State and local pensions in the US are currently in the middle of their gravest yet, but many people — deceived in many cases by union leaders and politicians trying to keep the scam operating for just a little while longer — continue to deny that there is even a crisis. Alarmingly, this includes a number of pension managers, who continue to insist that nothing is wrong despite repeated, obvious warnings to the contrary.For a time, one of the most outspoken skeptics—possibly the most outspoken—was Dick Ingram, director of the Teachers’ Retirement System of the State of Illinois. As the Wall Street Journal reports, Ingram made a habit of lambasting critics who worried that pensions were in trouble and claiming that the pension he was charged with managing was in no danger whatsoever.But now that Ingram has studied that data more closely, even he is finally sounding the alarm. The Illinois teachers’ fund is in dire trouble, and the plan’s problems will become more apparent as the fund moves forward with plans to reduce its expected rate of return from 8.5 percent (one of the highest in the nation) to a still very optimistic and aggressive 7.95 percent. The Journal follows Ingram’s change of heart:
During his first year on the job, Mr. Ingram and other officials at the fund blasted critics in letters to Illinois and national newspaper editors.One letter accused a critic of scaring teachers into thinking their pensions could be cut.But last fall, Mr. Ingram said he had a change of heart when he began studying the state’s budget problems.He became persuaded that it was highly likely that the state at some point wouldn’t be able to make its required payments to the pension plan.In February of this year, he sent a confidential memo to the pension fund’s board that later became public, warning that the state’s unfunded pension liability was “practically unmanageable.”
Looking at the data, discounting the expected rate of return seems like a smart decision. Although the past 30 years have seen average annual returns of 9.3 percent, the past ten years paint a much bleaker picture, averaging well below the target. With the economic future still uncertain, to put it mildly, the near future will probably look more like the past decade than the preceding boom years. Meanwhile, the plan’s funding sits at a paltry 46 percent of expected liabilities, and with Illinois state finances circling the drain and ratings agencies contemplating downgrades there won’t be much help from the state.Actually, the fix proposed is only the beginning. Ingram and company are still not facing the music; the new rate of return is still well above what most investment managers think is reasonable, and is twice the level that private pension funds are legally required to use.We hope Mr. Ingram continues his pilgrim’s progress and begins to fight in public for a more realistic set of numbers. The sooner managers and politicians are forced to confront the problem, the less painful the fix will be. Teachers relying on these pensions for their retirement, however, should be watching closely. At this point, there is no guarantee the funds will still be there when they need them.The pension meltdown across the country is both a scandal and social disaster. Collusion between politicians and union leaders has put the retirement security of millions of Americans at grave risk. (Remember, for most government agencies in the US, government pensions are instead of Social Security payments, not a supplement to them.) Working to put these pensions on a sustainable basis is going to bring a lot of pain to a lot of people, retirees and current workers included, but it’s something that needs to be done.