Pensions explained.

A previous version of this was posted on http://illinoisteaparty.net/pension-reform/. 
An updated version is being posted here, on dupagewatchdogs.org now   All links were valid when originally posted, but may no longer exist.  http://archive.org/web/web.php A.K.A. way back machine may find the content of old links.  Links for newer (updated data) are indicated in Blue.

Pension Explanation

The state funded public pension systems that are bankrupting the state of Illinois are “defined benefit” systems.  Each system sets a level of employee contributions and promised benefits based upon a formula.  The formulas assume matching employer (taxpayer) contributions, returns-on-investment, and amounts to be paid out based upon employee demographics, salary histories and actuarial tables.  If everything had gone as planned, the pension funds would be fully funded; since it hasn’t, the taxpayers are expected to pick up the shortfall.

Consider the Teachers’ Retirement System (TRS) as an example. The following chart shows the ratio between the TRS assets and TRS obligations.

trsfundinglevel 1987to2011

From page 8 of
http://trs.illinois.gov/subsections/general/Buck_2011_valuation_rept.pdf

Notice that in 1987 the TRS was about 70% funded. In 1994, Illinois passed legislation increasing the amount the state would contribute to pension funds. In 2004, Illinois sold pension obligation bonds in hopes of shoring up the pension funds. The TRS assumed that the invested assets would earn 8.5% in return-on-investments.  However actual returns-on-investment vary greatly. In 2001 and 2002 the TRS lost money, and from 2007 to 2009 the TRS lost about a fourth of its value.  The 2013 Report lists a funding ratio based on “Actuarial value” of 40.6%

End of Career Salary Spiking

Another factor causing the pension shortfall was wide spread salary spiking which occurred during the last two decades.   Salary spiking is defined as extra pay raises and/or high paying special projects that increase end of career salary and thus increase the pension for life.  In 2010 salary spiking resulted in the TRS paying out $3 for every $2 it had anticipated paying.  this chart is based on information from a 2011 FOIA request.

TRS effect of spiking

Pensions vs. Social Security and Incomes

Taxpayers never agreed to pay whatever it takes to fund public sector pensions, especially given the fact that many of these pensions exceed what those in the private sector receive.

  • In 2014 the maximum Social Security for an individual retiring at age 66 was approximately $30,000.
  • According to census.gov, (Table H-8B.  Median Income of Households by State Using Three-Year Moving Averages: 1984 to 2012) Illinois’ three year median household income peaked in 1998 to 2000 period at  $62,001 (inflation adjusted).  It dropped to $52,284 in the 2010 to 2012 period. While many taxpayers saw their incomes decline, public sector pensioners received cost of living allowances (COLA).  For instance, TRS paid a 3% compounded COLA.
  • Based on data in the June 30, 2013 TRS “Comprehensive Annual Financial Report,” the average salary for those with less than 5 years experience was $46,058, for those with 30+ years, it was $97,715, overall average was $67,558 and the average starting pension for those retired less than a year after 30+ years of work was $70,894.  Thus, an average recently retired teacher who worked a full career (30+ years) receives more in pension than the average active teacher earns for teaching, and more than the state’s median household income.
  • Based on Taxpayers United of America (TUA), as of April 1, 2014 the top 200 Illinois public sector pensions ranged from $196,613 to $452,843.  The majority are retired from universities followed by retired K-12 Superintendents.  For instance, Dr. Catalani who retired from Wheaton-Warrenville CUSD 200 in 2007 now receives $284,674/year.  His lifetime contributions cover 2.8% of his estimated lifetime benefits.
  • As of April 1, 2014 there were 11,054 Illinois public sector pensioners collecting more than $100K per year and 78,526 pensioners collecting over $50K per year. (TUA).

Illinois Constitution

The Illinois constitution requires our state government to have a balanced budget every year.  It does allow for borrowing (for special purposes – or up to 15% of the annual budget for emergencies), yet, Illinois ended the fiscal year June 30, 2011, with over $8 billion in unpaid bills and an estimated $85 billion in unfunded pension liabilities.  Combined ($8 + $85) was almost triple the 2011 budget which was around $33 billion.

In January 2011, Illinois “temporarily” raised its state income tax 67% and its corporate income tax 45% in an effort to stabilize its finances and to pay its $8.5 billion in past due bills. Despite generating about $30 billion in increased tax revenues (2011 to 2014) at the end of 2013 the state still had about $6.7 billion in past due bills and the unfunded liabilities have grown.  The bulk of the new revenue from the increased tax rates went to state pension payments and Medicaid.

  • In FY 1995 the state contributed $519 million to pensions which was 2.9% of the $17 billion general fund.
  • In FY 2006 the state contributed $938 million to pensions which was 3.8% of the $24 billion general fund.
  • In FY 2014 state contributions will be $5.99 billion, or 17% of the $35.7 billion general fund.

We are constantly being told that the under-funding problem is due to the state (taxpayers) not paying its fair share.  However, according to actual past contributions and current projections, for the teachers’ retirement system:

  • From 1995 to 2001 taxpayers contributed 93₵ for each $1.00 of member contribution,
  • From 2002 to 2011 (last decade) taxpayers contributed $1.86 for each $1.00 of member contribution, and
  • For 2012 to 2021 (current decade) taxpayers are projected to contribute $3.39 for each $1.00 of member contribution.

It appears that the state has always put in the “normal” portion, the part to cover benefits earned during the year, but, it has not always put in enough to cover the “actuarial” portion to make up for past shortfalls.

Recommendations

Illinois cannot balance the budget as required by law without addressing pensions.  Legislation has already been passed to address employees hired after January 1, 2011, which will help a few decades from now.  In order to solve the current problem, existing public sector employees and retirees must be part of the solution.

Minor pension reform did pass in 2013, but is being challenged in the courts.  On a related item, the Court ruled in July 2014 that retiree healthcare could not be diminished due to Illinois’ Constitution Article XIII, Section 5:

“…Membership in any pension…shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

However, the court cannot force funding or timely payments.  Already some hospitals and doctors are rationing care for state employees because they cannot afford to be the state’s bank.  What good is insurance without access?

The Constitution is not a suicide pact.  Given enough public pressure, it can be amended to change Article XIII, Section 5.

Links to source articles

The Law:

Pension Statistics, Shortfall & Abuse:

Raw Data is Available

TRS contributions

More Information:

  • 1/30/2012, (CHICAGO) The Civic Federation’s Illinois research institute warns that Illinois could face an unprecedented $34.8 billion backlog of unpaid bills [by FY2017] if action is not taken immediately to reform Pensions and Medicaid.  http://www.civicfed.org/FY2013IllinoisRoadMapPressRelease

Illinois actually has many public sector pension funds.  The following table summarizes the five large state wide pension funds that are in trouble financially.

http://capitolfax.com/2011/04/26/pews-new-pension-study-understates-illinois-pension-problem/ 

pension asset liability

  • TRS – Teachers’ Retirement System
  • SERS – State Employees’ Retirement System
  • SURS – State Universities Retirement System
  • JRS – Judges’ Retirement System
  • GARS – General Assembly Retirement System

Updated – Five largest pension funds in 2014

http://illinoisopportunity.org/pension-pressure/

2014 pension unfund

http://www.examiner.com/independent-in-chicago/secret-memo-shows-no-confidence-illinois-state-pensions#ixzz1rGhddiAp  February 9 memo from Executive Director, Dick Ingram, to the Teachers Retirement System Board of Directors warns that the State will be forced to not only cut from future pension funds, but also from currently retired teachers’ pensions.

http://articles.chicagotribune.com/2012-05-08/news/chi-rahm-emanuel-illinois-pensions_1_pension-systems-pension-funds-pension-costs

Today [May 8, 2012], the combined unfunded liabilities of Chicago’s four pension funds have grown to nearly $20 billion, which doesn’t include the $6.8 billion shortfall at the teachers fund.

Absent reforms, the fund for retired city firefighters would become insolvent in nine years, according to a city report issued two years ago. The police pension would go broke four years later. All four funds would be broke by 2030.

 

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