Tag: Illinois public pensions

There are many uncertainties in the days ahead — and it makes me angry that pensions underfunding is yet another one.

Originally published at Forbes.com on February 12, 2020.

Yesterday, the Illinois Education Association released new polling on what it calls the “State of Education” — that is, public opinion on schools and teachers in Illinois, based on a November poll of randomly-selected adults in Illinois.

The results were not a surprise.

Asked to say the first word that comes to mind about Illinois public school teachers, nearly two-thirds (63%) said something categorized as a positive response. Having high quality public schools was identified as a high priority (8 to 10 on a scale of 10) by 81% of those polled, second only to cleaning up corruption (85%); drilled down, 59% said it was a “10,” a top priority, compared to 69% identifying cleaning up corruption in that way (each choice was prioritized separately), and 58%, lowering crime.

What’s more, respondents had a more favorable view of their local schools than nationwide schools: only 23% gave schools state- or nationwide an A or B ranking compared to a full 53%, ranking their local schools that way.

When it comes to money, 66% said that “funding for public schools” should increase, 52% said that teachers are paid too little, and 66% strongly or somewhat supported the new law that sets teacher minimum pay in Illinois at $40,000 per year.

And, finally, lest you wonder why I’m addressing this poll on this platform, the poll does indeed ask about pensions, and these results were concerning. The poll asked:

“Right now, teachers hired after the year 2011 in Illinois must work in a classroom until age 67 in order to be eligible to receive their pensions, no matter how many years they have been teaching. Do you strongly oppose, somewhat oppose, somewhat support or strongly support recently hired teachers being able to receive their pensions at age 60 instead of waiting until 67?”

Yes, my jaw dropped when I saw this.

Illinois teachers are indeed able to retire before age 67. They will see their pensions reduced to reflect the increased number of years of payments, but they are not trapped in the classroom until age 67.

And it’s all the more shocking to design a poll suggesting that a reasonable alternative is retirement at age 60 — especially when teaching is far from the sort of strenuous job for which early retirement or a shift to another occupation is appropriate.

Now, in the question on priorities, though ranked as a priority by fewer people than chose education, 53% of people did believe that it should be a high priority to reform the state pension systems. But despite this, 62% of Illinoisans supported a change to enable retirement at age 60.

Ow. Ow. Ow.

It makes my head hurt.

Drilling down to various demographic groups, surprisingly, it is the younger demographic groups who supported a reduction in the retirement age most strongly. Here’s the breakdown (page 310 of the full report, as viewed online, or 251 in the printed report pagination):

• Age 18 – 24: 82%
• Age 25 – 34: 72%
• Age 35 – 44: 58%
• Age 45 – 54: 64%
• Age 55 – 64: 58%
• Age 65+: 53%

What accounts for this? Are younger folk simply less informed and more taken-in by the poll’s misleading wording, or are they ageist-, believing that older teachers should leave the classroom?

Remarkably, there was no other demographic split which produced this clear a trend. 63% of men and 61% of women supported an early retirement age. Even splitting out responses by whether they had a family member who was a teacher, there is not a stark differentiation — 63% of those with family members and 59% of those without support this age reduction. Of those who them selves worked in education, 66% supported the age reduction, compared to 61% of those who didn’t.

Lastly, the poll also asked:

“As you may know, teachers in Illinois do not pay into and therefore do not collect Social Security when they retire. Do you think that Illinois teachers should receive their full pension, see their pensions cut some or see their pensions eliminated?”

Again, headache. An appropriate question might have suggested that teachers should in fact participate in Social Security (and Illinois teachers are in the minority, as 35 states’ teachers are in the Social Security system).

But here are the responses: 75% believe they should receive their full pension, even though, mathematically, at least some of these folks must have simultaneously said that they believe that the state pension systems should be reformed. Again, there are only modest differences between teachers and non-teachers, between those who have teacher-family members and those who don’t. But there is a strong divide by sex: women are much more likely to support retaining full pensions, at 81% vs. 69% of men. And, the pattern of support by age isn’t quite as strong, but it’s still clear (page 305 of the report, as viewed online, or 246 in the printed report pagination):

• Age 18 – 24: 85%
• Age 25 – 34: 82%
• Age 35 – 44: 80%
• Age 45 – 54: 70%
• Age 55 – 64: 67%
• Age 65+: 72%

What’s more, the younger folks are less likely than the older ones to respond that they “don’t know.” They may be less-informed, but, if so, they don’t know what they don’t know.

Again, 53% of Illinoisans say that pension reform is an important priority for them, an 8 – 10 (page 83). That’s 55% of women and 52% of men, 53% of teachers, and 53% of non-teachers. And 35% say that pension reform is a top priority — a “10.” But of those who place reform at a 10, only 67% support reducing pensions. And, yes, again, split by age, 43% of 18 – 34 year-olds, vs. 55% of 35 – 59 year-olds, and 60% of 60+ year-olds, consider pension reform an important priority.

What’s more, that pattern is not there, or not as strong, for the “lowering taxes” priority (that’s 63%/70%/70%) or the “balancing the state budget” priority (77%/76%/79%).

All of which means that we — that is, those who support pension reform, who are convinced that it is a necessary step for Illinois to be able to balance its budget and provide essential services, who believe that there is no sleight of hand that can make the issue go away without hard choices — need to figure out how to get our message out to everyone that neither money nor pension benefits grow on trees. And if that takes meme-writing or some viral YouTube or Tik-Tok videos, well, then let’s get on it.

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.

Originally published at Forbes.com on January 28, 2020.

I’ve said it before: Illinois cannot continue kicking the can on its pensions. I’ve said repeatedly (and fellow soapbox-stander Adam Schuster repeated the message in the Chicago Tribune last week) that the state’s spending on pensions is costly, not only in terms of dollar amounts spent — over 25% of the state budget — but in terms of spending that ought to be spent on needs such as services for those with disabilities, the unemployed, students, and so on, but isn’t, because it’s going to pensions instead.

And I’ve lamented that Gov. Pritzker just doesn’t get it, most recently in an interview in which he said that stretching out the funding target was not off the table, and seemed to suggest interest in the CTBA “solution” involving Pension Obligation Bonds and a reduced funding target of 70%.

All of which prodded me to look at the largest of the state pension plans, the Teachers’ Retirement System, in more detail. This plan is, like the other main plans, about 40% funded, and its unfunded liability is 60% of the total. It is also notable in having cut the benefits for the Tier 2 workers most sharply, so that, given the valuation’s assumptions and funding method, the benefit that they accrue is, in total, less than their required contributions. (Direct state employees mostly participate in Social Security so that their pension is a supplement, not a replacement, and the State Universities System has quirks of its own, including a pure Defined Contribution option for new hires.)

And I plowed through the data in order to assess, how reasonable are these funding targets? And what can go wrong?

Now, current legislation dictates that the state must make contributions as a level percentage of pensionable pay, to reach a target of 90% funded in 2045, but the contribution schedule is actually slightly lower than this target now, and jumps up later, so in order to do my own calculations, I replicated (approximately and in a more smoothed manner) the contribution projections. There are also some finer details which I simplified but the basic concepts below should still be clear.

Chart One: what happens if there’s a run of bad luck?

I calculated three hypotheticals, in each case keeping the dollar amount of contributions unchanged:

In the first, I projected asset growth in the case that the 7% assumption turns out to be 6% instead. In the second, I assumed a long-term 6.5% return but also adjusted the liabilities to reflect the changes that’d be needed for a new valuation interest rate. And in the third, I kept the assumptions unchanged at 7%, but dropped the assets immediately by 33% to reflect a market crash.

Not good, eh? A drop to a 6.5% asset return/valuation interest rate assumption is not just reasonable but likely, and this keeps the plan from reaching anything close to its 90% objective — instead, only 62.5%.

Chart Two: Bad luck with a 70% target

The colors shift because I’ve excluded the original target to illustrate the fact that setting a 70% target produces an even greater risk of poor funded status. (Note that the CTBA’s projections look different because of their POB proposal, and recall that I am, well, anti-POB, especially with respect to anyone who promotes pension obligation bonds as a form of “refinancing”.) In the wholly-realistic 6.5% discount rate scenario, it barely budgets from the present funded status, and maxes out at 46.6%.

Chart Three: The effect on the unfunded pension liability, with a 90% target and “bad luck.”

Note that while the funded status for the two low-return scenarios was similar, they diverge in terms of absolute pension underfunding. In the actuary’s current projection, the unfunded liability peaks in 2029 at $86 billion. With a discount rate drop, it peaks at $110 billion in 2037.

Chart Four: Unfunded pension liability with a 70% funding target.

Yes, you see that right, in the scenario in which the plan targets a 70% funded level, and doesn’t adjust its contributions afterwards, the unfunded liability reaches $139 billion for the teachers’ plan alone in 2045, and has not yet peaked and begun to decline.

Are you starting to see my point?

Even with a 90% funding target, the state is at risk of liabilities growing year after year — or (not modeled here) even more money being spent on pension funding rather than daycare subsidies for low-income families, for example. And with a 70% target, of course, those numbers are even worse.

But wait, there’s more!

The final two of the six charts are an attempt to approximate the impact on the pension liabilities of a “repair” of the Tier 2 benefits. As it is, there is effectively no employer contribution. I modeled the impact of a 6% employer contribution (less than a Social Security contribution) and a 9% contribution, such as in a notional account plan (a “cash balance plan” in the private sector), along with the removal of the pay cap that is lowered every year in inflation-adjusted terms. This is approximative, but is a very conservative scenario.

Chart Five: Tier 2 “repairs” with a 90% target

Chart Six: Tier 2 “repairs” with a 70% target

To be clear, these are based on the baseline valuation, with “original” representing the original contributions for the 90% target.

Are these six charts enough? It was tempting to produce “worst-case” scenarios but those would be too easy to brush aside, and even these hypotheticals, intentionally made realistic, should be enough to make it clear that it’s not remotely reasonable to shrug off pension debt as something for the next generation to deal with.

Added next-day comments:

I’m often asked, “how long until the plan runs out of money?” And, in fact, that’s a fair quesiton to ask, with respect for the even-worse-funded Chicago plans, where they’re still making their way up the funding “ramp” and are so poorly funded that if they chicken out and markets have poor returns, they will become insolvent. In an article in September 2019, I explained some of the math; to take one example, if the mayor replaces the scheduled “ramp” increases for the municipal plan with inflatoinary increases instead, the plan becomes insolvent in 2027, even without adding in any “bad luck” scenarios.

But there isn’t as dramatic an answer for the state plans — the 23% vs. 40% funded status ratios do make a difference. Nonetheless, I spent so much time typing up these numbers that I might as well make the most of them: the following table illustrates the insolvency year under the valuation assumptions, and a second scenario in which assets earn only 6% and there is a market crash.

If the state continues its current contribution level — which is, yes, 48% of pensionable payroll, and, yes, that’s a lot — the plan reaches 90% funding under current assumptions and avoids insolvency in the “bad luck” assumptions; however, its funded status is very shaky, staying 27% – 28% during the entire modeling period. And if the state were to drop its contribution down to significantly lower levels, then the plan would end up insolvent in either scenario.

Sadly, though, I doubt this table will persuade any of the politicians who need to be persuaded, many of whom would likely say, if off the record, “what’s wrong with insolvency anyway? We’re paying for the benefits our fathers and grandfathers promised; why not demand the same of our children and grandchildren?”

And one final comment: none of these scenarios take into account another likely issue in Illinois, that of declining population. A contribution of 48% of pensionable payroll directed almost entirely at paying off past debt, will grow to even higher levels, as a percentage of pensionable payroll, if the number of teachers declines over time in line with the number of residents. That’s not pretty, either.

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.

Originally published at Forbes.com on January 22, 2020, and still relevant 4 years later.

Once more, from the top: here is why public pension reform matters.

In December, I cited a report by the Chicago Tribune that, due to lack of funding, 20,000 adults in Illinois with cognitive disabilities were on a waitlist for group homes or day programs, waiting seven years or longer, due to lack of funding.

Earlier this month, the Trib reported that, due to the end of work-requirement waivers for SNAP/food stamps, social services agencies were scrambling to place recipients in job training or volunteer programs.

Here’s a key excerpt:

“Basic processes to help with the administrative burden have yet to be put in place, state caseworkers say. For example, there is no efficient way to report volunteer or training hours completed outside of state-sanctioned programs, so people will have to do so monthly in person at benefits offices, where waits can stretch longer than two hours, said John Mitchell, an officer with AFSCME Local 2858, which represents caseworkers in northeast Cook County.

“Understaffed benefits offices also haven’t prioritized connecting people with employment services as they’ve dealt with a backlog for processing SNAP applications that was so bad that the federal government threatened to suspend funding, Mitchell said.”

Last week, the Tribune reported that the University of Illinois system was raising its tuition after having frozen it for the past six years. The increases are modest, all things considered, but here is the key paragraph:

“Residents long have complained that U. of I., the state’s flagship, is too expensive and does not offer enough financial aid. University data shows all three University of Illinois schools remain among the priciest in their peer groups, even though other schools raised their prices during Illinois’ tuition freeze.”

And this week, Chicago Mayor Lori Lightfoot announced plans for an anti-poverty summit “to marshal resources from the city, business community and philanthropic groups to rescue Chicagoans ‘trapped in the throes of generational poverty,’” as reported at the Chicago Sun-Times. How’s she funding this?

“The $250 million earmarked for Lightfoot’s ‘Invest South/West’ program is ‘re-prioritized money already in the pipeline’ from tax increment financing; the moribund $100 million Catalyst Fund; the Small Business Improvement Fund; and the share-the-wealth Neighborhood Opportunity Fund generated by developers paying a fee for permission to build bigger and taller buildings downtown.”

But at the same time, the city of Chicago issued its new “refinancing” bonds, in which the city found $210 in cash up front due to lower rates — and, it turns out, those rates were not favorable solely because of a lower interest rate environment, in general, but because the city legally committed the right to future sales tax revenue it has coming from the state, so that investors will receive their money even if the city goes bankrupt and has to default on other loans and cut city services. And it was only possible to do so because of a last-minute back-room provision inserted into the 2017 budget in the literal last hours of the legislative session. (See this Wirepoints report for details.)

The list goes on: insufficient spending on childcare subsidies for low/moderate-income parents . . . insufficient state spending on education, placing the burden on local property tax payers . . .

These are all areas where there is widespread agreement that the State of Illinois falls short.

At the same time, of course, however eager the Democrats currently in power in Illinois (that is, controlling the governorship and State House and State Senate, with supermajority control over the General Assembly, as Illinois labels it) are to raise taxes through a graduated income tax, skeptical voices caution that it simply isn’t possible to raise taxes however much you’d like to boost spending however much you’d like — even if you claim those increases will be limited to “the rich” (which is always defined as “everybody with more money than your audience at any given point in time). Not only will it raise the ire of those taxpayers, but increasingly many of them will find somewhere else to live.

And, yes, one would like to imagine that there’s an easy solution to these woes, whether it’s the perennial pledge to cut wasteful spending or the dream to find new sources of free money (in Illinois’ case, pot and gambling). But Illinois politicians have believed in the promise of free lunches for far too long.

And this is why public pension reform matters: 25.5% of Illinois’ spending is going to its state pension funds. Once the city has made it up to the top of its funding ramp, it will be spending 18% of its revenue on pension contributions, assuming its revenue projections are not overly optimistic. (See here for the contribution schedule — $2.2 billion in 2022 — and here for the revenue projection which I’ve increased by two years’ worth of inflation.) And these percentages could go higher if the state and city are forced to unwind the “Tier 2” pension cuts as a result of court cases or political pressure.

It should be obvious: pension reform is not about trying to fleece public employees and retirees.

Instead, it’s quite simple: had the state not promised more in pension benefit accruals each year than they funded through contributions at the time, that money would be available to spend on all these needs. And if Gov. Pritzker, the General Assembly, Major Lightfoot, and public union leaders were to forge a consensus for an amendment which would permit pension reforms, some portion of that 25.5% and the 18% would be freed up to spend on these needs.

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.