Thursday, April 5, 2018

A Letter from Bob Lyons

“[Bob Lyons] was recently asked, ‘who pays for our pensions; where does the money come from?’ [Lyons] asked Kathleen Farney, the research analyst of the Teachers Retirement System of Illinois, for the calculation of the past 20 years.

“Over the past 20 years, the percentage from investment earned is 46%; the percentage from the state's contribution is 35%; the percentage from the contributions of active teachers is 17%; the percentage from school districts is two percent.

“For most of those 20 years, active teachers have contributed 9.4% of their salary, but now it is reduced to 9.0% after the early retirement option ended. Individual school districts contributed .58% of teachers' salary and 10.1% for federally-paid teachers.

“The goal for the state's contributions is the one established by the state in 1995; the state was supposed to contribute enough money over 50 years so that in 2045 the five state pensions (TRS, SURS, SERS, GARS, and JRS) would be 90% funded.  

“Ideally, that would have called for 50 years of equal payments, but the subsequent annual payments would have been more expensive than the legislators were willing to pay, despite being the least expensive option for the total 50 years.  

“Instead, the state used a 15-year ramp to gradually increase the payments, with balloon payments in each of the last five years from 2040 to 2045. Of course, the state had a partial pension holiday in ‘06 and ‘07, and the state also lowered the expected rate of return [and TRS had to retroactively ‘smooth’ the fiscal effect of any changes made in the assumed rate of investment return over a period of five years. The ‘smoothing’ applied to any assumption changes from 2012].

“This year the state is paying more than $4 billion into TRS, though it really should be over $6 billion, but since more than 25% of this year’s state budget is going into the pensions, the state cannot afford to do what is actuarially necessary. 

“If TRS was currently funded at 100%, the necessary ‘normal cost’ to fund the current active teachers would be just over $1 billion.  Three-fourths of what the state pays TRS is what they owe.  Furthermore, no actuarial study was done in 1989 when the state made the decision to change a three percent simple COLA to a three percent compounded COLA.

“The COLA is our most significant benefit, and no one was asked to pay for it: not teachers, not school districts, or the state were required to increase their payments to pay for the benefit. 

“The old joke that a legislator can only look as far as the next election is more accurate than it is funny. If the State of Illinois had paid for our pensions as we had earned them, it would have cost them less money, and even more of our pensions would be coming from the profits of the TRS’ investments.”

“Please remember that this is not official. I cannot speak for the TRS board when I was on it, and I certainly cannot speak for it when I am no longer on the board—Bob Lyons.”

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