Tuesday, March 21, 2017

Illinois State Representative Grant Wehrli's Legislative Survey





Representative Grant Wehrli:

I responded to your online legislative survey today, but your survey does not address other important challenges of the state; nor does it offer the best solutions (or choices) for the state's complicated issues. Most unfortunately, the survey asks constituents to make simple choices to complex questions, questions that are constructed in a way that demands no scrutiny in order to answer intelligently, and with no understanding of the consequences for responding to an inane “yes/no/undecided” format. Take for instance the following three questions in your legislative survey.

Question #1: “There are many important challenges facing our state. Please rank the following in order of importance to you. –Creating Jobs, -Reforming State Pensions, -Improving Education, -Rebuilding Infrastructure, i.e. Roads and Bridges, -Reducing State Debt.”

The survey omits raising revenue in Illinois and re-amortizing the unfunded liability as important choices. (Please read how to raise more state revenue and how to re-amortize the flawed pension ramp again. Click here. I gave you some of that information when we met in your office on Monday, March 13).

Question #4: “Do you support moving away from state funded pensions and towards an independent 401-k system?  -Yes, -No, -Undecided.” 

The survey omits the dire consequences of “moving away from state funded pensions and towards an independent 401-K system.” Most constituents do not know about these consequences. According to the Teachers’ Retirement System of the State of Illinois:

“The Teachers’ Retirement System of the State of Illinois annually distributes approximately $3.8 billion in pensions and benefits to men, women, and children in every corner of the state, creating a sustained economic stimulus that helps drive the economy in all 102 counties. This study is based on recurring payments to retirees, survivors, and disability benefit recipients living in Illinois. Lump-sum payments for refunds and death benefits are excluded from the analysis since they do not provide a continuing source of income. Net, rather than gross, benefits are used in this analysis because the net benefits are what stimulate the state economy. The multipliers were produced by the Regional Product Division of the U.S. Bureau of Economic Analysis.

“The positive ripple effect of TRS benefits jumps by 46 percent to more than $5.584 billion in total economic activity throughout Illinois - new full-time jobs, salaries earned, and new goods and services produced across the state.

“The study, conducted by TRS using benefit statistics from February 2015 benefit payments, found that:

• Eighty percent of the System’s 89,817 total benefit recipients live in Illinois.
• The $3.8 billion in pensions and benefits paid to Illinois residents is 83 percent of the total pensions and benefits distributed by TRS annually. The statewide economic impact of TRS pensions and benefits can be measured in real terms:

TOTAL OUTPUT - $5.584 BILLION
This is the overall measure of economic activity in Illinois stemming from TRS pensions and benefits. It includes all TRS payments, salaries earned in those jobs, and increases in the state’s Gross Domestic Product.

JOBS SUPPORTED – 41,725
This is the total number of full-time jobs supported by the $3.821 billion in TRS pensions and benefits pumped into the Illinois economy.

EARNINGS CREATED - $1.562 BILLION
These are the total salaries earned by persons employed in Illinois jobs that are fueled by TRS benefit payments.

ILLINOIS GDP VALUE - $3.272 BILLION
This is the amount added to the Illinois Gross Domestic Product – the total value of goods and services produced within Illinois – due to TRS pension and benefit payments.

Furthermore, according to TRS, “making newly-hired teachers pay into Social Security and allowing them to be eligible for benefits would affect all current and retired teachers. Illinois teachers have never been part of the Social Security system. Most teachers rely almost solely on a TRS pension during retirement. Active teachers [currently] contribute 9.0 percent of their paycheck to help fund TRS and school districts contribute 0.58 percent of every teacher’s salary to the System. Last year, all told, teachers contributed $917 million to TRS and school districts contributed $155 million.

“For new teachers to become part of Social Security this scenario would mean a mandatory 12.4 percent payroll deduction split evenly between the member and the employer, which in the case of Illinois teachers is school districts and state government. Teachers would still be required to contribute 9.0 percent of salary to TRS.

“For school districts, the cost of teacher pensions would immediately rise by a considerable amount. Instead of contributing 0.58 percent per new teacher, every district would have to contribute 6.2 percent per teacher. It is estimated that this increased cost would equal $41 million for Illinois school districts in the first year and more than $2.4 billion over 10 years. Plus, districts would still have to contribute 0.58 percent for each participant in the current system.

“Finally, a 1999 study by the General Accounting Office found that adding teachers and other public employers from around the country who are not currently in Social Security would create, at best, a temporary surge in revenue for Social Security. Over the long term, adding teachers to Social Security would only increase the System’s total obligations and deepen the long-term funding problem” (TRS).

Perhaps the survey should also be asking your constituents whether the State of Illinois ought to keep a constitutional promise: in other words, whether a politician can break a constitutional contract with ANY citizen in Illinois if it suits a politician’s advantage. Moreover, how about asking whether a politician should continue to hurt the lives of people who were not responsible for the state’s pension debt and lack of revenue? And how about asking whether so-called pension reform, or the breaking of a constitutional contract, is moral and legal, and whether it is right to ignore the State and U.S. Constitutions again and again?


Question #6: “Most of Illinois’ neighboring states have in recent years adopted ‘right to work’ laws. Would you support initiatives to make Illinois a ‘right to work’ state to help us compete for jobs? –Yes, -No, -Undecided.”

You omitted what “right to work” laws would do to the State of Illinois. Besides not helping the state “compete for jobs,” according to the Illinois Economic Policy Institute and the University of Illinois:

“Efforts to create local ‘right-to-work’ zones would have negative impacts on workers and the economy in Illinois. The preponderance of evidence finds that worker incomes are lower in economies with ‘right-to-work’ laws and that employment effects are minimal at best. 

“For instance, average worker wages are $2.90 per hour (13 percent) higher in Illinois than in ‘right-to-work’ Indiana, and Illinois added 14,000 more jobs in 2014. At the same time, the unemployment rate in eastern Illinois counties was lower than in ‘right-to-work’ counties across the Indiana border in December 2014.

“The proposal for local ‘right-to-work’ zones is based on the assumption that high union density hampers local economies. An analysis of the 102 counties in Illinois, however, reveals that this presupposition is unfounded. 

“Higher county-level unionization rates within Illinois have no discernible impact on employment growth, establishment openings growth, and average household income growth. The evidence that unionization raises the unemployment rate in Illinois is also weak. The claim that ‘right-to-work’ is an effective way to put people to work is not supported by the evidence.

“Incorporating estimates from previous policy research, economic impact analyses are performed to determine the effect of adopting local ‘right-to-work’ laws in half of Illinois’ counties, excluding Cook County. The models randomly select 51 counties to become ‘right-to-work’ zones and demonstrate the negative consequences of the proposal. If half of the state’s counties (excluding Cook County) became ‘right-to-work’ zones: 

• Total labor income would fall by $1.3 billion;
• The economy would shrink by $1.5 billion;
• State and local tax revenues would be reduced by $80 million;
• Labor unions would experience a loss of 200,000 members;
• Racial income inequality and gender income inequality would both increase; and
• The number of workplace injuries and fatalities would rise.

“In the seven integrated county economies with over 100,000 workers in Illinois, predicted impacts are generally similar. If local ‘right-to-work’ zones were only passed in the Chicago six-county area, the regional economy would experience over 5,500 jobs lost and an economic contraction of $2.6 billion. 

“Both businesses and workers would relocate to other parts of the state with better incomes and higher consumer demand. Similarly, local ‘right-to-work’ laws would reduce total worker earnings by around $40 to $60 million in the Champaign-Urbana, Quad Cities, Rockford, and Springfield-Decatur regions. 

“Labor income would also be predicted to decline by $16 million in the Peoria-Bloomington community and by $104 million in the St. Louis region. Local ‘right-to-work’ zones would eradicate good middle-class jobs, replacing them with low-wage employment openings and redistributing income from labor to capital.

“Ultimately, economic analysis reveals that local ‘right-to-work’ laws would reduce worker earnings and decrease state and local tax revenues…       
  
“Local ‘right-to-work’ zones would have overall negative impacts for Illinois workers. First, workers earn more in fair-share collective bargaining economies. The preponderance of evidence indicates that incomes are between 2 and 6 percent lower in ‘right-to-work’ states. Compared to their counterparts in Indiana, a neighboring ‘right-to-work’ state, Illinois workers earned 12.8 percent more in average hourly wages in 2014. 

“There is also no evidence that higher unionization rates are associated with slower income growth across Illinois. Moreover, if half of Illinois’ counties adopted ‘right-to-work’ regulations, total labor income in the economy would fall by $1.3 billion throughout the state.

“Second, the impact of ‘right-to-work’ laws on employment outcomes is mixed. Previous estimates suggest a marginal 0.4 percentage point increase in jobs due to ‘right-to-work’ laws, but an effect of zero cannot conclusively be ruled out. 

“The unemployment rate in western counties in ‘right-to-work’ Indiana is higher than the unemployment rate in bordering eastern Illinois. Additionally, there is no evidence that a higher county-level union membership rate leads to smaller employment growth rate or establishment growth rate in Illinois counties. The predicted impact of 51 counties becoming ‘right-to-work’ zones in Illinois is a small 2,348-job increase in the state.

“A definitive consequence of enacting local ‘right-to-work zones’ would be further erosion of Illinois’ middle class. Labor unions would be expected to experience a loss of 200,000 members if half of the state’s counties (excluding Cook County) became ‘right-to-work’ areas. 

“Since unions provide greater income benefits for nonwhite and female workers than for Caucasian males, this causal impact of ‘right-to-work’ would increase both racial income inequality and gender income inequality. 

“Good middle-class jobs would be replaced by low-wage openings in ‘right-to-work’ counties, and employee income would be transferred to wealthy employers. As result, total economic output in Illinois would fall by $1.5 billion and cash-strapped local governments would experience a revenue loss of $80 million.

“Ultimately, economic analysis reveals that local ‘right-to-work’ laws would encourage free-riding, lower worker earnings, and reduce state and local tax revenues. The likely result would be a weaker Illinois economy. Improving the entire Illinois economy by increasing consumer demand, raising worker wages, and making investments in education and public infrastructure are better policy prescriptions with proven track records to help all counties in the state…”

(Read comment posted on Right-to Work case).

-Glen Brown



Friday, March 17, 2017

Connelly-Tracy pension bills SB 2172 & SB 2173




“…This week two members of the Senate Republican Caucus, Senators Michael Connelly (R-Naperville) and Jil Tracy (R-Quincy), announced they were filing a statewide pension reform plan. This is an attempt to try to move a smaller measure that the legislature ‘agrees’ upon.  Although the last attempt to pass this type of legislation failed, pension reform seems to be the ideal starting place According to Tracy and Connelly. The Connelly-Tracy pension package consists of two bills: One which includes the consideration model portions and one which includes the Tier 3 pension system. 

“SB 2172 creates a defined contribution plan for all new annuitants, offers inactive members a buy-out option and shifts costs to local school districts.

“SB 2173 would require current teachers to make a choice of two diminished benefits.  Either receive a reduced COLA and be able to retire with your full salary or keep your compounded COLA and retire with the salary you have when this bill becomes law.  No other salary increases you may receive would be counted to your pensionable benefit. This would also prohibit collective bargaining for salary and benefits.

“After the Senators’ press conference on Wednesday, Governor Rauner tweeted ‘I will sign this bill when it reaches my desk, making changes to our pension system is critical to a balanced budget’” (Government Affairs Director Mary Shaw, Illinois Retired Teachers Association).


Commentary:

Re: SB 2172

Defined-Contribution Savings Plan (401k) v. Defined-Benefit Pension Plan

A Defined-Contribution Savings Plan (401k):

       With a defined-contribution savings plan (401k, 403b, 457), only the contributions are defined.
       A defined-contribution savings plan shifts all the responsibilities and all of the risk from the employer to the employee (unless negotiated otherwise); thus, the benefit is not guaranteed for life.
       Nearly 87% of public employees are not eligible for Social Security.
       A benefit is based upon individual investment earnings.
       The employee assumes all funding, investment, inflationary and longevity risks.
       A defined-contribution savings plan does not have the pooled investments, professional asset managers, and shared administrative costs that a defined-benefit pension plan provides.
       There are no survivor or disability benefits and guarantees.
       Though the employee bears no portability risks, accounts are not always rolled over when an employee changes jobs.
       The employer (state) will have to bear the administrative costs of both defined-benefit pension and defined-contribution savings plans when the employee switches over.
       Though not the employees problem, “payments to amortize unfunded liabilities for the defined-benefit pension plan may be accelerated” (National Institute on Retirement Security, NIRS, 2012).
       The Governmental Accounting Standards Board “requires [an] acceleration of unfunded liability payments when the defined-benefit pension plan is closed to be recognized on financial statements” (NIRS, 2012).
       When changing from a defined-benefit pension plan to a defined-contribution savings plan, “new members do not start with any unfunded obligation” (NIRS, 2012).
       “Projected defined-benefit savings contributions for new members are worth more than the projected defined-benefit pension costs for those members” (NIRS, 2012).
       “No unfunded obligations [liabilities] for existing members are reduced when new members go into a defined-contribution savings plan” (NIRS, 2012).
       “The loss of new members make it difficult to finance the unfunded obligations of the defined-benefit pension plan” (NIRS, 2012).
       It is nearly impossible for anyone to save enough money in a 401k to last a lifetime of retirement, except for the wealthy elite (who also receive Social Security).


A Defined-Benefit Pension Plan:      

       A defined-benefit pension plan is more cost efficient than the defined-contribution savings plan.
       A defined-benefit pension plan offers predictable, guaranteed monthly benefits for life.
       Funds are invested by professional asset managers in a diversified portfolio that follows long-term investment strategies.
       The large-pooled assets reduce asset management and miscellaneous fees.
       A defined-benefit pension plan provides spousal (survivor) financial benefits.
       A defined-benefit pension plan provides disability benefits.
       The state is responsible for funding, investment, inflationary and longevity risks.
       A defined-benefit pension plan is a more effective protection than the defined-contribution savings plan.
       A defined-benefit pension plan provides an employee with self-sufficiency in retirement.
       A defined-benefit pension plan is associated with far fewer households that experience food privation, shelter adversity and health care hardship.
       A defined-benefit pension plan is less expensive for taxpayers than Social Security – a reason why legislators had negotiated for Illinois teachers to not pay into Social Security.
       The Teachers Retirement System of Illinois is the 39th largest in the U.S. with over 406,000 members (TRS, 2016).
       The average rate-of-return for TRS: 8.8% (over last 30 years) (FY 2016, TRS).
       TRS assets: $45.6 billion (as of Sept. 30, 2016, TRS).
       A defined-benefit pension plan has an economic impact of over $4 billion on Illinois; the effect on Gross Domestic Product is $2.38 billion; jobs that are created: 30,448 (TRS, 2012).
       Defined-benefit pension plans contribute over $100 billion to annual local, state, and federal revenue in the U.S. and provide capital to financial markets (NIRS, 2012).
Pension plans enjoy higher investment returns and lower fees than individual accounts, generating a 27 percent cost savings (NIRS, 2014). 
         Unlike individual investors who generally enjoy high-risk, high-reward investment strategies when they're young but switch to lower-risk portfolios that yield far lower returns as they age, pension plans can maintain a balanced portfolio that yields consistently high returns, generating an 11 percent cost savings (NIRS, 2014). 
Pension plans pool longevity risk, meaning that they only have to save for the average life expectancy of a group of individuals. Workers in a 401(k) plan need an investment strategy that provides for the event that they live a longer than average life. Longevity risk pooling generates a 10 percent cost savings (NIRS, 2014).


Sources: the National Institute on Retirement Security (NIRS), the Teachers Retirement System of Illinois 


Placing Illinois Teachers in Social Security (from the Teachers Retirement System)

“Issue: Requiring newly-hired Illinois teachers to become part of Social Security would help ease the burden on TRS, lower the state’s contribution to public pension systems, help ease the long-term financial problems facing Social Security, and create more income stability for retired teachers.

“Discussion: Making newly-hired teachers pay into Social Security and allowing them to be eligible for benefits would affect all current and retired teachers. Illinois teachers have never been part of the Social Security system. Most teachers rely almost solely on a TRS pension during retirement. Active teachers contribute 9.[0] percent of their paycheck to help fund TRS and school districts contribute 0.58 percent of every teacher’s salary to the System. Last year, all told, teachers contributed $917 million to TRS and school districts contributed $155 million.

“For new teachers to become part of Social Security this scenario would mean a mandatory 12.4 percent payroll deduction split evenly between the member and the employer, which in the case of Illinois teachers is school districts and state government. Teachers would still be required to contribute 9.[0] percent of salary to TRS.

“For school districts, the cost of teacher pensions would immediately rise by a considerable amount. Instead of contributing 0.58 percent per new teacher, every district would have to contribute 6.2 percent per teacher. It is estimated that this increased cost would equal $41 million for Illinois school districts in the first year and more than $2.4 billion over 10 years. Plus, districts would still have to contribute 0.58 percent for each participant in the current system.

“Finally, a 1999 study by the General Accounting Office found that adding teachers and other public employers from around the country who are not currently in Social Security would create, at best, a temporary surge in revenue for Social Security. Over the long term, adding teachers to Social Security would only increase the System’s total obligations and deepen the long-term funding problem.”


Buy-Out Option:

Your “Buy-out” will not last your lifetime! 


TRS Executive Director Dick Ingram told legislators in March 2016 that a “buyout” is a benefit cut that would “do little or nothing” to improve the financial health of TRS: “…[I]t must be stated that any buyout – whether it be full or partial, at retirement or before, rolled over into an IRA or used to purchase an annuity – is a reduction in the guaranteed benefit that the member may have earned up to the point of the buyout. You won’t see any significant relief for the unfunded burden we already have created. In fact, the buyouts may actually serve to accelerate the state’s pension obligations.”


Shifting Costs to Local School Districts:

If Illinois policymakers pass a bill to shift its responsibility of paying the “normal costs” to local school districts, many school districts would not be able to afford to pay these costs, even if they are phased over the years. 

“A shift would create a new and large financial requirement for school districts, which would be difficult for many to meet. Moreover, Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes. Shifting the state’s normal cost obligation onto school districts would only mean that an even higher proportion of school districts’ revenue would come from property taxes.

“[Furthermore,] 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… 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).

What would be other probable effects? In cash-strapped school districts, of which there are many, teachers would not receive increases in their salaries; many teachers would lose their jobs; student programs would be reduced or eliminated; class sizes would increase; it would be more difficult to recruit, as well as retain and attract, the best teaching candidates (which is already happening)… (Education Sector Policy Briefs).

The public school system in Illinois would be jeopardized; the public school teacher’s dignity and guaranteed retirement security would be imperiled, and their students’ right to be taught by the very best teachers available in Illinois would be at risk.

Approximately one-third of the total pension payment is the normal costs; the other two-thirds of the payment is the interest owed on the debt that the state created for not fully funding the pension system for several decades. To transfer the normal costs of the teachers’ retirement system to the school districts is to diminish the state’s role in providing income retirement security to its public employees, which has been the intention all along (Pension Cost Shift). 


SB 2173:

It is unconstitutional. 

Please also read my letter: To the Sponsors of House Joint Resolution Constitutional Amendment 18.