Sunday, March 31, 2019

The Teachers' Retirement System of Illinois Cost of Living Adjustment




“‘...In the 21 years from 1969 through 1989 there was only one year that inflation was less than 3.3% and the average annual rate of inflation was just over 6.2%.  In making the decision in 1989 to change our annual increase from three percent simple to three percent compounded, the members of the General Assembly made what they felt was a reasonable assumption that inflation would continue and that it would grow at the rate that it had been for more than 20 years.  Since state pensions had not kept up with inflation they would provide a necessary increase, but they did not ask anyone to pay for it because they assumed it would not really be expensive.  The change would cost the state, but they assumed it would still run behind inflation. And growing inflation would mean the state would collect more tax revenue’ (Bob Lyons, former Trustee for the Teachers’ Retirement System of Illinois).

“Anticipating further elevated inflation rates, the General Assembly granted a change from 3% simple to 3% compounded COLA in 1990 to the retirees in TRS. 

“Since 1990, (high of 4.1% in 2007 and low of .1 in 2008) the average inflation rate for the country has been overall 2.4%.   As Mr. Lyons writes, ‘The reality is that the change from 3% simple to 3% compounded did just what it was supposed to do and it has more than protected us from inflation.’

“And he’s right.  On average, thus far, we are looking back nearly 30 years with a .6% positive break.  And in our current media environment of people turning on each other rather than to each other, this COLA correction seems unacceptable to those who criticize the Illinois ‘Pension Problem’ as simply an issue of too many benefits. The finger pointing by the Tribune and other anti-union organizations ignore the truth: the cost of pension would not be so overwhelming if there were no debt payment as a result of decades of avoiding payments.  

“Eric Madiar, the former Chief Legal Counsel for Senate Leader John Cullerton and author of a thorough exegesis ‘Is Welching on Public Pension Promises an Option for Illinois?' speaking before the City Club of Chicago, once reminded his audience: ‘Our current pension disaster cannot be blamed on salary or pension cost increases.  Between 1985 and 2014, pension funding liabilities grew by $97 billion.  Benefit increase only counted for 8%, or $8 billion of that growth.  Pay increases were actually less than actuaries had assumed they would be. And the actually helped bring down the unfunded liability by $1.3 billion.  The state's failure to fund the system accounts for 49 or 47% of that growth.  So simply out, the main reason we are in this mess is for insufficient pension contributions’ (City Club of Chicago). 

“But like any Zen Balance question, we are all awash in what may decidedly come again in another inevitable wave.  Okay, so now maybe we are .6 ahead.  Now.  But in the 15 years before the 3% compounded (1975-1989), we were battling an average of 6.7% inflation – or a 3.6% disadvantage even if pensioners had compounded COLA’s.  

“Maybe the General Assembly didn't foresee a lessening of inflation or the Great Recession, but they understood what continued rampant inflation was doing to state retirees.  

“And, it’s not pensioners that created the fiscal problems at the state or municipal levels; it is and will always be the avoidance of funding the pensions that now comprise the interest-laden debt which must be serviced yearly.  As Bob Lyons also wisely points out, ‘The truth is that this year 76% of the 8.5 billion going to pensions is to make up for the continuous past underfunding of the five systems.  If Illinois pensions were fully funded, all it would take to fund the pensions for all current employees would be just a little more than two billion dollars. The so-called pension problem in Illinois has in reality not been caused by the cost of our pensions, but by the failure to fully fund them’…” (For the complete article by John Dillon, click here).


Commentary:

On May 8, 2015, the Illinois Supreme Court delivered the judgment of the court, with opinion. All seven justices concurred in the judgment and opinion (Doris Heaton et al., Appellees v. Pat Quinn, Governor, State of Illinois, et al., Appellants)]. There are two interesting footnotes in the judgment on pension reform litigation regarding COLA: "By way of comparison, data published by the Social Security Administration show that Social Security increases, which are tied to the cost of living, averaged 3.98%, nearly a percentage point more than under the Illinois formula, between 1975 and 2014 (page 4)." (http://www.ssa.gov/OACT/COLA/colaseries.html.). "While the automatic annual increases have sometimes exceeded changes in the cost of living, these judgments are not cost of living adjustments, and as indicated earlier in this disposition, the increases have actually lagged the average increases granted by the Social Security Administration, which are tied to the cost of living" (page 27). 


Regarding the Cost-of Living Adjustment (COLA) of the Illinois Teachers’ Retirement System: 
 
Illinois Pension Code: 40 ILCS 5/16-133.1) (from Ch. 108 1/2, par. 16-133.1) Sec. 16-133. (Automatic annual increase in annuity):

(a) Each member with creditable service and retiring on or after August 26, 1969 is entitled to the automatic annual increases in annuity provided under this Section while receiving a retirement annuity or disability retirement annuity from the system. An annuitant shall first be entitled to an initial increase under this Section on the January 1 next following the first anniversary of retirement, or January 1 of the year next following attainment of age 61, whichever is later. At such time, the system shall pay an initial increase determined as follows:

(1) 1.5% of the originally granted retirement annuity or disability retirement annuity multiplied by the number of years elapsed, if any, from the date of retirement until January 1, 1972, plus

(2) 2% of the originally granted annuity multiplied by the number of years elapsed, if any, from the date of retirement or January 1, 1972, whichever is later, until January 1, 1978, plus

(3) 3% of the originally granted annuity multiplied by the number of years elapsed from the date of retirement or January 1, 1978, whichever is later, until the effective date of the initial increase. However, the initial annual increase calculated under this Section for the recipient of a disability retirement annuity granted under Section 16-149.2 shall be reduced by an amount equal to the total of all increases in that annuity received under Section 16-149.5 (but not exceeding 100% of the amount of the initial increase otherwise provided under this Section).

Following the initial increase, automatic annual increases in annuity shall be payable on each January 1 thereafter during the lifetime of the annuitant, determined as a percentage of the originally-granted retirement annuity or disability retirement annuity for increases granted prior to January 1, 1990, and calculated as a percentage of the total amount of annuity, including previous increases under this Section, for increases granted on or after January 1, 1990, as follows: 1.5% for periods prior to January 1, 1972, 2% for periods after December 31, 1971 and prior to January 1, 1978, and 3% for periods after December 31, 1977.

(b) The automatic annual increases in annuity provided under this Section shall not be applicable unless a member has made contributions toward such increases for a period equivalent to one full year of creditable service. If a member contributes for service performed after August 26, 1969 but the member becomes an annuitant before such contributions amount to one full year's contributions based on the salary at the date of retirement, he or she may pay the necessary balance of the contributions to the system and be eligible for the automatic annual increases in annuity provided under this Section. 

c) Each member shall make contributions toward the cost of the automatic annual increases in annuity as provided under Section 16-152.

(d) An annuitant receiving a retirement annuity or disability retirement annuity on July 1, 1969, who subsequently reenters service as a teacher is eligible for the automatic annual increases in annuity provided under this Section if he or she renders at least one year of creditable service following the latest re-entry.

(e) In addition to the automatic annual increases in annuity provided under this Section, an annuitant who meets the service requirements of this Section and whose retirement annuity or disability retirement annuity began on or before January 1, 1971 shall receive, on January 1, 1981, an increase in the annuity then being paid of one dollar per month for each year of creditable service. On January 1, 1982, an annuitant whose retirement annuity or disability retirement annuity began on or before January 1, 1977 shall receive an increase in the annuity then being paid of one dollar per month for each year of creditable service. On January 1, 1987, any annuitant whose retirement annuity began on or before January 1, 1977, shall receive an increase in the monthly retirement annuity equal to 8¢ per year of creditable service times the number of years that have elapsed since the annuity began.

Source: Illinois Pension Code



No comments:

Post a Comment

Note: Only a member of this blog may post a comment.