Saturday, March 16, 2019

“Officials from several public employee groups told state lawmakers Thursday that the pension reform measures enacted in 2010 are patently unfair and possibly illegal"




The TRS Tier-Two Pension Plan (Posted on my blog May 11, 2011):
SB 1946 passed on March 24, 2010 in approximately 10 hours (There was no public policy for this legislature); it was signed into law on April 14, 2010. It began January 2011. 

Note: Tier II members are subsidizing both Tier I and Tier II benefits. In the future, when Tier II members are the significant majority in TRS, the subsidy they pay will cause a reduction in the state's annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. Furthermore, these teachers will receive a TRS pension that will be less than Social Security, and school districts will be responsible for making up the difference. 

Special note: teachers do not receive Social Security; the State of Illinois saves billions of dollars by not having to pay into Social Security. 


Now approximately eight years later:


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From Capitol News Illinois, March 14, 2019
SPRINGFIELD — “Officials from several public employee groups told state lawmakers Thursday that the pension reform measures enacted in 2010 are patently unfair and possibly illegal. And, in the case of public school teachers, the relatively new pension structure might soon fall out of compliance with federal Social Security regulations, something that could cost taxpayers billions of dollars.
“At issue is what’s known as the ‘Tier 2’ system, which lawmakers enacted during the 2010 session when the already-beleaguered pension funds were still reeling from additional losses suffered during the Great Recession. Nick Yelverton, legislative director for the Illinois Federation of Teachers, recalled how it was rushed through the General Assembly in about nine hours, with little or no notice to groups that would be affected.
“Under that plan, starting in 2011, new employees pay 9 percent of their salary into the pension system, the same as Tier 1 employees. Of that amount, however, only 7 percent is actually used to fund those employees’ pensions. The other 2 percent goes to pay down the unfunded liability of the Tier 1 employees.
“Tier 2 employees also get smaller benefits. They don’t vest in the system until they’ve worked for 10 years, instead of five. And their annual cost-of-living raises after retirement are capped at either half the previous year’s rate of inflation or 3 percent, whichever is less.
“‘This is unacceptable to our members,’ Yelverton told members of the House and Senate pension committees during a joint hearing. ‘We are now starting to see a lot of individuals who you normally wouldn’t think would be concerned about retirement security are very much aware of this fact, because they feel like money is being stolen from them that they will never see in retirement, and there’s good reason to believe that.’
“The Tier 2 system applies to all five of the state’s pension plans, but there are particular concerns about the state Teachers Retirement System, or TRS, which covers all Illinois public school teachers outside the Chicago school district.
“With more than 160,000 active members, including more than 41,000 in the Tier 2 system, TRS is the largest of the state’s five pension systems and the one that accounts for more than half of the state’s estimated $133.6 billion in unfunded pension obligations – the difference between the value of the pension funds and all of the obligations they’ve accrued to date.
“The concern, however, is that Illinois teachers do not participate in Social Security. Federal law allows state and municipal governments to do that, as long as the benefits they pay out are at least equal to what Social Security pays, a law known as the ‘safe harbor’ provision.
“But Andrew Bodewes, TRS’s legislative director, told the panel that because of the small cost-of-living increases built into Tier 2, those pensions soon are likely to fail to meet the federal adequacy test. ‘So that means once the Tier 2 teachers are retiring, each and every school district will have to perform a test on that member to see if they get a benefit at least as good as Social Security,’ he said. ‘And if they don’t, they (the school districts) will have to enroll in Social Security. They’ll have to enroll going backwards.’
“That means school districts would have to make as much as 10 years’ worth of back payments into Social Security. ‘This is not a TRS issue. We will not be involved in any way, shape or form,’ Bodewes said. ‘This is a school district issue. It will come at an enormous cost to the school districts, both from an administrative cost and the additional cost, 6.2 percent of pay, that’s associated with Social Security.’
“Officials from other pension systems – state universities, municipal employees and downstate firefighters, to name a few – also told lawmakers that the Tier 2 system was making it difficult to attract and retain employees. Some also mentioned the awkwardness of having two sets of employees working side-by-side, doing the same job, and earning vastly different pension benefits, with one group of employees paying a premium to subsidize pensions for the other group.
“‘When are we going to start being honest with the people that you folks work for and tell them they’re getting screwed by Tier 2 and pretty soon there are going to be chickens all over the place coming home to roost,’ Rep. Steven Reick, a Woodstock Republican, asked at one point during the hearing.
“Local government officials, meanwhile, said that while they understood the concerns about Tier 2 pensions, they could not possibly afford to enhance those pension benefits because some of their pension funds are already on the brink of collapse. ‘The fact that Illinois (lawmakers) passed the Tier 2 system in 2010 gives a lot of credence to the pressure on them that it was needed,’ Jeffrey Scott, legislative director for the Illinois Municipal League, told the panel. ‘Even with that, our funds are in trouble.’
“A report in November from the state Commission on Government Forecasting and Accountability estimated the five state pension plans – those covering teachers; state employees; state universities; judges and the General Assembly – have only about 40 percent of the assets they would need to pay off all of the obligations they have accrued to date.
“There are numerous bills pending in the House Personnel and Pensions Committees to change the Tier 2 structure for various public employee groups. State Rep. Robert Martwick, a Chicago Democrat, said he hopes to work with Gov. J.B. Pritzker’s administration to produce some kind of reform legislation this year (Illinois’ Tier 2 Pensions Could Run Afoul of Federal Social Security Requirements Costing Billions).

9 comments:

  1. January 10, 2015

    As stated by Dick Ingram, TRS Executive Director, “Tier II is the pension benefit structure created by the General Assembly in 2010 for anyone who had not contributed to TRS or another Illinois public pension system before January 1, 2011. Tier II is designed to help solve the financial problems faced by TRS and the other systems by reducing pension benefits for these new members. Lower pensions mean reduced long term costs for the state.

    “If Tier II is left alone, it will accomplish its mission. The $61.6 billon TRS unfunded liability will shrink over several decades and eventually be eliminated because the state will pay less to the ever-growing number of Tier II members. In fact, at some point in the future, we estimate that Tier II members actually will help create a surplus of funds for TRS that effectively could eliminate the need for any state government contribution to the System.

    “But the core of Tier II – the reduced benefits structure – is a problem the Teacher Recruiting and Retention Task Force will review. The benefit structure is unfair to all Tier II members. Right now, a Tier I member’s pension costs roughly 20 percent of an active member’s salary. Because of the benefit reductions in Tier II, a Tier II member’s pension is worth just 7 percent of an active member’s salary. However, by law, active Tier II members of TRS, like me, pay the same 9.4 percent salary contribution to the System that active Tier I members pay.

    “What all this means is that Tier II members are paying the entire cost of their pensions plus an extra 2.4 percent to TRS. That extra 2.4 percent subsidizes the pensions of Tier I members” (Topics and Report, Teachers Retirement System of the State of Illinois, winter 2015).

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  2. From Bob Lyons, March 31, 2012:

    Current law requires Tier II members to pay 9.4 percent of their salary and that subsidizes both Tier I and Tier II benefits. The Tier II contribution is 50 percent higher than the benefit’s value, which is 6 percent of their pay.

    In 20 years, when Tier II members are a significant majority in TRS, the subsidy they pay will cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. This is fundamentally unfair to Tier II members.

    These new positions will cost the state more money with an increase of the FY 13 contribution and a reduction of contributions from Tier II teachers. We believe that a funding requirement can be written that will make the payment guarantee a benefit that can be protected by the constitution, and that too will cost the state money.

    As you can well imagine, these steps will not be popular. We have already heard from critics about accepting the reality of future insolvency. Our fiduciary responsibility to the fund and to all of you requires us to take steps now to protect the pensions in the future. We are doing what we are required to do and what we feel is right.

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  3. From John Dillon:

    In the Tribune today, another completely bamboozled Naperville resident wrote in to “Voice of the People” that WE (the citizens of Illinois) need to change the IL Constitution before it is too late. When I say bamboozled, I repeat what all of us have worked to make clear to the Tribune, the IPI, and those who would think about how to seriously address this deficit in the budget: a balance due on a credit card (the pension system) used for decades and decades to pay for services in lieu of making the promised, necessary payments to the retirement systems of ALL public workers. (Remember - “No social security, but a pension when you retire?")

    The bill on the Public Workers Pensions (credit card) will STILL be due. The decision of the IL Supreme Court in May of 2015 made that perfectly clear, but so many ill-informed people, “journalists,” and pols ignore that WE are all on the hook for what the legislators didn’t do: pay into the pension funds what was required in order to meet the annual contribution.

    Now, they look back and blame various elements of benefits, but had they paid what was owed, there would be no issue, no unfunded liability of over $130 billion.

    So what do they (legislators) do? Well, what they always do. Try to avoid swallowing the bitter pill of doing the right thing: declare their long-term culpability and amortize the state’s debt in order to get some control of a spiraling debt. Instead, they create another class of workers to carry the burden of the state’s debt, they totally fail to see their own continued avoidance to do the right thing, slapdash a Tier 2, and unwittingly the manufacturing of another future fiscal crisis which will hit the local districts and populations rather than themselves.

    It will hit us all locally.

    This is all tantamount to pushing the total problem on your neighbor. Instead of actually addressing the issue the state faces, the general Assembly in creating Tier 2 has found a way to punish all of us at the local level WHILE THEY STILL IGNORE OR AVOID THE FULL PAYMENTS REQUIRED AND THE DEBT OWED FROM DECADES OF NON-PAYMENTS.

    Hope Pritzker reads this as he prepares another plan to avoid payments.

    God help Illinois.

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    Replies
    1. John, I wrote this four days after the Illinois Supreme Court Ruling on May 8, 2015.

      What will Illinois State legislators most likely do now instead of the legal and moral solution?

      …They will consider shifting the state's normal costs to the pension systems to local school districts. They will consider creating a Tier III defined-contribution savings plan for new teachers. They will ignore the fact that current Tier II teachers are contributing too much to their pension plans (even though this will cause serious Social Security problems in the future for these teachers and the State of Illinois!). They will continue to increase the inequities that have existed in Illinois for years (budget cuts across the board for the middle class and poor and more corporate welfare for the wealthy elite). They will continue to blame public employees and retirees for the state's budget problems, often rekindling so-called pension reform discussions, as if the Illinois Supreme Court decision never happened. They might attempt to repeal the Pension Protection Clause as if the Illinois Supreme Court decision never happened… In short, it is much easier for liars and thieves among the Illinois General Assembly and their minions to continue the charade of political posturing and scapegoating public employees and retirees then to address the state’s revenue and pension debt problems they have created and ignored in Illinois for decades.

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  4. May 12, 2015

    Revamp the flawed Pension Ramp: “Starting in 1995, yet another funding plan was implemented by the General Assembly. This one called for the legislature to contribute sufficient funds each year to ensure that its contributions, along with the contributions by or on behalf of members and other income, would meet the cost of maintaining and administering the respective retirement systems on a 90% funded basis in accordance with actuarial recommendations by the end of the 2045 fiscal year. 40 ILCS 5/2-124, 14-131, 15-155, 16-158, 18-131 (West 2012). That plan, however, contained inherent shortcomings which were aggravated by a phased-in 'ramp period' and decisions by the legislature to lower its contributions in 2006 and 2007. As a result, the plan failed to control the State’s growing pension burden. To the contrary, the SEC recently pointed out:

    “‘The Statutory Funding Plan’s contribution schedule increased the unfunded liability, underfunded the State’s pension obligations, and deferred pension funding. The resulting underfunding of the pension systems (Structural Underfunding) enabled the State to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the State.’ SEC order, at 3. That the funding plan would operate in this way did not catch the State off guard. In entering a cease-and-desist order against the State in connection with misrepresentations made by the State with respect to bonds sold to help cover pension expenses, the SEC noted that the State understood the adverse implications of its strategy for the State-funded pension systems and for the financial health of the State. Id. at 10. According to the SEC, the amount of the increase in the State’s unfunded liability over the period between 1996 and 2010 was $57 billion. Id. at 4.5 The SEC order found that ‘[t]he State’s insufficient contributions under the Statutory Funding Plan were the primary driver of this increase, outweighing other causal factors, such as market performance and changes in benefits.’” (Emphasis added.) Id. at 4 (In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants) Opinion filed May 8, 2015, JUSTICE KARMEIER delivered the judgment of the court, with opinion. Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Burke, and Theis concurred in the judgment and opinion).

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  5. Also from the Illinois Supreme Court Ruling: “Senator Hutchinson: Would another alternative be the proposal that the Center for Tax and Budget Accountability outlined before the conference committee, which would have re-amortized the current unfunded liabilities to a new gradual [level] dollar payment schedule to achieve well over eighty percent by 2059? Senator Raoul: Yes. So that—that and many other things could have been possible alternatives.”

    The current “Pension Ramp” does not work for the five public pension systems. The “Ramp” entails larger payments today as a result of the 1995 funding law – Public Act 88-0593 – to pay the pensions systems what the state owes. There needs to be a required annual payment from the state to the pension systems. The debt needs to be amortized for a longer frame of time (a flat payment) just like a home loan that is amortized; though the initial payment will be difficult in the beginning, over the long term it will become a reduced cost and a smaller percentage of the overall Illinois budget as it is paid off throughout the years.

    “Decades of mismanagement and failure to match contributions are the predominant reasons that the state’s pension systems are suffering to the degree that they are today. Years of pension holidays, continually borrowing against the systems without a plan for repayment and a severe economic recession, which caused investments to plummet, further exacerbated the problem” (Senate President John Cullerton). Thus, there needs to be a required “actuarially-sound” annual payment from the state to the pension systems! Indeed, the State of Illinois has a revenue problem and its policymakers have stolen money for decades from public employees' pensions to hide this fact.

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  6. “At the core of the budget ‘crisis’ facing [Illinois] is [its] regressive state tax structure… That is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy).

    Illinois income tax uses a single-rate structure that results in low-income wage earners paying more taxes than the wealthy. Illinois is among 10 states in the nation with the highest taxes paid by its poorest citizens at 13 percent (The Institute on Taxation and Economic Policy).

    Pass a graduated rate income tax like the majority of states in this country. The state needs a tax rate that is “efficient with minimal impact on the economic decisions that taxpayers have to make” (Center for Tax and Budget Accountability), one that captures increased revenues in times of economic growth, one that maintains revenue collections during poor economic times, one that is simple and not liable to inconspicuous error, one that is transparent and builds trust with the state’s government officials (Center for Tax and Budget Accountability), and one that helps 99 percent of the state’s population.

    Focus on why the State of Illinois cannot obtain more revenue. Besides federal sources of income, the state uses only 11 sources of revenue: personal income tax (but note Illinois was tied for the fourth lowest individual tax rate on households in the top income bracket), corporate income tax (note extortionate tax breaks given to many Illinois corporations!), sales tax (Illinois does not tax services like most other states for another significant source of revenue), corporate franchise tax and fees, public utility taxes, vehicle use tax, inheritance tax, insurance taxes and fees, cigarette taxes, liquor taxes and other miscellaneous (or rather unsubstantial) tax sources (Commission on Government Forecasting and Accountability).
    “A majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… [States that do not tax services, such as Illinois], could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively.” Illinois is one of five states with sales taxes on fewer than 20 services (The Center on Budget and Policy Priorities).

    Expand the state’s tax base. A broader-based taxation system that would provide a decrease in taxes for low-income and many middle-income families. Taxing services alone “would generate enough revenue to stabilize the General Revenue Fund and prevent structural deficits that lead to cuts in basic needs and social service programs” (Center for Tax and Budget Accountability).

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  7. Increase taxation on the wealthy: Illinois is in the top 10 of regressive state tax systems where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners. “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor [can] rarely save at all – the taxes are inherently regressive” (The Institute on Taxation and Economic Policy).

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  8. “…The largest Illinois public pension plan is the Teachers' Retirement System. Teachers hired under the Tier II system, as of 2011 and later, had such severe benefit cuts that the latest annual report (from 2017) shows that in making their 9% of pay contributions (though, to be fair, in many cases, their school districts pay this on their behalf) they are actual paying in more than the actuarial value of the benefits they accrue.

    “Although, to be sure, the math would work out differently if the discount rate were lowered from its current 7%, in the report's calculations, the value of Tier II employees' benefit accruals is 7.11% of pay -- that's 1.89% less than the 9% contribution. (The story is different for the other major retirement systems which have more generous benefit structures relative to employee contributions.)

    “What's more, the Tier II benefits for all systems cap pensionable pay. That cap rises each year at a rate that's half the inflation rate. By the time Pritzker's new 90% funded status target is reached in 2052, that cap will have reduced so much in value that it will be equal to the median teacher pay.

    “…A new report was published on February 19 by three scholars at the University of Illinois at Urbana-Champaign and at Chicago rejects the very notion of a ‘pension crisis’ based on funded status. Instead, they argue, a pension system is only ‘in crisis’ when it ‘is insolvent and unable to make benefit payments to current retirees.’ Instead, they claim, what matters is not whether the state pays for the accruals it promises its employees or leaves that to future generations, but whether Illinois' spending on pensions from year to year is level and manageable, in this case, at about 1% of state GDP.

    “But even this report acknowledges the problem with the teachers' pensions, though they do so to lament what they call the ‘crisis' framework’ -- that is, that legislators were in too much a rush to fix benefits that they didn't do any reasonable analysis.

    “There is also a potentially serious and costly flaw in the Tier II plan. If the rate of inflation is high enough, Tier II benefits will be so low that they will violate federal law, which requires that they be at least equivalent to social security benefits. Consequently, Illinois could be required to increase the benefit of approximately 78 percent of the employees not currently enrolled in Social Security (State of Illinois Report of the Pension Modernization Task Force, House Joint Resolution 65, 2009).

    “The ‘crisis’ framework led lawmakers to create Tier II without much consideration of its potential pitfalls. A belief that something needed to be done in the present led to too little time and consideration of the future implications of what was being implemented.

    “The Tier II plan passed through both state chambers in a single day. Lawmakers never saw detailed projections from pension system actuaries of the plan’s impact. Sara Wetmore, vice president and research director at The Civic Federation, pointed out ‘They passed this so quickly that there really wasn’t any way for anybody to know if there would be any problems in the future’ (Mathewson, 2016). A few short years after its creation, the problems of Tier II are widely acknowledged (Secter and Geiger, 2015)…” (Elizabeth Bauer, Forbes 22 Feb. 2019).

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