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Illinois Teachers Beware: Your Pensions Aren’t Safe

In a country where unscrupulous union bosses have colluded with cowardly politicians to promise — but not to fund — high pensions to public employees for year after year, Illinois stands out.

Specifically, the Illinois Teachers Retirement Fund is one of the country’s worst funded pension funds. According to accountants — who use softer methods to measure the health of public funds than they do of private pensions — teacher pensions in Illinois are only 45 percent funded — the fund is expected to be able to pay less than half the pensions Illinois politicians and union heads have been promising for years.

$44 billion in promised benefits isn’t going to be there unless something magical happens.

Actually, as this article in The points out, it’s even worse. The fund’s trustees have “assumed” a totally unrealistic rate of return: they are pretending to believe that the fund’s investments will return 8.5 percent per year.

How crazy is that? In their defense, it can be argued that this is just projecting historical experience: in the last 30 years, investments actually achieved a 9.3 percent rate of return.

But those were highly unusual years. The two longest US economic expansions in history came back to back. While we could all get lucky and have the same kind of run in the next future years, most analysts don’t think anything like these results are possible. New York’s Mayor Michael Bloomberg, a man who knows something about finance, says that assuming an 8 percent rate of return is “laughable” and “absolutely hysterical.” In fact, any assumptions over 7 percent are “indefensible.”

Unfortunately, trustees of public pension funds often have good reasons to overstate future returns. Both the politicians and the union leaders often seem more interested in making the numbers look pretty than in making sure that the funds will actually be able to honor their promises.

It is, in other words, a scam. Both the politicians and the unions want to fool people. They want teachers to think they have secure pensions and they want taxpayers to think that these big pension promises won’t cost them much money. Assuming unrealistic rates of return allows them to square the circle: they can promise big pensions without raising taxes to pay for them right away.

Under growing pressures from the forces of reality (aka the bond rating agencies who increasingly believe that years of misgovernment have made Illinois a bad credit risk), the trustees now, we are told, are considering ratcheting back their insane and even fraudulent assumptions about future returns to something merely irresponsible and wrong: 7.75 percent. If somebody promises you 7 percent, says Bloomberg, make sure their name isn’t Madoff before you give them the money.

The other problem with assumed high rates of return is that in order to meet these ambitious targets, fund managers are drawn toward high risk investments. Pension funds generally should be conservatively managed; the casino is no place for grandma’s nest egg. Prudent, thoughtful trustees only thinking about the welfare of pensioners would be looking for ways to minimize risk rather than driving pension funds toward aggressive, go-go bets on the latest hot derivative products from Wall Street.

Already Illinois lawmakers are looking for ways to chip away at the disingenuous, unfunded promises their predecessors made teachers and other employees in past years. They promised too much, failed to set aside the money to pay for it, and now they have to claw the money back from retirees.

The only real solution to problems like this is a fundamental reform of public sector pensions. Where defined benefit pensions remain, truly independent trustees need to be appointed who don’t care anything about the credibility of union leaders and politicians — their sole and paramount concern should be the welfare of current and future recipients. Both the politicians and the unions will hate this because it means they can only promise benefits they are actually ready to pay for, but in the long run, both taxpayers and state employees will benefit from honest and independent pension management.

In the meantime, if you are a teacher in Illinois, you need to know that your pension is not safe and that those who are managing the issue are not putting your welfare first. The political establishment in Springfield wants your pension managers to assume unrealistic rates of return to help make the state budget look pretty.The politicians don’t care if that means that you bear big risks down the road; it makes their lives a little easier now and that is what, apparently, most of them want.

If you aren’t doing this already, you should open an IRA and look at other ways to save more for a future that is less secure than you think. It’s the only smart thing to do. If an economic miracle occurs and the state pension funds earn those high rates of return the politicians are projecting, you’ll just be that much better off down the road. You’ll have a nice pension and some private savings too.

But if the law of gravity actually prevails, and the pension fund and the state budget implode, you will have a cushion to protect you when the lawyers and bankruptcy courts get to work on reducing the pension you were promised to something that the state and local school districts can afford.

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  • Anthony

    “The only real solution to problems like this is a fundamental reform of public sector pensions….” Good luck with that aspiration – too a large extent morals remain at core of Illinois public institutional problems (corruption, venality, self-serving, clientelism, etc.).

  • Glenn

    But what about former Chicago mayor Richard M. Daley’s pension? Is it safe? From today’s WSJ:

    [QUOTE] Legislators in dozens of states have crafted retirement perks that are even more generous than those of their government employees. As states and municipalities confront the crushing cost of pension promises, these elected officials are being asked to rein in a system they benefit from.

    Illinois residents recently got a glimpse of the double standard at work when they learned how former Chicago Mayor Richard M. Daley had gamed the system. In early 2011, as he was ending his 22-year tenure, Mr. Daley complained of the growing cost of government and warned that rich pension benefits for public workers might sink Chicago’s budget. But he didn’t mention that he had exploited the system he was criticizing to boost his own final retirement package to $183,000 a year.

    According to the Chicago Tribune, Mr. Daley hit the jackpot using an obscure loophole in Illinois pension law. As a former assemblyman, he is allowed by the retirement plan to collect both a legislative and mayoral pension. What’s more, while mayor he was allowed to re-enter the state legislature’s pension system for a month so that his legislative pension would ultimately be based not on his small legislative salary of $17,500, but on the much larger salary he earned as mayor. The result: He now collects an additional $50,000 a year in retirement pay. [END QUOTE]

  • Jack

    My guess is that the pension shortfall woulc be easily made up if union dues were spent on pensions and not on politicians.

  • SteveMG

    Okay, Via Media has shown conclusively (to me) that the Blue State Model is done for. The math is too much to overcome.

    But what about the Red State Model? How will that work?

    It seems to me that we’re caught between the reactionary blue staters who have mostly ignored this crisis (but are slowly realizing that they can’t continue to do so) and the radical red staters that go too far, too fast. Their goal is to destroy as much as it is to reform.

    We need a purple model that reforms but doesn’t destroy in the sense of Macaulay’s words that you “reform, that you may preserve.”

    I don’t see it out there.

  • Kenny

    Do not feel sorry for any unionized public school teacher. They have been grossly compensated for years due not to any outstanding teaching skills on their part but due solely on their thuggish union activity.

  • cubanbob

    The best thing President Romney and a republican congress can do it make it explicitly clear the US Government will not bail out the pension funds and to disabuse any thought of an an implied guarantee of the full faith and credit of the United States. That will strip any illusions of the unions and state politicians of their being a deus ex machine from Washington. Then they will have no choice but to deal realistically with the problem.

  • njcommuter

    There may be a path to public pension reform, but it will require public officials to actually put the good of the exchequer ahead of their own good:

  • Deeg

    As an Illinois resident, with a parent living off this pension (total draw: 32k/year) it is quite simple. If they capped the total amount you could draw out (eg at 40-60k/year), but made contributions contingent on percent of salary (which harms the big administrators, boo hoo) the system could survive if it was genuinely independently managed. Of course, it won’t be, and the politicians will gladly grab whatever surplus it can get away with under a new normal for present-day spending projects, which means that it would be underfunded even further for the lesser payout, etc. Which is why I expect I will have to financially support a parent once the funds run out, but cannot fathom why the younger teachers aren’t screaming for their own 401k plans instead…

  • Jeffersonian

    As someone who works (but doesn’t live) in Illinois, the contempt I feel for its legislator class is bottomless. We recently saw a 67% increase in our state income tax rate. Newly larded up with this tax pelf, Springfield immediately increased spending by a couple of billion dollars.

    These are people not connected to reality. They’re all hoping that they aren’t the ones standing when the music stops.

  • gorgo

    Decades of corruption have made it structurally impossible for politicians in Illinois to even name the problem, much less fix it, assuming they’d ever be inclined to try. But someday that system will collapse, as it must, and the state will then step in. At that point, look for riots in Springfield and Cook Co. that make last year’s riots in Wisconsin look like a square dance.

  • William1

    If you aren’t doing this already, you should open an IRA….

    Well, an IRA also has counter-party risks:

    (1) that the Federal Government might force IRA holders into a Government-Sponsored Annuity (per Teresa Ghilarducci’s currently stymied plan), and

    (2) the Federal Government can alter the tax rate of the withdrawn monies; that is, at this point in time you might be anticipating a certain tax rate on your 401K in retirement, but that tax rate could be changed!

    Of course, the risks of the Illinois Teachers Retirement Fund are much greater than the counter-party risks of a 401K.

    The only sure way to secure retirement account is to have your own nonqualified savings, in my opinion.

  • Brian Crouch

    It bears repeating daily: something that cannot go on forever, will not.
    The worst part of this malfeasance: those responsible for the unrealistic pension promises will not be held to account, but any leaders who take appropriate steps to reverse the damage will be demonized.

  • jms

    A couple of points not addressed by the article. First, Illinois state pensions are guaranteed by the Illinois Constitution, so reducing existing pension obligations is nearly impossible. Second, many if not most of the Illinois pension plans have cash-out options. Some of the more generous plans, like the SURS portable plan, allow anyone in that plan to take out all of their contributions, with interest, and 1:1 matching funds from the government and move it into another pension system. So even if the state went to the effort to cut existing pension obligations, it would take a long time because of the State Constitutional guarantee, and there would be a run on the pension system as retirees cashed out their pension with matching funds and interest that would easily bankrupt the state. The retirees and vested pensioners have a financial gun aimed at the government’s head, which is a big reason why Illinois has little chance of any sort of state pension reform. Their only real option is to reduce pensions going forward. It’s quite a mess that’s been a long time in the making.

  • thibaud

    Very interesting that Mr Mead’s latest on pensions abandons the standard Via Meadia flapdoodle about a supposed “Blue Social Model,” instead focusing the discussion on issues of governance and quality of pension management. This is progress.

    Again, this is not an issue of more or less government but simply BETTER government.

    Our cousins in Canada and other advanced, heavily interventionist (what the old Mead called “blue”) nations – most notably Holland – have professional, expert pension management and solvency ratios that are vastly higher than ours.

    And yet Canada, Holland, Germany, Sweden etc have

    – universal health insurance that works well and that costs a fraction of what ours costs on a per-capita basis;

    – significantly lower unemployment rates than “red” America

    – comparable or higher GDP growth than “red” America.

    Solvent pensions and robust economic growth co-exist nicely with a strong safety net and universal health insurance in advanced nations that are culturally similar to us.

    It’s refreshing to see Mr Mead backing off from his ludicrous “Blue Model” canard that presumes the opposite.

  • thibaud

    Re #13 – interesting points. Nice to see fact-based and expert additions to this discussion.

    The pension benefit guarantees that you reference, if I understand correctly, resulted from the rewriting of the Illinois State Constitution in 1970, which itself was pushed, IIUC, heavily by the Illinois Republican Party that for the two years prior dominated the state government, with majorities in the legislature and a Republican governor Richard Ogilvie.

    Note also that the issue of underfunded pensions is not a recent one. It is a perennial issue in US politics, which is IIUC why ERISA became the law of the land, and exists under Republican-dominated legislatures/governors as well as Democratic ones.

    In fact, nearly all of Illinois’s major public pensions as of 1970 were no better funded than the contemporary fund that Mead references. See p. 12 of this study,

    “At the time of the [Illinois Constitutional] Convention [in 1970], the Pension Laws Commission reported that the General Assembly Retirement System (GARS) was 68.5% funded, while the State University Retirement System (SURS) was 47% funded.

    “The remaining [Illinois] state-funded retirement systems had the following funding percentages [in 1970]:
    State Employees Retirement System (SERS) 43%;
    Judicial Retirement System (JRS) 32.3%; and
    Teachers Retirement System (TRS) 40%.

    “[In 1970], the five State pension systems had an aggregate funding ratio of 41.8%. By comparison police and firemen pension funds were respectively only 33.8% and 19.1% funded.

    “As noted at the outset, the five systems currently have a combined funding ratio of 39%….”

    /end quote

    The Economist shows how that very “blue” nation, Canada, leaves the US in the dust when it comes to professional, non-corrupt, competent public pension fund management:

    Again, this is not a partisan issue. Reforming pension management does not entail shredding the safety net, gutting services or other “starve-the-state” Paul Ryan-style lunacy.

  • Jim Warren

    The teachers pensions may be under-funded, but the Teacher’s Union Management’s retirement fund is full to the brim.

    The unions have become the robber-barons they were formed to defend their members from. Same as it ever was.

  • richard40

    comment 7, njcommute

    I read your link,

    It is an exellent proposal. It basically amounts to converting all public defined benefit pensions to 401k’s, with the state paying a large match. This has the following great advantages:

    1. The gov has to turn over the money to fully fund the pension now, rather than when the worker finally retires, so they have to pay for their pension promisses now, rather than promise now, pay later. This might make the current states buget situations worse, forcing benefit cuts, spending cuts, or tac hikes, but to me that is good. No more false promise now pay later scams.

    2. The person themselves determines how risky their investment options are, not some politically motivated, politically appointed, state burocratic hack. You would probably need some prudence limits on investment options, since you would not want somebody blowing their whole pension on Enron, penny stocks, or derivitives, but making a standard broad based stock index or bond mutual fund an allowable option would keep risk tolerable, and is in many ways better than some of the investments that state fund trustees make now.

    3. The person will not have to worry about the state cutting off their pension if the state goes broke, it will be their own money, and not belong to the gov. Also, if you have a reasonable vesting period, say 10 yrs, you could even get something out of your state pension if you leave gov service early.

    4. Critics will charge that the pensioners would be subject to too much market risk, but that is not true. The person can also choose low risk defined benefit anuities from their investment firm, like the constant anuities you can buy today from life insurance companies now, to mostly eliminate their risk. They get less returns, but also much less risk.

    5. It also means gov workers also have a reason to hope the overall economy does well, instead of thinking I got mine, who cares about the rest of you.

    6. The money the state is paying to support pensions ends up getting ivested in the private economy, thereby generating added private investment and growth, but without the gov being able to attach strings on that investment, or direct it to their political friends, like solyndra.

    7. State budgets will not get blown up in future yrs from unfunded pensions, since any pension benefits will have already been paid for.

    Of course the gov union hacks would fight this tooth and nail, because they could no longer promise unfunded benefits to their members. And their retired members would no longer depend on the union, and the politicos they support, to protect their pensions, they would own them.

  • Ari Tai

    re: Il. constitution, right-of-withdrawal.

    Isn’t the same thing true in California, at least for teachers, if not all state government pensions?

  • njcommuter

    comment 17, richard40:

    Note that the proposal does not only apply to unionized employees but to ALL employees, including elected and appointed officials. There might be some problems with judges (solution: blind trusts?) but by including the bosses and writing it into the state constitution you promise the little guy that he’s not getting the short end of the pension fund.

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