Friday, November 16, 2012

After the election, what’s next for teacher pensions? by TRS Executive Director Dick Ingram

The elections are over and everyone is wondering the same thing about Illinois government: “What’s next?” For Teachers’ Retirement System and its 366,000 members, that question will continue to focus on what must be done to ensure the long-term financial future of TRS, as well as the other state pension systems.

Between now and January 9 – when a newly-elected General Assembly convenes – teachers across Illinois are anticipating that legislators will renew a contentious debate about the future of TRS and possibly take action to overhaul the System’s financial structure.

Our latest audited financial report shows that TRS is a strong retirement fund – in the near term. The System accumulated $3.7 billion in revenue during fiscal year 2012 and ended September with $37.5 billion in assets. TRS paid more than $4.5 billion in benefits last year. For now, teacher pensions are secure.

The long-term sustainability of TRS, however, remains uncertain due to the overall bleak fiscal condition of the State of Illinois. The state’s debts that are expected to surpass $37 billion in 2017 and there are no plans in place to successfully meet that burden. Illinois is further tested by an underperforming economy that creates significant political and fiscal challenges which inhibit tax collections. 

In the future these factors will increasingly undermine the state’s legal responsibility to fully fund teacher pensions annually and to keep retirement promises to TRS members that were first established in 1939.

Against the backdrop of these difficulties, TRS has issued blunt warnings about the serious consequences of two fiscal trends on a collision course: One, the state’s pension debt is growing faster than state revenues. Two, state government has continually failed to provide actuarially-adequate funding to stabilize that pension debt, much less to pay it off.

Despite $37.5 billion in assets, TRS at the end of FY 2012 had only 40.6 percent of what will be needed to pay all anticipated benefits over the next 30 years. When you combine TRS with the state’s other pension systems, Illinois has the worst-funded major pension system in the country. No other state even comes close. TRS’s unfunded liability alone stands at $52 billion. This means that we have only half of the assets needed to pay the benefits due to our members who already are retired.

Along with this warning, the TRS Board of Trustees acknowledged the harsh reality that TRS will be insolvent in the future unless changes are made to stabilize the System. The trustees established a five-point foundation for any future reform. These five cornerstones are:

·         Require the use of standard actuarial practices and formulas to determine funding levels instead of alternate calculations required by state law that artificially lower state contributions. For example, the state’s required contribution to TRS for fiscal year 2014 under state statutes is nearly $1 billion less than the actuarially determined amount, and this only exacerbates the unfunded liability.

·         Require a guarantee in law ensuring that state government fully funds the state’s public pension funds in the future; reversing years of lower-than needed contributions. Without a guarantee the current problem will just grow bigger.

·         Fix a serious financial inequity in the funding and benefits for Tier II members hired after January of 2011. Current pension law significantly penalizes Tier II members and creates future funding imbalances that will run into the billions of dollars.

·         Require that any changes enacted in the pension code be straightforward and avoid complications that unnecessarily slow the administration of benefits so we can apply them fairly to all members. This kind of transparency will help restore the trust that has been eroded by decades of broken funding promises.

·         Require that any changes to the pension code adhere to Article 13, Section 5 of the Illinois Constitution – the pension protection clause. While the question of constitutionality is ultimately decided by the courts, all reform efforts must start by meeting this standard.

The need to act on the state’s pension problems is as urgent as ever. TRS members and the taxpayers of Illinois deserve a solution that puts the System on permanently sound financial footing.

What’s next? The problems facing TRS and the state’s pension systems can be fixed. Unfortunately there are no magic answers awaiting discovery. Many other states, all in far better fiscal circumstances than Illinois, have responded to similar pension challenges by making tough decisions to ensure the future viability of their retirement systems. Illinois has not. Any change in Illinois will require similar tough decisions from everyone. Continued inaction will just make these decisions more difficult in the future.

TRS is a promise keeper. Our fiduciary duty to uphold the System’s long-term stability means we must ensure that retirement promises are kept not only for those already retired, but for veteran teachers in the midst of their careers as well as new teachers just starting out.

TRS has worked hard over the last several years to ensure that state officials and legislators have the data and sound analysis necessary to make these decisions. We have framed the issue and outlined the consequences. What’s next? It is time to answer that question.

[Besides the trustees' "five cornerstones" for reform, "what's next" and imperative? How about rectifying the state's revenue problem and pension debt?]

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