security when/if he wins. If there is one article you should read, it is the one in the link below. It is written by Robert Reich, professor of public policy and former Secretary of Labor. Some notable quotations about Ryan and Romney include "More than any other politician today, Paul Ryan exemplifies the social Darwinism at the core of today's Republican Party: Reward the rich, penalize the poor; let everyone else fend for themselves. Dog eats dog…

"The Ryan plan would also turn Medicare into vouchers whose value won't possibly keep up with rising health-care costs -- thereby shifting those costs on to seniors. At the same time, Ryan would provide a substantial tax cut to the very rich -- who are already taking home an almost unprecedented share of the nation's total income. Today's 400 richest Americans have more wealth than the bottom 150 million of us put together… And although Romney has carefully avoided specifics in his own economic plan, he has said he's ‘very supportive’ of Ryan's budget plan… Romney wants to permanently extend the Bush tax cuts to the wealthy, reduce corporate income taxes, and eliminate the estate tax. These tax reductions would increase the incomes of people earning more than $1 million a year by an average of $295,874 annually, according to the non-partisan Tax Policy Center. Oh, did I say that Romney and Ryan also want to repeal President Obama's healthcare law, thereby leaving 50 million Americans without health insurance?"  (The Ryan Choice). 

Even Warren Buffet told congress: "My friends and I have been coddled long enough by a billionaire-friendly congress. It’s time for our government to get serious about 'shared sacrifice'… Our leaders have asked for ‘shared sacrifice’… But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched. While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks…"

I will be voting for Obama; I will be voting for Obama so class sizes do not double. Imagine the short window of one-on-one student/teacher time with a class size of 40? According to CNN, "Mitt Romney, who is spending [time] promoting a plan for America's public school system, spent [one] morning defending his stance that smaller class sizes don't necessarily equate with better learning in schools" (Romney defends class size stance to teachers).

I will be voting for Obama to keep our bargaining rights as teachers…; I will be voting for Obama to keep police officers patrolling our streets, and I will be voting for Obama to keep Social Security and Medicare from being gutted by Romney and Ryan who care very little about the middle class…

--Todd Mertz
For Another Point of View: Why Chris Hedges is Voting Green
Would anyone like to tell us "Why you are voting for Governor Romney?"

To lighten the tone, Avengers Director Joss Whedon Endorses Mitt Romney in Spoof Political Ad:

Monday, October 29, 2012

Statement of the Teachers’ Retirement System Board of Trustees

Springfield, IL – The Teachers’ Retirement System Board of Trustees today issued the following statement regarding the on-going debate in the General Assembly concerning an overhaul of the state’s pension code:

“The Board of Trustees of the Teachers’ Retirement System reiterates and reaffirms its resolution of March 30, 2012 (as amended on April 30, 2012) declaring that present legislative action is paramount to ensure the continued solvency and viability of the plan, by providing for fairness and equity in benefits, adequate funding and adherence to generally accepted actuarial principles and standards. Additionally, the Board of Trustees underscores its unalterable position that any changes to the Pension Code must adhere to the Pension Protection Clause, Article 13, Section 5, of the Illinois Constitution of 1970.”

This statement was approved by the trustees on October 26 during a regularly-scheduled meeting. The Board’s March 30 resolution, which was approved unanimously, reads as follows:

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:

1. 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.

2. All future contributions must be guaranteed by statutory language substantially similar to that presented to the Governor’s pension assembly in February.

3. Any changes to the Pension Code must first correct the existing inequities and funding flaws created with the enactment of Tier II and,

4. Any changes to the Pension Code must be based on the simplest and most straightforward changes possible.

5. Any changes to the Pension code must adhere to the Pension Protection Clause, Article 13, Section 5, of the Illinois Constitution of 1970.

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.

About Teachers’ Retirement System:
The Teachers’ Retirement System of the State of Illinois is the 39th largest pension system in the United States, and provides retirement, disability and survivor benefits to teachers, administrators and other public school personnel employed outside of Chicago. The System serves 366,000 members and had assets of $37.5 billion as of September 30, 2012.

Contact: Dave Urbanek
October 29, 2012 Public Information Officer
Office: 217-753-0968


Friday, October 26, 2012

TRS Executive Director Dick Ingram has failed to perform his fiduciary responsibility by Tom White, Executive Director of the Metropolitan Water Reclamation District Retirement Fund (retired)

Dick Ingram has tried to mislead the TRS trustees and TRS members into believing that his and TRS fiduciary responsibility is no more than what Employee Retirement Income Security Act (ERISA) would require. This is an out-an-out misrepresentation.

Ingram would have the trustees believe that TRS fiduciary responsibility requires them to neither champion or defend any particular benefit, but rather only have their eye on the overall health of the fund. In truth, their primary fiduciary responsibility is to insure that benefits promised and earned, per the state statues, are provided. The TRS trustees’ oath of office includes “will not knowingly violate or willingly permit to be violated any of the provisions of the law applicable to the retirement system.” 

Moreover, Ingram has continued to reference the insolvency studies that he now admits utilize arbitrary assumptions, and he has disregarded or refutes potential state asset-raising legislation while continuing to entertain unconstitutional reduction of benefits.

The TRS trustees’ oath of office should result in TRS taking the State of Illinois to court relative to any signed legislation that would violate benefit provisions provided in the statutes. That certainly will not happen with Ingram as the Executive Director.

I have e-mailed and spoken with trustees Bob Lyons and Cynthia O’Neill. Minimally, I was trying to get Lyons and O’Neill and the rest of the TRS board to address the above issues. Specifically, I believe that they should direct Ingram to no longer reference the impending insolvency, which is a pure fabrication. Ingram now calls his original insolvency assumptions “arbitrary” because the state’s contributions in the first two years of his stress test are significantly higher than what he had proposed. Additionally, the state is discussing additional funding options, beyond stress test assumptions. Ingram continues to divert the state’s additional funding discussions by encouraging reduction in retirement benefits.

Ingram should also be put on notice with regard to his ERISA-based fiduciary responsibilities and should not comment on the legislature’s or Governor Quinn’s discussion relative to raising additional capital. Therefore, the “hands off Dick Ingram” that I recently heard at an Illinois Retired Teachers Association meeting on October 24th, which I have also heard from Lyons, is NOT the right way to proceed.

Assuming that TRS trustees put Ingram on notice as to what he cannot say as a TRS fiduciary, personnel actions should be taken when their directives are violated. This could be a suspension without pay or possible termination. I have mentioned to O’Neill and Lyons that outside counsel should be consulted before taking this path.

If Ingram were to be fired, it would not be because TRS is trying to silence him from telling the truth. His truth is arbitrary! He has continued to violate fiduciary responsibilities of the organization that he represents. TRS has been infiltrated by a Civic Committee/Civic Federation mole, and the TRS trustees have allowed him to remain at the podium, on their payroll, long after he has been uncovered.  

Although I have respect for the job that O’Neill and Lyons have performed as TRS annuitant trustees, I have been dissatisfied that the TRS Board of Trustees has allowed Ingram’s poisoning to continue. If this mess ends up in the courts, I am afraid that the courts could decide that impending insolvency trumps constitutionally-guaranteed benefits. Then the TRS statement of benefits, which I and all teachers relied upon at retirement, becomes a worthless piece of paper.

We should immediately begin distributing petitions to be signed by TRS members, active and retired and any other likeminded Illinois citizens, calling for the resignation of Dick Ingram, specifically related to his failure to perform his fiduciary responsibility.
--Tom White, TRS retiree and retired Executive Director of the Metropolitan Water Reclamation District Retirement Fund (Illinois Complied Statues 40/5, Article 13.)

To:  TRS Board of Trustees
From: Tom White, Annuitant, Retired Executive Director MWRDRF
Re: Fiduciary Responsibilities
Date: May 12, 2012
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.

The prudence and loyalty fiduciary standard under ERISA, as published in the handwritten “Comments on Fiduciary Duty” provided at IL TRS Board Meeting of August 8, 2011, included the following:

“These standards (ERISA) establish that the trustees must protect the overall actuarial soundness of the fund, but do not extend to a protection of particular benefits for members.” 

Being a public plan, the statutes set out a much higher fiduciary standard, specifically:

 (40 ILCS 5/1-109) (from Ch. 108 1/2, par. 1-109)
    Sec. 1-109. Duties of Fiduciaries. A fiduciary with respect to a retirement system or pension fund established under this Code shall discharge his or her duties with respect to the retirement system or pension fund solely in the interest of the participants and beneficiaries and1:
    (a) For the exclusive purpose of:
    (1) Providing benefits to participants and their beneficiaries;
    (2) Defraying reasonable expenses of administering the retirement system or pension fund;
    (b) With the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims;
    (c) By diversifying the investments of the retirement system or pension fund so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
    (d) In accordance with the provisions of the Article of the Pension Code governing the retirement system or pension fund.
(Source: P.A. 82-960.)

1 Courts have interpreted (40 ILCS 5/1-109) to mean that fiduciaries must act “with an eye single to the interests of the participant and beneficiaries” and with complete and undivided loyalty to the beneficiaries. Furthermore, Trustees “must overcome any loyalty to the interests of the party that appointed” them when functioning in their respective capacity as plan fiduciaries.

Excerpts from “Role and Responsibilities of Fiduciaries” provided for the MWRD Retirement Fund (40 ILCS Act 5, Article 13), December 2, 2008, by Joseph M. Burns, Esq. of Jacobs, Burns, Orlove, Stanton & Hernandez, Chicago, IL

Additionally, the Board of Trustees Manual (January 2012), under the Code of Ethics and Conduct section (p10), similarly references the trustees’ fiduciary duties under article 1 of the statutes.

The current TRS Oath of Office further reflects these fiduciary responsibilities:

I, __________, do solemnly swear that I will support the Constitution of the United States, and the Constitution of the State of Illinois; will diligently and honestly administer the affairs of the Board of Trustees of the Teachers' Retirement System of the State of Illinois; and will not knowingly violate or willingly permit to be violated any of the provisions of the law applicable to the retirement system.  Underling added for emphasis!

“Once again we have a problem” with Executive Director Dick Ingram:

Thursday, October 25, 2012

From the “Report of the State of Illinois' Budget Crisis Task Force”

…Underfunded Retirement Promises Are Crowding Out Other Needs

It is widely recognized that Illinois has the worst unfunded pension liability of any state. Its five retirement systems had a total of $85 billion in unfunded liability in 2011, and the figure has increased since then. Dealing with some of the lowest funded ratios of public pensions in the nation has contributed to the state’s ongoing fiscal crisis. Illinois’ pension problems were cited by Moody’s Investors Service when it downgraded the state’s bond ratings in January 2012, making Illinois’ credit rating the lowest of all fifty states. However, Illinois has done nothing to reform state employee pensions since that time, and it is doubtful that anything will happen before 2013…

The primary cause of the state pension systems’ underfunding is that the state does not impose the same obligation on itself that it imposes on local governments, and for decades its employer contributions have been below annually required amounts. Illinois has planned so poorly that it had to borrow to make its scheduled pension contributions for FY 2010 and 2011, which were below the ARC amount. State leaders vowed to make the entire FY 2012 pension payment without issuing bonds, but as of the development of this report it is unclear whether Illinois has made its complete pension contributions to all the systems for the fiscal year that just ended or whether part of the FY 2012 pension contributions are among the $7.5 to 8.0 billion in unpaid bills that are being carried into FY 2013.

The Way Pension Costs Are Reported Can Obscure the Problem

Illinois’ pension systems are likely in a more dire fiscal condition than they seem. Illinois’ three largest pension systems discount future pension liabilities using an assumed rate of return on investments of around 8 percent. Since the financial crisis, ongoing economic instability in Europe, and worries of a double-dip recession, many believe that this assumed rate of return is overly optimistic. Most state pension systems have exceeded an 8 percent rate of return over the past several decades, but the rates have been much lower in recent years.

Lower discount rates will soon be required in Illinois and other states. Under new rules approved by the Governmental Accounting Standards Board (GASB) in June 2012, Illinois will be required to report liabilities using “market rates,” which are typically closer to 5 percent. Although this change will no doubt have a positive impact by more accurately estimating the level of state liabilities, it reveals an even more precarious financial position. For example, “[u]nder the new rules, the Illinois Teachers’ Pension System [TRS], one of the country’s worst funded, would have shown just an 18 percent funding ratio as of July 2010.”

Finally, some state obligations were not reported at all until recently. Since liabilities for retiree healthcare (“other postemployment benefits” or OPEB) were only reported after GASB Statement 45 was implemented in FY 2008, long-term trend data are not available. However, even using only recent reports, it is clear that Illinois’ OPEB liability is large and increasing more than a billion per year. Illinois’ Unfunded Actuarial Accrued Liability (UAAL) for other post-employment benefits was $33.3 billion as of June 2011…

Background and History

…Illinois’ pension systems date to the 1940s, and since 1970 the state constitution has protected employees’ benefits. Nearly 80 percent of workers covered by Illinois’ state pension plans are not eligible for Social Security. In the 1990s, national surveys found that Illinois’ pension benefits were not generous compared to other states. Offsetting the relatively low benefits, Illinois has historically provided greater financial support for healthcare benefits to retirees than most other states and has been one of the few states that provides and funds disability benefits.

Underfunding of the Illinois pensions systems dates to the early 1980s. Until that time, the policy was that the state made sufficient contributions to cover annuitants’ benefits, while the employees’ contributions and investment income were used to build future reserves. There was no actuarial basis for this system, but it did sustain the pensions. Fiscal stress in 1981 led Illinois to abandon this policy. State contributions plummeted in 1982 and 1983 and increased very modestly for the next decade, although annuitants’ benefits payments grew dramatically. Between 1981 and 1995, the state’s pension contributions increased 28 percent, but benefits expenditures increased by a factor of almost 4.5, and unfunded liabilities escalated. In 1995, the funded ratio for the five systems combined was only 53 percent.

Recognizing the Problem but Putting Off the Painful Solution for Years

In 1994, Illinois established a plan to bring the pension systems to 90 percent funding by 2045. This “fifty year plan” has guided the funding of the pensions up to the present. However, the scheduled contributions are less than the ARC — also known as “normal cost plus interest” — meaning that even if the state makes payments as scheduled in the 1995 plan, unfunded liabilities continue to grow.

This is another reason why it is hard to see the true picture of Illinois’ pension problem. Much of the budgetary discussion of pensions in the state is the “scheduled” payments and few understand the more important concept of the ARC. The financial condition of the pension systems improved during the late 1990s, as the booming economy helped increase the five systems’ combined funded ratio to about 70 percent. But during this time, benefits were expanded as well.

In 2000, the pension systems were relatively sound, but the economic recession of 2000-2003 was disastrous for the systems’ asset values. The funded ratio for the five systems combined plummeted to 49 percent in 2003. In response, pension benefits were reduced, the state issued $10 billion in bonds (of which $7.3 billion went to the pension systems), and legislation was enacted allowing a “partial pension holiday” for FYs 2006 and 2007. Although the intent of borrowing was to reduce unfunded liabilities, the statute was written such that the required contributions going forward included the amount of debt service on these bonds, which reduced the amount actually contributed to the pensions and worsened the chronic underfunding. The 2006 and 2007 contributions made during the pension holidays were only about half the amount required based on actuarial calculations. So the financial condition of the pensions continued to deteriorate.

In fiscal years 2008 to 2010, Illinois was required to make larger contributions to its pension systems to make up for the pension holidays of 2006 and 2007. Unfortunately, these ramped-up payments coincided with the Great Recession when the state’s fiscal condition was already poor. During the relatively good economic times of the late 1990s and mid-2000s, Illinois had not raised taxes. Rather, the state had relied heavily on borrowing and temporary measures (like the pension holiday), so it was not well-prepared to weather the recession. Illinois made its required contribution to the pension systems through FY 2009 but issued pension obligation bonds to cover the payments for FYs 2010 and 2011.

Changing Pensions in Illinois: Small Strides

Although Illinois has made significant strides in some areas of its finances, pension reform has been difficult to achieve. In 2010, Illinois established a two-tier pension system with reduced benefits for employees hired after January 1, 2011. This will generate substantial long-term savings but did nothing to reduce the preexisting unfunded liability. Legislation that would create a third tier in the form of a defined contribution 401(k)-style plan — and requiring larger employee contributions if workers opted to keep their traditional pension plans — did not pass the 2011 legislative session.

Despite the shortcomings of this particular third-tier proposal, some type of equitable pension reform is urgently needed. Between FY 2012 and FY 2013, Illinois’ required contributions to the five pension systems increased nearly $1 billion, and that amount does not completely cover the liabilities incurred during the year. In addition, Illinois is required to pay debt service for the pension bonds it issued to cover payments to the systems in FYs 2003, 2010, and 2011. “In FY 2008, total pension costs, including regular state contributions and pension-related debt service, took up only 8 percent of General Funds revenue from state sources, but by FY 2012 these costs had grown to almost 20 percent of state revenue. By FY 2015, pension costs are projected to take up one-fourth of the state’s resources.”

Small strides have also been made with respect to OPEB. Last spring, Governor Quinn proposed that if employees were to keep their free retirement healthcare, their annual cost-of-living adjustments (COLAs) would be reduced from 3 percent compounded annually to the lesser of 3 percent or one-half of the consumer price index, not compounded. Alternatively, those who wanted to retain their 3 percent annually compounded COLA would be required to pay a fee (or higher employee contributions) for their post-employment health insurance. This proposal did not pass, but the General Assembly did enact limits on state subsidies for retiree healthcare. Under the new law, employees will contribute to their healthcare premiums based on their ability to pay.

Serious Problems Remain

Pension reform is one of the most pressing issues facing Illinois. Without reform, huge costs loom for future taxpayers or would-be beneficiaries of state programs that will be crowded-out. But the magnitude of the problem also means any solution will include big benefit reductions or cost shifts, so political interests differ sharply on how to act. The lack of legislative action on pensions has not been for lack of ideas. In fact, several proposals have been put forth.

Governor Quinn proposed ambitious pension reforms in April 2012. Under this proposal, Illinois’ pension systems would be 100 percent funded by 2042. The proposed reforms included reductions in the COLA, increases in the retirement age, and increases in employee contribution rates. In addition, the normal cost of pensions of teachers and state university employees would become the responsibility of the universities and school districts, rather than the state.

Proponents of the shift argue that currently school districts can raise teacher salaries but bear no responsibility for the resulting pension cost increases. Opponents raise the specter of large property tax increases they argued would be needed to support teachers’ pensions. IGPA released a plan to reform SURS in early 2012; its principles also could be applied to the state’s other pension systems. The IGPA proposal would create a hybrid defined benefit/defined contribution system for new employees. Hybrid systems help balance the pros and cons of defined benefit and defined contribution plans, allowing retirees to have a guaranteed income since, in Illinois, most are not eligible for Social Security.

Despite a variety of ideas and proposals to fix Illinois’ ailing pension systems, political logjams have halted proposed reforms. The latest legislative session ended in May without any changes being made to the state employee pension systems. Governor Quinn called a special legislative session in August to address the issue, but this session also ended without results. A possible post-election session may be more fruitful. The November 2012 ballot includes a proposal that would amend the Illinois Constitution to require a three-fifths majority to increase benefits under any state or local retirement system.

Because the state’s resources are limited, some type of reduction in pension benefits appears inevitable, despite the difficulties in making any type of change. Illinois’ future pension payments are scheduled to grow at rates exceeding the anticipated growth rates of the state’s revenue sources. Assuming that total spending is kept within the limits of the state’s revenues, if Illinois makes the required contributions to its pension systems, serious cuts in other areas of the budget will be necessary. Pension obligations will continue to crowd out other spending…

Conclusions and Recommendations

The recent recession hit Illinois particularly hard. At the onset of the financial crisis, Illinois was essentially insolvent because it had no reserves; had used borrowing, time-shifting and fund-shifting devices to balance the budget for the previous six or seven years; and had shortchanged its pension systems for decades. Illinois also suffered a crisis of leadership at a time when a strong and effective governor was needed to make tough decisions to move the state forward. For these reasons, even at a time when all U.S. states were struggling, Illinois’ fiscal crisis was one of the very worst.

Make the Tough Choices Sooner Rather than Later

Illinois starts with a large structural deficit, an imbalance between sustainable revenues and existing spending levels. Illinois faces major challenges going forward due to the aging of the population, rising health care costs, unfunded pension liabilities, stagnant and eroding revenues, and impending federal budget cuts. Some of the problems going forward are the consequence of time-shifting from unbalanced budgets in recent years — debt service costs for pension obligation bonds, pension payments that were less than the ARC, and billions in unpaid bills.

The state needs to recognize that large cuts in many areas of the budget as well as increases in revenues will be necessary. The default policy if policymakers do not make the tough choices soon will be two-fold. First, further time-shifting will make the situation in future years even worse — larger stacks of unpaid bills and more debt service payments to pay for past gaps. Second, without deliberate choices as to what to cut or who to tax, cuts will be concentrated in the “discretionary” areas of spending for human services and education — programs that have already seen large cuts. We do not offer specific recommendations for which spending to cut or which taxes to increase, only a few general observations.

Pension reform must be a priority. Illinois’ pension systems are crowding out all other areas of the budget. Without some type of reform that reduces costs going forward, the systems appear destined for insolvency. Illinois needs to act now to salvage the benefits of future retirees. Illinois could learn from hybrid systems adopted in a number of other states.

Medicaid costs and reforms must be addressed. Illinois should work with the federal government to control Medicaid costs and implement reforms. “Optional” treatments such as medications and preventive care can be cost-effective alternatives to hospitalization, but under the current federal rules these are the first services to be cut.

Revamp the State’s Fiscal Toolkit

There are a number of things that can be done to provide better information on the fiscal situation and improve the budgetary decision making process:

Timely reporting. Illinois’ budget is typically enacted at the end of May; the governor’s office should issue a detailed report of the enacted budget within a month. The comptroller should release detailed reports of actual revenues and expenditures within six months of the fiscal year’s end so that this information is available when the next year’s budget is proposed. The private sector accomplishes this task regularly.

Accrual accounting. Illinois should supplement cash-based budget reports with companion tables that use the accrual accounting concepts required of year-end CAFRs. This reporting should include changes in net liabilities for pensions and OPEB.177 Reporting changes in assets and liabilities alongside current cash receipts and expenditures will expose budget shortfalls concealed by cash-based accounting.

Pension schedules. Illinois should provide annually required contribution amounts (ARC or “normal cost plus interest”) in the same table as the pension contribution schedule so that lawmakers and the public can clearly see that even if the state makes its annual contribution to the systems, unfunded liabilities continue to grow. Even better would be to show “normal cost plus interest plus a 30-year amortization of unfunded liabilities” as the benchmark.

All funds, not General Funds. Illinois should reduce its focus on General Funds-only budgeting and present the total funds budget so that major expenditure categories such as transportation and major revenue streams such as the sales tax are fully brought into the budget frame. This would also eliminate confusion that results when expenditure items are shifted into and out of the General Funds budget from one year to the next.

Transparent transfers. Statutory transfers between General Funds and other funds (and between non-General Funds) should be itemized in the governor’s prospective budget and in reports on the enacted budget. Illinois’ comptroller should report statutory transfers to and from the General Funds (and between other funds) on its drilldown website. Currently, only aggregated amounts are available, making this information impossible to track.

Multi-year forecasting. Illinois should build on the steps it made last year to generate multi-year forecasts and plans for the total budget (not just General Funds) that extend at least four years beyond the current budget year. This will improve the state’s ability to make decisions, which will lead to better fiscal outcomes. Illinois should make its forecasts available to the public and encourage outside review.

Long-term planning. Responsible long-term fiscal planning is vital if Illinois is to put its house in order. Budget forecasts and legislative and public hearings should be used to develop spending priorities and a responsible long term fiscal plan for Illinois. Rules and regulations will need to be put in place so that the plan is not just a recommendation but will be adhered to.

Fiscal notes. Legislation that will have a significant fiscal impact on Illinois should be accompanied by a fiscal note so that lawmakers can see the price tag associated with a given policy. Illinois currently has very limited resources available to make estimates of these costs but this should be a priority for planning and budgeting.

Political revenue estimates. Illinois needs a non-politicized process for approving revenue estimates. The General Assembly should either adopt COGFA’s estimates or establish a consensus process as other states have done.

Omnibus spending bill. Currently, Illinois’ budget is enacted as a series of appropriations bills rather than a single, coherent state budget. If the total state budget was enacted as a single omnibus bill, this would facilitate monitoring and increase transparency. Illinois should establish a real rainy day fund and use it responsibly. During good times, the state should save automatically and allow time to replenish the reserve funds after a fiscal emergency ends. Illinois could learn from successful models of rainy day funds such as those in Virginia and Texas.

Other Issues

Tax reform at the state level may be needed to achieve revenue systems that are adequate and predictable and that minimize volatility. Illinois’ state sales tax is antiquated and has eroded over time. Illinois should reform its income and sales tax structures to make them broader-based, stable, and productive. Illinois should establish procedures for monitoring the fiscal condition of its local governments and taking early action to help local governments resolve their fiscal problems. Illinois could learn from well-established monitoring and early intervention procedures in North Carolina, New Jersey, Kentucky, Pennsylvania, and Michigan.

Illinois’ infrastructure needs can no longer be ignored. Deferred maintenance is costly in the long run because problems continue to worsen. Especially problematic is Illinois’ lack of a comprehensive capital improvement plan that identifies priorities and establishes repair and replacement schedules for five or ten years in the future. Infrastructure quality will have an impact on Illinois’ long-term economic development.

My Commentary:
Illinois' Revenue and Pension Debt Problems (a Reiteration)

Illinois Pension Reform Is without Legal and Moral Justification