Jane the Actuary Retirement

Forbes post, “The Pension Combine? Illinois’ Public Pension Unfunding Has A Long And Bipartisan History”

Originally published at Forbes.com on February 1, 2022.

In 2008, then-Chicago Tribune columnist John Kass wrote a column about corruption in Illinois, “In Combine, cash is king, corruption is bipartisan.” Commenting in the middle of the trial then underway for political fixer Tony Rezko, Kass relates a conversation with former-Senator Peter Fitzgerald, “the Republican maverick from Illinois who tried to fight political corruption and paid for it [by being] driven out of Illinois politics by political bosses, by their spinners and media mouthpieces, who ridiculed him mercilessly.”

“’What do you call that Illinois political class that’s not committed to any party, they simply want to make money off the taxpayers?’ Fitzgerald said. ‘You know what to call them.’

“What?

“’The Illinois Combine,’ Fitzgerald said. ‘The bipartisan Illinois political combine. And all these guys being mentioned, they’re part of it.’ . . .

“’In the final analysis, The Combine’s allegiance is not to a party, but to their pocketbooks. They’re about making money off the taxpayers,’ Fitzgerald said.”

Newcomers to the state of Illinois may find it odd to see the word “bipartisan” show up anywhere in reference to Illinois, but they forget that the state’s history includes jailed governors from both political parties.

And this is a bit of a preface to the history I want to share on Illinois pensions.

Here’ another preface: over the past decade, there have been a handful of scholarly articles on pension underfunding and pension reform attempts, each attempting to determine what causes some states to have well-funded and other states, poorly-funded plans. Unfortunately, the only readily available data on the topic starts in 2001, but these scholars run their regressions and try to find correlations: is it Democrats? Is it Republicans? Is it single-party control? Is it split control? Is it the influence of public unions?

Nothing especially persuasive emerges from these studies, except for one: “Polarization and Policy: The Politics of Public-Sector Pensions,” by Sarah Anzia and Terry Moe, published in 2017 at Legislative Studies Quarterly.

Their main argument: before the Great Recession, in those states with un/underfunded pensions, both parties were the cause of the underfunding. Simply put, the public at large simply had no interest in pension funding, but was very much interested in a high level of government services and a low level of taxation. There was therefore no incentive for politicians of either side to fund pensions. As they write,

“[Politicians] are in the position of being able to promise public workers and their unions much-valued benefits without having to pay the true costs—for if they fail to make the necessary contributions, the bills won’t come due for many years, when other politicians and generations of taxpayers will be responsible for paying them. Thus, current politicians have incentives to behave myopically: by increasing benefits, keeping contributions lower than they should be—and relying on others, in the future, to pay the full costs. . . . This is an alluring calculus that knows no party lines.”

Only after the Great Recession, when a crash in the stock market combined with the emergence of the Tea Party (and, I would add, the pending implementation of GASB 67 in 2014, which required that state and local governments disclose their pension liability more visibly, along with increasing attention by rating agencies), did a split emerge, in which Republicans were more likely to support pension reform/pension funding measures, yet even still without a complete partisan divide.

And a review of the history of Illinois’ pension funding is a case study in how this pre-Great Recession bipartisan pension funding indifference played out. The whole history was outlined in great detail in a 2014 report by Eric Madiar, who at the time served as Chief Legal Counsel to Illinois Senate President John J. Cullerton; while the objective of much of his document is to argue a political point, his history lesson is extremely helpful, and starts with a 1917 report by the Illinois Pension Laws Commission lamenting that pension plans were not being funded and calling for the legislature to begin to fund pensions when benefits are earned. Throughout the 40s, 50s, and 60s, dire reports were issued by similar commissions, to no avail, with the result that the Illinois constitution of 1970 essentially treated the pension protection clause as an alternative to funding pensions.

But it gets worse: the low levels of pension funding were not the result merely of haphazard pension funding, but an intentional funding policy. In 1973, under Democratic Governor Dan Walker, the state legislature explicitly adopted a “pay-as-you-go” policy, contributing into the plan only as much as was needed to pay out benefits for the year. And in 1982, under Republican Governor Jim Thompson, as a budget-savings measure, even this level of contribution was abandoned, with the contribution level reduced to only 60% of benefits, where it remained until 1995. The only reason that pensions did not become insolvent was that at the same time, they shifted from investments only in low-risk, low-return investments such as government bonds, to more aggressive investments of the sort we expect today.

As the 80s continued, it was widely recognized that this policy was unsustainable, and in 1989 the state passed new legislation with a 7 year ramp and a goal to reach full funding in 40 years’ time. But the legislature never actually appropriated the funds to make these contributions.

Then, in the 1994 election between incumbent Republican Jim Edgar and Democratic candidate and current state comptroller Dawn Netsch, the underfunded pensions became a political issue, and Netsch criticized Edgar for failing to implement the 1989 funding plan. Each candidate had a competing plan: Edgar’s was a 50 year plan with a 20 year ramp, and Netsch offered a 10 year phase in. After Edgar won the election, the legislature enacted a bill modeled on his proposal, with a 50 year 90% target and a 15 year ramp. But even based on projections at the time, this plan would have taken until 2034 to begin to reduce the unfunded liability, as until then the contributions would not have covered the full cost of each year’s new benefit accrual and interest on the debt.

And the story doesn’t even end there: in 2003, under Democrat Rod Blagojevich, the state issued $10 billion in Pension Obligation Bonds (POBs), and counted the repayment principal and interest as part of its pension contribution. Then, during 2006 and 2007, the state took two contribution holidays. Note that this preceded the Great Recession. And in in 2010 and 2011, now under Democrat Pat Quinn, the state issued more bonds, in this case using the proceeds not merely to boost the funded status but to cover part of the annual required contribution. (This last part of the story comes from Jeffrey R. Brown and Richard F. Dye’s “Illinois Pensions in a Fiscal Context: A (Basket) Case Study.”) To be fair, it was under Quinn that Illinois for the first time implemented a pension reduction, the Tier II benefit, and none of what I’ve chronicled pairs together the legacy of benefit increases and who bore responsibility for these — simply because there is no similarly convenient summary of this history.

So there you have it: a century-long legacy of unfunded pensions in Illinois.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Finally, Medicare Takes A Step Towards Cost-Control – And Alzheimer’s Advocates Push Back”

Originally published at Forbes.com on February 1, 2022.

 

Back last June, the FDA made the controversial decision to approve a medication intended to treat Alzheimer’s disease, despite the lack of solid evidence of that drug’s effectiveness, and the strong appearance that the drugmaker had cherry-picked studies to include only a single trial and exclude those which showed no effectiveness. What’s more, the drug, Aduhelm, had significant side effects, a list price of $56,000 per year, and even its theoretical mechanism of action did not square with emerging developments in the research. From all reports, the drug was approved because of the strong wish for an effective treatment rather than because this particular drug was effective.

But earlier this month, the Centers for Medicare and Medicaid Services (CMS) provided Medicare-watchers with some good news: they plan only to cover this drug only through “coverage with evidence development (CED),” which means that “FDA-approved drugs in this class would be covered for people with Medicare only if they are enrolled in qualifying clinical trials.” This remains only a draft proposal, with a 30 day comment period before it is finalized, expected to be on April 11.

As Rachel Sachs at Health Affairs explained immediately following the announcement,

Medicare only covers products and services that are “reasonable and necessary” for diagnosis or treatment. CMS is able to use the NCD [National Coverage Determination] process to evaluate the evidence in support of a new product or service and determine whether this standard is met. Although most products that meet the FDA’s standard of “safe and effective” are likely to meet the “reasonable and necessary” bar, the two are in fact different. Yesterday’s NCD provides a strong, clear statement of CMS’ independence and willingness to enforce its own legal standards for its own agency priorities.”

And the New York Times reported that this was, in fact, “the first time that C.M.S. limited Medicare beneficiaries’ access to an F.D.A.-approved drug in this way.”

This followed prior reports that nearly half the 2022 Medicare Part B premium increase, or about $10 per month, was due to Aduhelm costs, though subsequently manufacturer Biogen announced a price cut down to $28,000.

In the meantime, the public comments submitted thus far can be viewed by the public at the CMS website, and a skim through those comments posted as of this writing (and largely dating to the period just after approval, in July/August of 2021) by medical professionals, shows widespread criticism of the FDA approval.

And Biogen has responded to the CMS decision by increasing the enrollment levels of its confirmatory trial, though only from 1,300 to 1,500 participants, a far cry from the expected 50,000 patients if it was widely available. At the same time, a rival drugmaker, Eli Lilly, has submitted initial data for its own similar drug, donanemab, for which it hopes to receive approval and launch at the end of this year. If Eli Lilly’s data is similarly inconclusive, of course, it is deserving of the same caution.

So far, so good — in fact, a rare win for common sense.

Unfortunately, though, the Alzheimer’s Association disagrees, and is engaged in a campaign to call on the public to oppose this decision — a campaign which readers who spend time on twitter will have noticed in the form of frequent ads urging people to “tweet at the president” to tell him to reverse the decision. They imply that this is discrimination, and that people with Alzheimer’s are being treated unfairly, saying in their alert that “No president has allowed this to happen with treatments for diseases like cancer, heart diseases and HIV/AIDS, and we can’t let it happen for Alzheimer’s.” And similarly, in the news update on their website, they write, “Medicare has always covered FDA-approved treatments for those living with other conditions like cancer, heart disease and HIV/AIDS. For CMS to treat those with Alzheimer’s disease differently than those with other diseases is unprecedented and unacceptable” — wholly failing to mention the very real concerns about whether this drug is effective in the first place. And, yes, if a drug with similarly-questionable effectiveness were on the table for cancer or heart disease, I would hope that CMS would be just as cautious.

What’s more, the CEO of the Alzheimer’s Association, Harry Johns, was even more accusatory, calling the decision “shocking discrimination against everyone with Alzheimer’s . . . especially women and minorities” — the latter claim because in principle individuals with money would be able to pay for the drug out of pocket. And in an interview, Johns did not acknowledge any of the concerns shared by others, but simply repeated the claim that, since it was approved by the FDA, it should be paid for by Medicare.

And, finally, a few words of international comparison: as Medicare was deliberating on its decision, December, the European Medicines Agency voted against approval of Aduhelm (which is most likely binding for the UK as well), and Japan likewise decided to require additional data, a step that could require several further years as they wait for the same additional study results as CMS is requiring.

Whether CMS stands its ground or succumbs to public pressure remains to be seem, but their decision on Aduhelm is an encouraging sign.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Washington State’s Celebrated Long Term Care Program Is Headed Towards Trouble”

Originally published at Forbes.com on January 11, 2022.

Nearly two years ago, social insurance advocates were celebrating the creation of a new long-term care program in the state of Washington. Here, for instance, is what The Nation wrote in May of 2019:

“The Long Term Care Trust Act, which passed the state legislature at the end of April and will be signed into law by Governor Jay Inslee on Monday, establishes the country’s first social-insurance program to pay for long-term care. All residents will pay 58 cents on every $100 of income into the state’s trust. After state residents have paid into the fund for ten years—three if they experience a catastrophic disabling event—they’ll be able to tap $100 a day up to a lifetime cap of $36,500 when they need help with daily activities such as eating, bathing, or dressing. . . .

“The architects of the legislation were trying to find ‘a number adequate enough to meet people’s needs and at the same time not be catastrophic if everybody [made claims] at the same time,’ [AARP vice president Elaine] Ryan explained. ‘To make it actuarially sound so people could be guaranteed a benefit.’

“The policy’s universal structure and funding is also significant. All working people will pay into the fund through a payroll tax and then be able to claim a benefit when they need it. The same structure has ‘stood the test of time’ with Social Security and Medicare, Ryan noted. Politically speaking, ‘it mattered a lot that it was set up as a social-insurance program,’ Caring Across Generations’ [Sarita] Gupta said.”

It sounded great — but too good to be true.

Now officials in Washington are recognizing there are problems with the plan.

In December, Gov. Jay Inslee announced a delay in the start of the payroll tax, so that the legislature could make changes when the new session convenes on January 10th, following a multitude of complaints about the program, in particular because workers who move out of state, or who were less than 10 years away from retirement, would be paying into the system without ever being able to benefit from it. The tax is now planned to begin in April, but if House Bill 1732 passes, the tax would be delayed until July 0f 2023. In addition, House Bill 1733 would allow people working in Washington but residing elsewhere, as well as temporary workers with nonimmigrant visas, and disabled veterans and spouses of active duty military members, to opt out. Neither of these bills, however, would deal with the issues posed by the eligibility requirements themselves.

But these eligibility requirements are in place for a reason, to reduce costs with lower numbers of recipients, and to build up reserves which are spent down as current workers ultimately retire. Here’s what the 2017 feasibility study itself reported:

“We estimate the Base Plan under Option 1 will require a 0.54% payroll surtax rate over the 75-year period 2020 through 2094. We estimate an ultimate tax rate of 0.94% to cover program costs after 2094 once the population receiving benefits has stabilized.” In other words, if all Washington residents were eligible regardless of age and contribution history, the cost of the program would double, because that’s what will ultimately happen when, 75 years into the future, all retirees have paid into the program. In practice, the actuaries consulted for this report anticipated that payroll taxes would be increased well before the 75 year period ends.

In addition, the $100 per day benefit is slated to increase by no more than the inflation rate, and possibly be reduced if it is deemed necessary for solvency purposes, according to the enabling legislation. And that $100 per day benefit is anticipated to be enough for the average individual receiving 96 hours of home care per month, based on Medicaid rates, for one year, according to the legislation’s findings.

One might argue that, however imperfect this legislation might be, its flaws can be remedied in the future. But the law is a mixture of characteristics of programs of social assistance and social insurance, to its detriment. A requirement to have paid into the system is characteristic of a social insurance program, and the 10 year contribution requirement is essentially the same as the eligibility requirement for Old Age benefits in Social Security. However, true social insurance programs pay out benefits to those eligible regardless of residence — again, once you’ve paid into Social Security long enough to have earned your benefit, you can collect regardless of where you live, even if you have moved abroad. In fact, even noncitizens who worked in the United States long enough to have accumulated sufficient Social Security credits, can receive benefits after having moved back to their home countries. What’s more, many social insurance systems provide some sort of refund mechanism for workers who do not accumulate enough contribution years to be eligible.

And this hybrid system will likely prove to be unsustainable politically. Even if ordinary Washingtonians are not well-versed in social insurance concepts and theories, it will not sit right with them that those who retire with 10 years of payroll taxes have “earned” their benefits but those with 9 years have not, and, likewise, that those who have “earned” benefits would lose those “earned” benefits merely by moving out of state. How precisely this will play out over the long term remains to be seen, but the new bills are not likely to be the end of the story.

In any case, these problems will not be easy to remedy.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.