Wednesday, May 24, 2017

All about Illinois Public Pensions from the Better Government Association

"...[A] BGA analysis of 2017 data from major pension funds for state and municipal employees vividly illustrates the disconnect between high-rolling pensions, legally protected but irksome as they may be, and the deep financial plight experienced by many of those funds. 
"Simply put, the state's 17 largest pension funds are slated to pay out more than $17.3 billion in benefits to some 483,000 retirees and survivors this year, totals that underscore the broad reach of pension checks for former public employees. Those payments do not come direct from tax money, though there is indirect correlation that can render the public confused and budget makers dyspeptic. 
"Just four percent of all beneficiaries this year are in line for pension paydays exceeding $100,000, with the biggest checks largely going to once high-paid former school administrators and physicians at public teaching hospitals. Payments for the overwhelming majority of pensioners, most of whom don't qualify for Social Security, are far more modest.
"The median pension in 2017 for retired suburban and Downstate teachers stands at $52,016, the analysis shows, while the median for general state workers is $28,946. For university workers, the median pension stands at $26,101, while for non-public safety municipal workers outside of Chicago it is $9,064.
"The median represents the mid-point of all individual pensions paid out by a retirement system. It is different from an average, which can be skewed by those out-sized, six-figure payouts. 
"The Illinois Constitution includes a strong prohibition against pension benefits, once granted, ever being 'diminished or impaired.' But if the size of all pensions could magically be capped at $100,000, the savings at those major funds would amount to $450 million this year, only 2.6 percent of the total. 
"The analysis from the BGA, the latest in a series of annual pension updates dating to 2012, was made with data obtained through the Freedom of Information Act. 
"It examined pension records for funds covering public school teachers and university employees, state, Chicago, and Cook County employees, and tens of thousands of other public workers in the suburbs and Downstate. Excluded from the analysis were records from hundreds of smaller, municipally operated pension funds covering police and firefighters outside of Chicago. The raw pension data for 2017 is now posted under the tools and data section of the BGA website. 
"The financial perils faced by Illinois pension funds are both real and ripe for misunderstanding and political demagoguery. The aim with any public pension fund is to make it financially self-sustaining so that it can pay obligations to pensioners well into the future without stressing government budgets. 
"That decidedly has not been the case with many of the largest pension funds in Illinois, where government officials have spent decades skimping on money they owed to cover the employer share of retirement benefits for public workers. The result is those public bodies have rung up enormous interest debt on woefully past due pension bills and are now forced to play catch-up, in the process squeezing resources available for schools, public safety and other crucial functions of government.
"Just five of the 17 pension funds—those managed by the state for public university workers, suburban and Downstate teachers, general state employees, judges and legislators—collectively face an unfunded liability of $130 billion. 
"A recent analysis by the legislature's economic forecasting arm, a bipartisan body akin to the Congressional Budget Office, vividly illustrates the central role played by the state's chronic failure to meet its pension funding obligations in the explosion of debt at those five state funds. 
"From fiscal 1996 to 2016, unfunded liabilities at those funds grew by nearly $108 billion, or 675 percent, despite a long-term commitment to ramping up annual pension investments and improve financial soundness at the retirement funds, according to the Commission on Government Forecasting and Accountability. 
"The commission attributed the largest share of that debt growth, $44.6 billion, to the shortfall in employer pension contributions from the state. Bookkeeping changes that lowered predictions of future investment returns accounted for another $31 billion in debt growth, while lackluster investment returns grew the debt by $14.7 billion. 
"Meanwhile, employee salary and benefit increases collectively grew the debt by $1.7 billion, or just 1.3 percent, the commission reported.
"As a rule of thumb, pension experts generally consider a pension fund healthy if it has on hand at least 80 percent of the financial resources it needs to cover future obligations to retirees. There are some exceptions, but most big pension funds in Illinois are nowhere close to meeting that benchmark, with many in the sub 40 percent category. 
"And that's where the analysis often gets hijacked by misunderstanding or worse. Those financially ailing funds still have resources to cover pension obligations, but could in theory fall short years from now without governments making good on those expensive, late payment interest charges they owe. 
"Early this decade, confusion over the complexities of pension fund finance led some Chicago media to highlight what turned out to be badly flawed projections from a Northwestern University public finance specialist. He claimed that by 2018 many Illinois pension funds would begin running out of cash to pay retirees.
"The 2018 fiscal year is just weeks away, beginning on July 1, and that doomsday scenario is not close to panning out. Pension funds in Illinois, while far from in the pink, appear to have ample resources to cover pension obligations for many years to come. 
"The real problem is the mound of make-up payments those government employers are now being forced to come up with because of all those years where they didn't appropriately pay into pension funds. 
"Dave Urbanek, a spokesman for the large Teacher's Retirement System, the school teacher pension fund, said the shortchanging predates World War II. 'Since 1939, TRS has never once received an annual state contribution that an actuary would say meets the 'full funding' standard,' said Urbanek.
"TRS, the largest of the state's pension funds, possessed more than $45 billion in assets to cover its pension obligations in fiscal 2016, according to data from the legislative commission. Even so, the commission pegged the cost of long term pension obligations at the fund at more than $118 billion, resulting in a funding ratio of just 37 percent. 
"In fiscal 2016 alone, the state obligation to TRS and the other four employee pension funds it maintained was $6.8 billion, an amount so large it consumed more than 26 percent of the day-to-day operations budget of Illinois government, according to Ralph Martire, executive director of the Center for Tax and Budget Accountability. 
"But Martire said only $1.6 billion of that amount, less than 24 percent, was needed to cover the so called normal cost of pensions, benefits actually earned by employees in 2016. The other $5.2 billion amounted to late payment charges. 'The real problem is a debt-service problem and a tax-policy problem,' said Martire, whose Chicago-based think tank contends Illinois finances are being crippled by insufficient taxes. 
"The pension debt, combined with low tax revenue, has been a strong influence on Illinois receiving some of the lowest credit ratings among the states, a dubious distinction that drives up the cost of borrowing. 
"The idea of better funding was admirable, but the methodology was flawed, according to Martire. The state borrowed money against pension contributions to fund services, and buried taxpayers under a mountain of unfunded liabilities."
Jared Rutecki writes for the Better Government Association, a Chicago-based watchdog organization.


  1. ...It is true that at the time of the 1970 Illinois Constitutional Convention, the state’s pension systems were no better funded than they are today (Eric Madiar, Chief Legal Counsel to Illinois Senate President John Cullerton and Parliamentarian of the Illinois Senate). Any dialogue about TRS and other public pension systems being underfunded is misleading because it refers only to the retirement systems’ long-term unfunded liability (the current value of future financial obligations minus available assets). It is evident that Illinois policymakers, members of the Civic Committee and Civic Federation, and many so-called journalists of the Chicago Tribune and others want to renege on the constitutional guarantee to public employees.

    It is also true the unfunded liability of the pension systems grew exponentially because of the state’s inconsistent funding methods, unreliable accounting methods, and “special deals” made by legislators (and sometimes with union and business community stakeholders) that were to be funded with future monies. The scapegoating of public employees (especially teachers), exacerbated by greed and corruption particularly flagrant in the financial sector, exploded into the Great Recession. Of course, this came after eight years of inordinate military spending for two costly wars and deregulation and unprecedented tax cuts for the wealthy by the federal, state and local governments. This tsunami of debt intensified every state’s budget deficits. We can also add fiscal irresponsibility, incompetence, avarice, and corruption to Illinois' financial debacle.

    Posted on this blog: April 14, 2012

  2. ...Let us not forget that defined-benefit pension plans have an economic impact of several hundred billion dollars each year and support several million American workers in their jobs; they contribute over a hundred billion dollars to annual local, state, and federal revenue, while reducing government expenditures; they also provide capital to the financial markets, and they deliver the same level of retirement income as an individual 401(k) type savings account at half the cost as a result of their professional asset management and better long-term investment strategies, particularly during challenging economic times. Let us also not forget that defined-benefit pensions are associated with far fewer American households experiencing food privation, shelter adversity, and health care hardship and provide a bastion of hope and financial stability for millions of people in this country (The National Institute on Retirement Security). Instead of annihilating the defined-benefit pension plans, they should be advocated by everyone.

    It is true that state-funded pensions are less expensive for Illinois taxpayers than Social Security and that Illinois taxpayers save hundreds of millions of dollars per year by not paying Social Security payroll taxes for 78% of all active employees in the five-State-managed plans (Illinois Federation of Teachers)...

    Posted on this blog: September 6, 2011

  3. Hi Glen. As always, thanks for posting the info.

  4. “...The primary reason for the significant, annual growth in the state’s pension contribution is poorly understood and is often not reported correctly in the media. It has nothing to do with increasing benefits for workers, nor any other inherent aspect of the pension systems themselves. By far and away, the main reason the state’s contributions to its pension systems are increasing so much annually is the unrealistic, heavily back-loaded schedule the legislature set back in 1995 for repaying the debt the state owes to its pension systems.

    “Two compelling data points conclusively prove that debt is driving the increase in annual pension payments. First, of the roughly $5.1 billion General Fund contribution to the five pension systems estimated for FY2013, about $1.1 billion is the normal cost of funding benefits being earned by current workers, whereas well over three-quarters, $4.0 billion, is repayment of debt. Of the $6.19 billion General Fund contribution to the five pension systems for FY2014, about $1.02 billion is attributable to the normal cost of the benefits being earned by current workers, while $5.17 billion constitutes debt repayment…

    “Over four out of five taxpayer dollars paid as part of the state’s annual pension contribution go to paying down pension debt, not to funding benefits being earned by current workers. Indeed, the entire 20.99 percent year-to-year growth in the pension contribution from FY2013 to FY2014 is due to increasing debt service under the existing repayment schedule.

    “Second, when one considers the factors that have contributed to the growth in the state’s unfunded liability since FY1996, the amount borrowed from what should have been paid to the systems is by far the largest reason for this growth…

    “The greatest cause of the state’s unfunded liability has been borrowing against the pension systems. This borrowing meant that the state’s contributions were not sufficient to pay for both benefits earned by current employees and interest on the pre-existing unfunded liability. Without sufficient contributions, an unfunded liability annually grows by a retirement system’s investment rate assumption (which ranges from seven percent to eight percent among Illinois’ five state systems).

    “The state’s annual contribution to the retirement systems for debt service can be thought of as having two components: one part goes to pay down principal and the other is for interest on the principal. This is similar to paying down a credit card bill or home/car loan…

    “The significant debt owed to the pension systems is the core cause of the systems’ cumulative unfunded liability—a situation that did not arise overnight. In fact, Illinois lawmakers essentially borrowed against the pension systems for decades by underfunding what was owed, and instead diverted the revenue that should have gone towards pensions to fund the delivery of current services—like Healthcare, Education, and Public Safety..."

    Posted on this blog: January 8, 2014

  5. “…There's been a longstanding imbalance between revenue growth and service cost growth, which prevents Illinois from sustaining the same level of services from year to year. This creates a real challenge for politicians, because $9 out of $10 the state spends on services goes to education, health care, social services and public safety. Cutting those core services every year is hardly a blueprint for re-election or good public policy.

    “Raising taxes always scares politicos, no matter how rational or needed the increase would be. So decision makers consistently chose a third, irresponsible path: using the pension systems like a credit card, diverting revenue that should have funded the normal cost of retirement benefits to instead fund current services.

    “This avoided the need for service cuts or distasteful tax increases, while allowing constituents to consume services without paying the full cost thereof in taxes. It became such a political crutch that the practice of borrowing from what was owed the pensions to fund services was codified into law as part of the 1995 pension ‘funding ramp.’

    “This ramp so aggressively borrowed against the pensions that it ballooned the unfunded liability from $17 billion in 1994 to $54 billion in 2008 — when the Great Recession hit and financial markets crashed. It accomplished this boondoggle by using an amortization schedule that was so back-loaded it resembled a ski slope, calling for annual payments in excess of $16 billion in out years.

    “Now that we know the Illinois Constitution means what it says, the only viable and constitutional solution going forward is replacing the current back-loaded repayment schedule with a longer, level dollar amortization that permits payment of all retirement benefits when due, increases the funded ratio to a point that's considered healthy, and is affordable so that bond rating agencies have confidence payments will be made.

    “And Illinois still must raise taxes so it finally has the means to sustain core services without irresponsibly borrowing to pay for them...”

    Posted on this blog: May 21, 2015

  6. “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)… 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 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 not been able to pay its bills. The reason is a dramatic fall-off in State revenues over the last four years, costing the State $4.4 billion” (TRS Public Information Officer, Dave Urbanek).

    Posted on this blog: June 10, 2011

  7. …Considering their spring legislative focus, it is apparent that many legislators do not contemplate today’s economic realities: Illinois’ economy has largely become a “services and information-based economy… [and that] changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures” (Chicago Metropolitan Agency for Planning, July 2011).

    These same legislators also ignore the fact that Illinois “suffers from structural deficits or from failure of revenues to grow quickly as the cost of services…, [and that] structural deficits stem largely from out-of-date tax systems, coupled with costs that rise faster than the economy… Fixing these structural problems would help [Illinois] balance [its] operating budgets without resorting to [an unconstitutional radical 'pension reform' instigated and propagandized by the Civic Committee, Civic Federation, Chicago Tribune and their ilk]” (The Center on Budget and Policy Priorities, January 2011).

    So what should Illinois legislators do? How about finding ways to generate more revenue instead of perpetually attacking public employees' and retirees' pensions? How about restructuring the unfunded pension liability? The Pension Ramp is flawed! What can the IEA and IFT offer by way of negotiation this spring on the issue that “something must be done!” about the public pension systems, (in particular, the teachers’ pension system), the unfunded liability, and increasing state payments? How about defending the Illinois Constitution above all else? What can current and retired teachers (and other public employees) surrender that will barely diminish the state’s colossal financial liability created by past-and-present greed, corruption, arrogance, incompetence and self-interest? Nothing…

    Posted on this blog: January 13, 2012