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Thursday, Sept. 1, 2011 08:31 am

Pinchin’ pensions

Fixing Illinois’ broken system



Rita Tarr Scheibe spent most of her career helping others as executive director of social service agencies, including Contact Ministries and Catholic Charities. The jobs were fulfilling, but not ones that would pay the bills after she got divorced and became a single parent. She and her employers both paid into Social Security, but Scheibe, now 53 years old, had no insurance and no other retirement benefits.

Having earned a degree in psychology and education in 1998, Scheibe about five years ago took up teaching, in part because it offered financial security both now and once she reaches retirement age. “I had to start thinking more like a grown up,” says Scheibe, who is now an alternative education teacher at Butler Elementary School in Springfield. “One of the best parts about teaching is the good benefits you can count on, so I decided to use that part of my degree to teach.”

These days, however, the future of teachers’ benefits is in question, as are the benefits for hundreds of thousands of other state employees, many of whom reside in Sangamon County. About 2,200 Sangamon County residents are retirees in the Teachers’ Retirement System, and about 7,800 Sangamon County residents are retirees in the State Employees’ Retirement System, General Assembly Retirement System or Judges’ Retirement System. About 1,150 Sangamon County residents are drawing pension checks from the State Universities Retirement System.

The Teachers’ Retirement System is the largest of the five statewide pension systems that, altogether, have an $85.6 billion unfunded liability – the difference between what’s been promised to current and future retirees (“accrued” liability, about $138.8 billion), and what the systems actually hold, (assets, about $53.2 billion). That $85.6 billion difference means the five pension systems  collectively are only 38.3 percent funded, far below the 90 percent required by 2045 under Illinois law and the lowest among all the states in the nation.

All five systems depend on their members’ contributions, state contributions and investment earnings on accumulated assets. Though the members’ contributions are taken out of every paycheck without fail, the state’s history of employer funding is full of skipped, shorted and borrowed payments, and investment earnings are subject to the sometimes harsh realities of the overall economy.

Though the state in 1995 passed a new law detailing a plan for bringing the state systems up to 90 percent funding by 2045, the unfunded liability has only gotten worse through the years. About $57 billion of the current unfunded liability accumulated after the 1995 law passed, with about $24.7 billion of that due to inadequate employer, or state, contributions, according to the Commission on Government Forecasting and Accountability.

Most agree, pensions are “the number one fiscal challenge that we face,” as COGFA pension manager Dan Hankiewicz told an audience full of state pension recipients at a recent Springfield Citizen’s Club panel discussion on the matter. What to do about the problem is a more contentious issue.

The leading proposal, backed by business, takes aim at the benefits employees have been promised, while unions say “attacks” on members’ benefits are unfair when the state is mostly to blame.

Illinois ranks last in the nation for pension funding.


To help the state reach the 90 percent funding goal it set in 1995, lawmakers in spring 2010 approved a two-tier pension system that raised the retirement age and lowered the benefits for any employees new to the systems as of the first of this year. According to COGFA, the implementation of “tier two” benefits for new employees means the state could save $71 billion dollars through the year 2045 – if lawmakers make their required payments.

The change saved the state about $976 million in the fiscal year that ended June 30, 2011, with a reduced payment of about $3.5 billion. This year, the cost is about $3.9 billion, and, if nothing changes, next year’s cost will be about $4.3 billion, with costs rising incrementally each year until the state owes about $22 billion in FY2045 to reach its 90 percent funding goal.

That’s too much, says Tyrone Fahner, president of the Civic Committee of the Commercial Club of Chicago and former Illinois attorney general. His group says that the projected pension bill for 2045 that year will consume nearly half of the state’s primary revenue streams – sales, income and corporate taxes.

“That obviously has an impact on funding for public safety, for health, the needs of the elderly, special needs kids, other essential public programs – all of these are crowded,” Fahner says, justifying his push for a three-tier proposal laid out in Senate Bill 512, which could come up for a vote during this year’s fall veto session.

Currently, tier one employees – those who enrolled in one of the systems before January 2011 – can retire at age 60 after working for eight years to receive their full benefits, with annual cost-of-living increases of 3 percent. Tier two employees are those hired after spring 2010 legislation became effective at the first of this year. They can retire at age 67 after working 10 years to receive their full benefits, with annual cost-of-living increases of 3 percent or half of the consumer price index, whichever is less.

The changes proposed in Senate Bill 512 would offer three choices to tier one employees – pay a larger portion of salary to receive the same benefits, pay less and receive lower benefits after working longer, or enroll in a 401k-type program with no defined benefits, only defined contributions. No current retirees would be affected and new employees would not have tier one benefits as an option.

For tier one TRS members who want to continue with their current benefits, instead of paying 9.4 percent of salary, as they do now, they would pay 13.77 percent in the first three years of the new three-tier system. Their contribution requirement would be reassessed as time went on, but TRS executive director Richard Ingram says it would only eat up more of teachers’ salaries.

Ingram says that after the first three years, teachers’ rates could increase to 15 or 16 percent, with eventual worst-case scenarios reaching nearly 25 or 26 percent – about one-quarter of a teacher’s overall salary.

Scheibe, who earns about $48,000 each year and has at least another 10 years before retirement, says those increases are significant. “Of course that’s going to be a scary option. It would be an even more scary option if I were still single, on my own, trying to survive on one income,” she says. “When you’re talking about taking an extra five percent out each year, it’s a lot more difficult to survive.”

With the current teachers retiring or switching plans if they’re unable to afford higher rates, eventually tier one benefits would be phased out. The same would be true for the other pension systems, though the rates would vary from system to system.

Will Lovett is a lobbyist for the Illinois Education Association, which opposes SB 512. “The three options, they’re all very bad options for our members,” he says, noting that teachers, who don’t pay into Social Security, rely on the current retirement system for stability. The tier three 401k-type option would leave them with nothing should the economy turn sour, he says.

Besides, Lovett says, teachers have done their part all along. “Our membership feels strongly about protecting their retirement. They feel that they’ve never missed a pension payment and they feel unfairly penalized for something that was never their fault. The state is coming back with this type of legislation and saying, ‘We, the state, didn’t live up to our obligations, but we’re going to stick you with our credit card bill.’”

Lovett says public pensions in Illinois are not overly generous as they are now, just decent and about on par with other states. “In this economy, retirement packages and total compensation packages really do play into the kind of people you can bring into the classroom,” he says, suggesting that quality teachers could choose other states with better benefits should Illinois approve SB 512.

If SB 512 were implemented, the state could cut its eventual 2045 pension bill by almost half, Fahner says. Instead of taking up nearly 50 percent of the state’s primary revenues in 2045, pensions would only require about 26 percent of those revenues, meaning fewer public services would be crowded out in favor of pension payments.

The entire argument could be moot, though, if the proposed legislation turns out to be unconstitutional, as lawyers for Senate President John Cullerton’s office are predicting. They cite a provision written into the Illinois Constitution during the 1970 Constitutional Convention: “Membership in any pension or retirement system … shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

The Civic Committee argues that pension benefits already earned can’t be touched, but any future pension benefits can. “We’re both confident that our side is right,” Fahner says. “Let the court decide.”

John Patterson, a spokesperson for Cullerton’s office, says the Senate president would vote against SB 512, “but he wouldn’t stop a vote.” Cullerton has also floated the idea of pushing future costs of the teachers’ pensions back onto local school districts, but Patterson says no legislation has been drafted. “It was more of just an idea,” he says.

Illinois' pension systems had an $85.6 billion unfunded liability at the end of FY2010. Source: Illinois' Commission on Government Forecasting and Accountability.

Problem or crisis?

The directors of the pension systems say the air of panic surrounding the pension problem is an exaggeration of the actual situation.

“I think it’s sensationalist to say there’s an $87 billion hole,” says Timothy Blair, director of the State Employees’ Retirement System, General Assembly Retirement System and the Judges’ Retirement System.

Blair and Teachers’ Retirement System director Richard Ingram emphasize the fact that the unfunded liability never comes due all at once – the more important numbers to look at are the assets and the long-term return rate.

The State Employees’ Retirement System had an unfunded liability of $20.1 billion in FY10 and held $9.2 billion in assets, for a funded ratio of 31.4 percent. SERS that year saw $2.14 billion in revenues through state and employee contributions and investment income, and it paid out $1.39 billion in benefits.

Though the unfunded liability for all five systems at the end of June 30, 2010, was about $85.6 billion, Blair says that number is likely to go down by as much as $10 billion, after a year of more than 20 percent returns on investments. He adds that neither double-digit gains nor losses (like those seen in FY2009 – a 20.1 percent loss for SERS) in one single year should be viewed in a vacuum.

“Our long-term return has been roughly 8.5 percent. If you do the math on that, even if the state were to completely decide they weren’t going to be in the business of contributing to pensions, our assets would last for decades,” Blair says. “We just need stable funding over the long term.”

TRS’ Ingram issues a similar sentiment. “Frankly, all of the conversation, every element of SB 512 is focused on benefit reform. There is nothing in that about funding reform, that guarantees that payments will not be skipped,” Ingram says. “That is what the outside world is looking at Illinois to address. How do you meet your commitments? You’ve made a promise to 370,000 people [in TRS]. How are you going to keep that promise?”

Fahner says the idea that Illinois’ pension systems aren’t an absolutely urgent crisis is “nonsense.” “They’re crossing their fingers and hoping to die,” Fahner says. “Their ability to pay is counting on a healthy national economy and a healthy state economy. I don’t know how you see it, but I don’t think we’re at either one of those places today.”

He says that, unless the state pays off its unfunded liability, pension members might as well invest in a Ponzi scheme, in which “investors” are paid back only with new investors’ money. “That’s exactly what is going on here is a Ponzi scheme. … They can deny it all they want, but it’s only a very short matter of time before some people will not get their benefits.”

House Speaker Michael Madigan’s spokesperson, Steve Brown, couldn’t say if a vote this fall on SB 512 had been planned. “While there’s a desire to move sooner rather than later, there’s no timetable.”

Springfield Republican Rep. Raymond Poe did not vote for SB 512 when it passed out of a House committee last spring. He says he believes the measure is unconstitutional and that “it looks to me like the whole motive of that bill is to push people into a different [tier] than they’re in. … The employees are not the ones who got us into this mess. The state didn’t pay its part.”

Poe adds that he thinks the civic committee’s prediction that, without pension restructuring, the state will end up using 50 percent of its main revenues to pay for pensions is “painting a worst-case scenario.”

“Evidently, they’re down on the U.S. They’re down on the economy. They’re telling you we’re never going to come back,” Poe says. “I guess I’m a little bit more optimistic than that.”

Poe says he doesn’t expect a floor vote until after the 2012 elections, by which time lawmakers will know more about their newly-mapped districts’ constituency, but Fahner says that’s likely not the case. “The Speaker and the leader of his [Poe’s Republican] party are the sponsors of the bill, so if they want to have it called for a vote in veto session, it will be called,” Fahner says.

Still, the measure needs more support in order to pass, he says. “I cannot promise you that we have the votes as we speak, and we don’t, but I believe we will by veto session,” Fahner says. If not, he adds, “The public will be informed. … It’s time for accountability of our legislative members and leaders.”

Contact Rachel Wells at rwells@illinoistimes.com.


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