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Post by macrockett on Apr 25, 2010 22:32:31 GMT -6
www.nytimes.com/2010/04/25/us/25cncdebt.html?ref=us&pagewanted=printChicago News Cooperative April 23, 2010 Pension Financing Shortfall Is a Threat on the Horizon for State By DAVID GREISING In this Tea Party age, when thousands of people demonstrate nationwide against high taxes, the 15,000 people who rallied in Springfield last week tried a change-of-pace chant. “Raise My Taxes!” they shouted at the television cameras and any lawmakers who happened by. The clamor over the state’s estimated $13 billion budget deficit —and concerns over jobs and spending that prompted the protests — tends to drown out discussion of an issue that economists identify as perhaps the biggest long-term threat to Illinois’s financial health: The state’s shortfall of at least $61 billion in pension funding and the lack of any realistic plan to catch up. In fact, the state’s pension troubles are even more dire than the official figures would indicate, according to a review of pension data and other economic studies by the Chicago News Cooperative. Illinois, which sold $3.47 billion in securities so it could make its required contribution to pension funds this year, is laying plans to sell at least $4.6 billion more to meet its obligations for fiscal 2011 — a move that is likely to jolt financial markets and many investors who thought years would pass before the state tried another sale of notes to cover its pension costs. Taxpayers ultimately will bear the burden as the need to pay for the bonds strains the state budget and threatens spending in other areas.
To date, the state has provided only about 54 percent of the money necessary to meet its projected long-term obligations, according to a study by the Pew Center on the States. But economists who have studied the state’s figures say Illinois’s true obligation to retirees most likely is far larger than official estimates.
The state legislature’s Commission on Government Forecasting and Accountability has put the shortfall at $61 billion. But a group of business leaders led by the Civic Committee of the Commercial Club of Chicago estimates the actual figure at $79 billion, and Joshua D. Rauh, a Northwestern University economist and an expert on how states finance their pension systems, offers a much higher estimate: $166 billion in the largest three funds alone.
The fight over such a long-term problem has immediate consequences for the state. Illinois is borrowing billions of dollars to catch up on its pension shortfall, and the extra borrowing adds to the state’s debt burden. Pensions are not the only area in which the state is failing to meet its long-term commitments to current and former employees. Illinois is $40 billion behind in covering retiree health care costs. In order to eliminate the shortfall — which had gone unnoticed because the legislature did not require reporting by state health plans until recently — taxpayers would have to lay out at least $550 million a year, according to Moody’s Investors Service.
In the past, the pension and health-care shortfalls were largely overlooked by Illinois taxpayers and politicians. But not any longer: the state’s pension problems, in particular, have become a major concern among investors, and a potentially potent issue as Springfield legislators try to agree on a state budget.
“Illinois is clearly at the top of the list in terms of states that have a funding problem for their pensions,” said Susan K. Uhran, managing director of the Pew Center on the States. In a nationwide study, Pew found that Illinois’s 54 percent funding of pension obligations is lower than any state in the nation.
Ted Hampton, a Moody’s analyst, said, “Not only do they have an under-funded pension relative to other states and a very weak financial situation, but they are struggling to make their statutorily required contributions to the pension plans, and they don’t have the revenues to do it.”
Moody’s downgraded Illinois’s credit rating in December and assigned a “negative outlook” in late March to a proposed state bond offering, in large part because of the pension problems. An upgrade announced earlier this year was the result of a change in Moody’s rating system, not an improvement in the state’s fiscal condition.
Laurence Msall, president of the Civic Federation, a tax policy and government research organization, said he was startled when he heard recently from David Vaught, the state budget director, that Gov. Patrick J. Quinn plans to issue up to $7 billion in new debt instruments, at least in part to pay for next year’s $4.1 billion pension contribution.. “This is both fiscally irresponsible and very expensive,” Mr. Msall said. Illinois first issued pension bonds in 2003, when former Gov. Rod R. Blagojevich pushed through a $10 billion bond issue, the largest such deal ever, purportedly to help the state catch up on pension contributions. But nearly a quarter of the proceeds went to fill gaps in the state’s budget. By 2007, the state’s unfunded pension liability had grown back to the level it had hit prior to the $10 billion bond sale. Now, the state’s taxpayers must pay interest of more than $540 million a year on those bonds and outlays will escalate sharply in coming years as the state must repay the borrowed funds. Contributing to Illinois’s pension troubles is a tendency to be overly optimistic when budgeting how the pension-fund managers will perform. Today, Illinois is one of only five states that budgets for an investment return as high as 8.5 percent. Over the last 10 years, four of the state pension funds — those representing teachers, state employees, judges and state lawmakers — have averaged only a 3.89 percent return. Data for the state’s university employees, representing about one-fifth of the state pension funds, could not be obtained. For the four pension funds, the returns on investment over the last decade have come in at less than half the forecasted amount — a shortcoming that could have huge ramifications over time as state taxpayers are forced to make up the difference. Even a small change in investment returns can have a huge impact on the long-term financial health of the state pension plans. But a recent change in the way Illinois reports investment results has shaken confidence in the state’s estimates. A law passed last year allows the Commission on Government Forecasting and Accountability to report average investment results over a five-year period when estimating the state’s pension shortfall. The technique, called “asset smoothing,” can have a large impact after a year like 2009, when the five state pension funds as a group lost 20 percent. Some pension watchers are crying foul over the practice. The issue caused a rift last year on the state’s Pension Modernization Task Force, prompting a group led by the Civic Committee to issue a dissenting report, in part because of concerns that asset smoothing was enabling the state to provide misleading estimates of Illinois’s unfunded pension liabilities. Business leaders wrote in their report that asset smoothing “cannot possibly justify false reporting” of the state’s pension shortfall. Instead of the $61 billion official figure, the dissenting group put the unfunded liabilities at $79 billion. In 1995, the state began a 50-year plan to catch up on its legal obligation to make good on pension commitments to state employees. The target: 90 percent financing of the state’s pension plans by 2045. Since then, the state has taken some form of “holiday” on meeting its obligations under the plan in at least four separate years. And required payments are expected to rise sharply next year because fiscal 2010 marked the end of a 15-year ramp-up phase toward much steeper annual contributions. Last month, the legislature adopted a program to permanently slow the growth of the state’s pension liabilities. The program raises the retirement age to 67, and caps the top pension-eligible salary at $106,800. Instead of the guaranteed benefits offered to current employees, new hires will be offered only a defined-contribution pension plan. Mr. Rauh, from Northwestern, quickly dubbed the new law Illinois’s “irrelevant pension reform.” Despite the change, Mr. Rauh estimated, Illinois’s three largest pension funds will run out of money by 2018 if no further reform measures are enacted. Such an event, Mr. Rauh said, “threatens to bankrupt the state on a 10-year horizon.” The reforms do not go far enough, Mr. Rauh added. For example, current employees have earned the pension benefits they have accrued up to this point, but it would be legal, he said, to reduce pension benefits for any future work. Without major reform in the near future, Mr. Rauh said, the state could face serious financial trouble. “How many years,” he said, “before the capital markets say, ‘Geez, these guys are close to running out of money.’ ”
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Post by doctorwho on Apr 26, 2010 6:24:44 GMT -6
online.wsj.com/article/SB10001424052748704133804575198141369372302.html#printModeAPRIL 22, 2010 New Jersey Rebellion
A school budget revolt at the polls.
School board elections in New Jersey are normally low-turnout affairs where voters accede to higher education spending. But Tuesday's election results bought a populist revolt that could be a sign of the backlash to come in California, New York and other states where lawmakers are unwilling to change their profligate ways.
To address New Jersey's $11 billion budget deficit, Republican Governor Chris Christie wants to reduce state aid to local school districts, and he urged voters to reject local school budgets in the vast majority of districts where teachers have not agreed to a one-year pay freeze. Predictably, he's earned the wrath of the New Jersey Education Association and its political allies. But New Jersey voters signaled their support for the Governor by defeating 315 of 537, or 59%, of budgets on the ballot this week.
In a typical year, more than 70% of school budgets are approved; the last time voters rejected a majority was 1976. As remarkable was turnout, which was way up Tuesday, rivaling Presidential elections in some counties. Overall, 24% of registered voters turned out, up from 13.4% last year. According to New Jersey School Boards Association data, turnout hadn't topped 18.6% in 27 years.
Garden State residents pay the highest property taxes in the country, and they are finally saying no to getting soaked. New Jersey is a mainly suburban state, so the rebellion is especially significant as a warning to Democrats, who had come to believe that they have a lock on wealthier northern suburbs because of cultural issues and environmentalism. Suburban voters are fed up with the spending and taxes, even for the sacrosanct subject of education. The election results are obviously a big setback for the Democratic Party-government union alliance that has ruled Trenton for the past decade. So far, Governor Christie is winning the spending debate. The lesson for other governors is that opposition from public-employee unions is not insurmountable if you can articulate to voters what's at stake.
let's hope this carries over to here also- wait until enough people get a load of the spending that has gone on here- in many cases needlessy... I have a feeling the mood of the country is going to have people actually listening to candidates this time- especially those who recap the last few years the end of apathy will be the end of BAU here |
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Post by asmodeus on Apr 26, 2010 6:28:41 GMT -6
Those people are more than welcome to make out a check to the Illinois Department of Revenue. But we all know they didn't mean raise MY taxes but rather raise EVERYONE'S taxes.
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Post by macrockett on Apr 26, 2010 19:35:08 GMT -6
online.wsj.com/article/SB10001424052702303695604575181983634524348.html#printModeAPRIL 27, 2010
Pension Bomb Ticks Louder
California's public funds are assuming unlikely rates of return.The time-bomb that is public-pension obligations keeps ticking louder and louder. Eventually someone will have to notice. This month, Stanford's Institute for Economic Policy Research released a study suggesting a more than $500 billion unfunded liability for California's three biggest pension funds—Calpers, Calstrs and the University of California Retirement System. The shortfall is about six times the size of this year's California state budget and seven times more than the outstanding voter-approved general obligations bonds.The pension funds responsible for the time bombs denounced the report. Calstrs CEO Jack Ehnes declared at a board meeting that "most people would give [this study] a letter grade of 'F' for quality" but "since it bears the brand of Stanford, it clearly ripples out there quite a bit." He called its assumptions "faulty," its research "shoddy" and its conclusions "political." Calpers chief Joseph Dear wrote in the San Francisco Chronicle that the study is "fundamentally flawed" because it "uses a controversial method that is out of step with governmental accounting standards."
Those standards bear some scrutiny.
The Stanford study uses what's called a "risk-free" 4.14% discount rate, which is tied to 10-year Treasury bonds. The Government Accounting Standards Board requires corporate pensions to use a risk-free rate, but it allows public pension funds to discount pension liabilities at their expected rate of return, which the pension funds determine. Calstrs assumes a rate of return of 8%, Calpers 7.75% and the UC fund 7.5%. But the CEO of the global investment management firm BlackRock Inc., Laurence Fink, says Calpers would be lucky to earn 6% on its portfolio. A 5% return is more realistic.
Last year the accounting board proposed that the public pensions play by the same rules as corporate pensions. But unions for the public employees balked because the changed standard would likely require employees and employers to contribute more to the pensions, especially in times when interest rates are low. For now, it appears the public employee unions will prevail with the status quo accounting method.
Using these higher return rates for their pension portfolios, the pension giants calculate a much smaller, but still significant, $55 billion shortfall. Discounting liabilities at these higher rates, however, ignores the probability that actual returns will fall below expected levels and allows pension funds to paper over the magnitude of their problem.
Instead, the Stanford researchers choose to use a risk-free rate to calculate the unfunded liability because financial economics says that the risk of the investment portfolio should match the risk of pension liabilities. But public pensions carry no liability. They're riskless. That's because public employees will receive their defined benefit pensions regardless of the market's performance or the funds' investment returns. Under California law, public pensions are a vested, contractual right. What this means is that taxpayers are on the hook if the economy falters or the pension portfolios don't perform as well as expected.As David Crane, California Governor Arnold Schwarzenegger's adviser notes, this year's unfunded pension liability is next year's budget cut—or tax hike. This year $5.5 billion was diverted from other programs such as higher education and parks to cover the shortfall in California's retiree pension and health-care benefits. The Governor's office projects that, absent reform, this figure will balloon to over $15 billion in the next 10 years. What to do? The Stanford study suggests that at the least the state needs to contribute to pensions at a steadier rate and not shortchange the funds when markets are booming. It also recommends shifting investments to more fixed-income assets to reduce risks. But what the public-pension giants find "political" and "controversial" is the study's recommendation to move away from a defined benefits system to a 401(k)-style system for new hires. Public employee unions oppose this because defined benefits plans are usually more lavish, and someone else is on the hook to make up shortfalls. Calpers and Calstrs are decrying the Stanford study because it has revealed exactly who is on the hook for all of this unfunded obligation—California's taxpayers.
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Post by macrockett on May 4, 2010 19:07:41 GMT -6
latimes.com/news/opinion/commentary/la-oe-kaus-20100503,0,1456853.story
latimes.com
America's lead weight
Unions have benefited the country, but changes in the economy have made mainstream unionism itself an impediment to growth.
Robert "Mickey" Kaus
7:55 AM PDT, May 3, 2010
Do you have to love labor unions to be a good Democrat? That was the question raised last year by the unpopular bailouts of unionized Detroit automakers. It's been raised again this year by California's budget crisis, created at least in part by generous pensions for unionized public employees. I think the answer is no. It's time for Democrats, even liberal Democrats, to start looking at unions and unionism with deep skepticism.
I don't mean we should embrace the right-wing view that unions are always wrong. Unions have done a lot for this country; they were especially important when giant employers tried to take advantage of a harsh economy in the last century, not only to keep down wages but to speed up assembly lines and, worse, force workers to risk their lives and health. If you think about it, unions have been the opposite of selfish. By modern standards they've been stunningly altruistic, lobbying for job safety rules and portable pensions and Social Security and all sorts of government services that, if they were really selfish, they might have opposed, because if the government will guarantee that your workplace is safe and your retirement is secure, well, then you don't need a union so much, do you? HMMM, NOT SURE I BUY THIS STATEMENT...
At the same time unions were winning government protections, changes in the economy were making mainstream unionism itself an impediment to growth. We are no longer living in a World War II world in which big, slow-moving bureaucratic organizations are the engines of prosperity. Only fast-moving, flexible organizations prosper today. Technology changes too rapidly. Firms have to be able to make snap decisions: expand here, contract there, change the way they work every day. That was the lesson of Japan — how 1,000 little improvements in productivity can add up to a big advantage.
But our union system is stuck in 1950, when it was considered a glorious achievement to generate thick books full of work rules that restricted what could be changed. At some automobile plants, every position on the assembly line was considered a distinct job classification. You wouldn't want an "Installer Level II" to have to do the job of an "Installer Level I," would you? Then came the competition from Japanese factories, where employees spent their time building cars instead of work rules, and there was only one job classification: "production." If something needed doing, you did it. Is it any wonder the Japanese cleaned Detroit's clock for two decades?
Keep in mind that Detroit's union, the United Auto Workers, is one of our best. It's democratic. It's not corrupt. Its leadership has often been visionary. Yet working within our archaic union system, it still helped bring our greatest industry to its knees. And the taxpayers were stuck with the bill for bailing it out, while UAW members didn't even take a cut of $1 an hour in their $28-an-hour basic pay. How many Californians would like $27-an-hour manufacturing jobs? Actually, there was a good auto factory in California, the NUMMI plant in Fremont. It got sucked under when GM went broke. Those 4,500 jobs are gone.
Yet the answer of most union leaders to the failure of 1950s unionism has been more 1950s unionism. This isn't how we're going to get prosperity back. But it's the official Democratic Party dogma. No dissent allowed.
Government unions are even more problematic (and as private sector unions have failed in the marketplace, government unions are increasingly dominant). If there are limits on what private unions can demand — when they win too much, as we've seen, their employers tend to disappear — there is no such limit on what government unions can demand. They just have to get the politicians to raise your taxes to pay for it, and by funding the Democratic machine they acquire just the politicians they need.
No wonder that in our biggest school systems, it's become virtually impossible to fight the teachers unions and fire bad teachers. The giant Los Angeles Unified school system, with 33,000 teachers, fires only about 21 a year, or fewer than 1 in 1,000, according to the findings of an L.A. Times investigation. Now either Los Angeles has the greatest teachers in the world or something is very wrong. Talk to parents and you'll know the answer.
When I was growing up in West L.A., practically everyone went to public schools, even in the affluent neighborhoods. Only the discipline cases, the juvenile delinquents, went off to a military academy. It was vaguely disreputable. Now any parent who can afford it pays a fortune for private school. The old liberal ideal of a common public education has been destroyed. And it's been destroyed in large part not by Republicans but by teachers unions.
As the private economy has faltered, we increasingly have a two-tier economy: If you're an insider, a unionized government employee, you're in good shape. Even if you don't do a very good job, you won't be fired. Even in hard times, Washington will spend billions in stimulus funds so that you don't get laid off. You won't even have to take much of a pay cut. And you can retire like an aristocrat at taxpayer expense. But if you're an outsider, trying to survive in a world of $10-an-hour jobs, competing with immigrant labor, paying for your own healthcare, forced to send your children to lousy public schools run by unfireable teachers and $100,000-a-year bureaucrats — well, good luck to you. But be sure to vote Democratic.
"The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians, pushed by our friends in labor, gradually expanded pay and benefits … while keeping the job protections and layering on incredibly generous retirement packages that pay ex-workers almost as much as current workers. Talking about this is politically unpopular and potentially even career suicide … but at some point, someone is going to have to get honest about the fact."
That quote is from Willie Brown, a Democratic hero, explaining why the state may go the way of Vallejo and General Motors. Easy for him to say; he's retired. But you won't catch any Democrats who are running for office saying it. They're too dependent on organized labor's money and muscle.
We need nonretired Democrats who tell the unions no. Or else, perhaps after more bankruptcies and bailouts, Republicans will do it for them.
Robert "Mickey" Kaus, a blogger and the author of the End of Equality, is a candidate for U.S. senator in the Democratic primary.
SOUNDS LIKE AT LEAST ONE DEMOCRAT IS READING THE TEA LEAVES.
Copyright © 2010, The Los Angeles Times
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Post by macrockett on May 4, 2010 22:37:45 GMT -6
Read this story along with the one above. One of many examples that give purpose to what the writer above has to say.
If you have read every article in this tread you begin to see a common theme. Virtually every major city and many states are choking on the cost of very generous public employee wages and benefits.
This article points out the fallacy of the "8%" assumption pensions are based on. The one thing it doesn't mention, that the earlier California article and the Pimco article do, is that these assumptions are based on the use of high degrees of leverage. Today, the use of leverage is being racheted down due to the fear of excessive risk.
So if these pension assumptions are not realistic, pensions are being underfunded by the employees and the State. More importantly, the promises are unsustainable and the taxpayer is on the hook for the short fall. That's you and I and every other Illinois taxpayer.
So far, at the municipal level, only one city has declared bankruptcy to wipe the slate clean. Vallejo, CA. Stay tuned.
MAY 5, 2010
Los Angeles on the Brink of Bankruptcy
What Mayor Villaraigosa must do to save the city.
By RICHARD RIORDAN AND ALEXANDER RUBALCAVA
Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa and the City Council have been either unable or unwilling to face this fact.
According to the city's own forecasts, in the next four years annual pension and post-retirement health-care costs will increase by about $2.5 billion if no action is taken by the city government. Even if Mr. Villaraigosa were to enact drastic pension reform today—which he shows no signs of doing—the city would only save a few hundred million per year.
Los Angeles's fiscal woes can be traced to two numbers: 8% and 5,000. Eight percent has been the projected annual rate of return on the assets in Los Angeles pension funds. Four years ago, we strenuously warned Mr. Villaraigosa of the dangers behind the myth of that 8%, only to be told by the city controller's office that our warnings were "based on faulty assumptions which are largely disputed."
How faulty were our assumptions? Over the last decade, the two main pension funds in Los Angeles have seen their assets grow at just 3.5% and 2.8% annually.
Five thousand is the number of employees added to the city's payroll during Mr. Villaraigosa's first term as mayor. According to California's Economic Development Department, when Mr. Villaraigosa took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people. Today, there are just 4.19 million jobs in Los Angeles and over 632,000 unemployed people.
The mayor can't control the economy, but he could have chosen to control spending to keep the size of government proportional to the size of the local economy. Instead he's done the opposite: squeezing the city's productive workers to fund the salaries, pensions and other benefits of government workers.
How have city leaders responded to the crisis? Pension officials have played accounting games, like smoothing the investment return over seven years rather than five years. This is designed to dilute the near-term effect of the financial meltdown at the expense of much higher payments later.
The City Council, wincing at the mere thought of layoffs, chose to shrink the work force through an early retirement program for city workers. This costly program, suggested by union leaders, will not be paid off for 15 years. And most egregiously, rather than laying off employees, city officials have shifted certain workers to agencies like the Department of Water and Power and the airport, which have their own funding.
In order to pull the city back from the brink and put Los Angeles on the road to recovery, the following steps must be taken:
• Defined benefit pensions must be replaced with 401(k) accounts for new employees.
• Current employees must pay much more than 6% (or 9% in the case of public safety employees) of their salaries for their pension benefits. At a time when the city is contributing over 25% of payroll to the pension funds, this is only fair.
• Increase the retirement age to 65.
• Reduce city staff back to 2005 levels. Since the police and fire departments represent more than 80% of the city budget, they must also be forced to run more efficiently.
• Eliminate the $300 million spent on costly retiree health-care benefits. City workers who retire before they are eligible for Medicare enjoy health insurance subsidies up to $1,200 a month, courtesy of Los Angeles. We can no longer afford to subsidize these Cadillac plans.
As a result of his delays in responding to the city's fiscal emergency, Mr. Villaraigosa has squandered not just his career, but his relevancy. He continues to insist that bankruptcy is not an option for Los Angeles even as anyone who can count understands there is no other option.
Meanwhile, Los Angeles is still the best place to live—ask anyone who enjoys its beaches, mountains and climate. If the mayor wants to keep it this way, he'd better act now.
Mr. Riordan is a former mayor of Los Angeles. Mr. Rubalcava is the president of Rubalcava Capital Management, an investment advisory firm.
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Post by macrockett on May 5, 2010 19:24:53 GMT -6
Score another victory for the teachers union!
Chicago school vouchers shot down by Illinois House
Posted by Ray Long at 5:25 p.m.
SPRINGFIELD --- The Illinois House today shot down landmark school voucher legislation that aimed to allow children to transfer from the worst-performing Chicago public elementary schools to private and parochial schools.
The legislation would have set up the largest voucher program in the nation if all 30,000 Chicago Public Schools students eligible took part. Teacher unions opposed the measure, which also would have needed final approval from the Senate and the signature of Gov. Pat Quinn, who was non-committal about the issue today.
The legislation got 48 votes, but needed 60 to pass. The debate was lengthy and often emotional.
Fighting back tears, Rep. Suzanne Bassi, R-Palatine, called on fellow lawmakers to “search your souls” to support the measure because “we have failed these kids in the inner city schools.”
“I’m pleading with you,” echoed Rep. Ken Dunkin, D-Chicago. “I’m begging you. Help me help kids in my district.”
But Rep. Art Turner, D-Chicago, delivered a lengthy, impassioned speech calling for the measure’s defeat. But he also railed against the current educational system, saying improvements need to be made in the home life of children and in the Chicago Public Schools, where 10 of the worst schools are in his legislative district.
“Chicago board. Get busy,” Turner bellowed. “Do what you’re supposed to do.”
Rep. Elaine Nekritz, D-Northbrook, opposed the measure saying she questioned the legality of using public money for “sectarian purposes.”
But Rep. Jim Durkin, R-Western Springs, pointed to a 2002 U.S. Supreme Court decision that upheld a voucher program in Cleveland and threw his support to the measure.
“I had some reservations at first because it doesn’t help anybody in the suburbs” and other areas outside of Chicago, Durkin said. But he said he was unwilling to “take a chance” in opposing a bill that “could give them a better life.”
Rep. Susana Mendoza, D-Chicago, called the measure “one of the most important” education bills lawmakers will consider. “This bill is about giving people school choice,” Mendoza said.
Posted at 05:25:29 PM in Legislature
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Post by macrockett on May 5, 2010 19:28:02 GMT -6
www.chicagotribune.com/news/opinion/editorials/ct-edit-pension-0505-20100504,0,6555855.story chicagotribune.com Yes you can, Part 3 5:20 PM CDT, May 4, 2010 We've written twice recently on the legality of reducing pension benefits that current state employees earn going forward.[ /b] Legislative leaders who pretend that isn't possible had better hustle up their own remedy, and fast: Joshua Rauh, a public finance expert at Northwestern University's Kellogg School, calculates that Illinois' pension plans could run out of money as early as … 2018.
The more citizens realize that curbing future benefits is a necessity, the less many lawmakers want to hear about it. Official Springfield, full of people accruing public pensions, would rather delay and deny: Their notion of pension reform has started and stopped with less generous payouts in future decades to people who haven't yet been hired. The more than $2 billion a year that could be saved right now with lower benefits for current workers evidently is money the lawmakers think Illinois can live without.
Gov. Pat Quinn, House Speaker Michael Madigan, Senate President John Cullerton: If this is the legacy you want, keep delaying reforms that would cut costs today. But the denying just got more difficult. On Tuesday, the number of world-class Chicago law firms that say this reform is constitutional grew to four.
The background: Democrats who run Springfield long have said the state constitution guarantees workers the pension scheme that was in place on the first day of their careers. So the Dems were grumpy when Sidley Austin lawyers researched that point for the Commercial Club of Chicago and concluded: "(S)tatutory pension rights are not frozen in place for all eternity and may be amended to alter the parties' relationship on a prospective basis — meaning to alter benefits to be earned in the future."
But the Dems grew warm and fuzzy again when two former judges, Abner Mikva and Gino DiVito, disagreed with Sidley's opinion. And maybe the judges are right. But the crowd of smart thinkers who say they're wrong is growing. Three more heater firms now concur with Sidley: Jenner & Block, Mayer Brown and Sonnenschein Nath & Rosenthal. Read the agreed-upon thinking at chicagotribune.com/pension. (One twist: It appears that future benefits can be trimmed for all employees except for the relatively small number of judges and state officials whose salaries and tenures are constitutionally protected.)
For lack of repairs, Illinois' pension crisis worsens. Northwestern's Rauh warns that already-promised benefits threaten to empty the pension funds of seven states before 2020: Oklahoma, Louisiana, Illinois, New Jersey, Connecticut, Arkansas and West Virginia.
Yet lawmakers seem interested only in preserving unaffordable pension benefits of employees. Which makes us wonder if legislative leaders are running from this fight not because they think curbing benefits is illegal, but because they fear it's as legal as can be.
Copyright © 2010, Chicago Tribune
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Post by macrockett on May 5, 2010 19:34:38 GMT -6
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Post by macrockett on May 5, 2010 20:36:29 GMT -6
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Post by macrockett on May 5, 2010 20:41:29 GMT -6
www.chicagobreakingnews.com/2010/05/state-playing-hot-potato-with-pension-burden.htmlState playing hot potato with pension burden
May 5, 2010 7:55 PM | No Comments
Debbie Lanich turned 60 in September and began to collect on what she sarcastically refers to as her "lavish state pension" -- $19,536 annual retirement compensation for 26 years as a child abuse investigator. "We would go into public housing projects at night, walking up the stairwells past drug dealers because the elevators didn't work," said Lanich. "I've had a gun pulled on me, a knife pulled on me, been grabbed, had the headlights on my car smashed and the serpentine belt cut." So Lanich, of Wilmette, gets rankled these days when she hears pension costs being lambasted as a prime culprit in the state's record $13 billion deficit. "The pension funds have been used by the state as petty cash forever," she complained. "I never missed any of my payments into the fund." That pretty much frames a fierce argument over how to rein in the state's enormous pension debt, a problem literally decades in the making as Republican and Democrats officials alike proved willful accomplices. Whichever party controlled state government has long done an abysmal job of socking away adequate cash to pay for all the retirement promises it made. With a vengeance, the bill is now coming due. The accumulated weight of chronic funding shortfalls threatens to cripple Illinois' budget, starve education, health care and other vital services of much-needed revenue, and stoke pressure for tax hikes.
Pension costs loom large over the still unresolved budget debate in Springfield as the current legislative session heads to a climax.
The red ink is so deep that Gov. Pat Quinn and Democratic lawmakers are considering borrowing billions to cover pension obligations for next year, rather than diverting scarce tax dollars from other budget priorities. The state did the same thing last year and the cost of paying for that borrowing is adding more than $800 million to the budget problem Springfield is struggling with right now.Just weeks ago, Quinn and lawmakers agreed on a controversial new law trimming retirement benefits for future public workers. Years from now, that could slow the growth in pension spending. But it will do little to cut costs in the near term. To accomplish that, business groups want lawmakers to go further, arguing that retirement benefits for current public workers are overly generous and need to be scaled back. The effort faces daunting legal hurdles and strong opposition from organized labor, which points to a recent bipartisan state task force report showing Illinois retirement costs to be a bargain compared with neighboring states and even much of private industry. The dueling claims, like the pension problem itself, are layered with complexity and self-interest. Here are some data points to consider in gauging their relative merit: The state handles five separate pension systems for state workers, judges, lawmakers and statewide elected officials, university employees and public school teachers outside Chicago. Those funds serve 723,000 employees, retirees and survivors and as of last summer owned assets worth $48.7 billion. At the same time, the funds were on the hook for at least $126.4 billion in retirement benefits. The nearly $78 billion mismatch means that the systems collectively held less than 40 percent of the money they needed to cover long-term obligations. Most experts consider 80 percent a minimum threshold for fiscal soundness. The state's pension bill for fiscal 2011 totals more than $5 billion, according to Quinn's budget projections. But less than one-third of that is necessary to cover the actual costs of retirement benefits to be earned next year. The rest amounts to enormous surcharges tacked on because the state must play catch-up as well as repay its pension-related borrowing. Tales of fat pensions and abuses are legion, but lawmakers have carved out the juiciest benefits for themselves, judges and statewide officials. Rank-and-file workers get less, though they generally can retire with full pensions at a younger age than counterparts in the private sector. On the other hand, state pensioners can't supplement retirement benefits with 401(k) packages, and four out of five don't qualify for Social Security. State records show annual pensions now average $43,164 for retired public school teachers and $33,120 for retired university workers, but neither group receives Social Security. The average pension for retirees from the general state payroll -- most of whom do get Social Security -- is $26,663. At its simplest, the deep fiscal hole of the pension funds was dug by an absence of foresight and statesmanship on the part of state leaders from both parties. Time and again, tax revenue that would have been prudent to squirrel away for future pensions was diverted for more immediate and voter-friendly uses. Political expert Charles N. Wheeler III said the financial neglect dates back at least 40 years. "For governors and legislators, there were always more pressing needs they wanted to spend money on," said Wheeler, a professor at the Springfield campus of the University of Illinois. A big problem with that approach was that money never pumped into the funds couldn't be allowed to grow through investments. The funds would be a lot healthier today if they had been able to fully cash in on the big run-up in the financial markets over the past two decades. With the Baby Boom generation aging and the steep recession still fresh, many states and cities -- Chicago among them -- are struggling to fund their public pension systems. But experts say nowhere is the problem more acute than at the five Illinois funds. That said, not all pension funds are struggling. The Illinois Municipal Retirement Fund, which covers workers at 2,900 suburban and downstate municipalities, holds reserves that sit north of the magic 80 percent funding threshold even after the stock market crash of 2008. The healthy bottom line is no mystery even though IMRF and state pension benefits are comparable, said IMRF executive director Louis Kosiba. The same legislature that routinely shorted commitments to state pension funds has demanded more vigilance from the IMRF and its member communities. "Local governments are more mindful of debts," said Kosiba. "There's never been that kind of discipline at the state level." In the mid-1990s, the General Assembly finally sketched out a long-range plan to force discipline on itself and restore the state funds to soundness. As crafted, however, the scheme was anything but bold, passing off most of the big expenses and tough funding decisions to legislatures far in the future. That day is finally here, and it comes at a time when the state is also struggling to recover from the worst economic downturn since the Great Depression. Business groups contend the best way to dig out of the mess is with an overhaul of the pension system itself, which they argue is expensive and archaic. Most private-sector employers long ago junked "defined-benefit" plans in favor of more flexible 401(k)-style retirement accounts filled by employee and employer contributions. Leading the charge for such a revamp is The Civic Committee of the Commercial Club of Chicago, which claims it would save the state $2 billion a year right off the bat. There are many stumbling blocks to such an idea, but the biggest is Article 13 of the 1970 Illinois Constitution, which contains a clause declaring state pension benefits a contractual right that "shall not be diminished or impaired." Commercial Club President Eden Martin agrees that the provision protects any benefits already earned by current employees covered by state pension systems. But Martin says a legal opinion commissioned by his group makes a strong case that future benefits for today's workers can be scaled back. "The state is virtually bankrupt, so what's in our best interests?" said Martin, who expects a legal challenge if such a change ever were approved. "Pass the law and we'll find out if we're right or wrong." Labor groups counter with their own legal opinion. It concludes that a long body of case law, as well as debate by the framers of the Constitution, make it clear that a deal should be a deal and the pension structure can't be changed prospectively for those already on state, university and school payrolls. Anders Lindall, spokesman for the American Federation of State, County and Municipal Employees Council 31, said a pension task force appointed by Quinn last year found that Illinois pension costs were generally lower than in Indiana, Iowa, Kentucky, Michigan, Missouri and Wisconsin. What's more, the report said the Illinois costs were often lower than in the private sector, where employers must contribute to Social Security and many also kick in for 401(k) plans. Lindall accused backers of a pension revamp of trying to make modestly paid public workers the fall guys for the irresponsibility of others. "There is a tremendous campaign driven by the corporate class to focus attention and harness public anger," Lindall said. "It doesn't give an adequate picture of the average pensioner." --Bob Secter
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Post by asmodeus on May 6, 2010 6:01:20 GMT -6
That's misleading...they qualify for SS if they work in the private sector. Anyone who works in the private sector and pays into SS for the required minimum period of time will receive SS benefits.
Again, misleading. This average is for people receiving a pension. Those who don't have ANY pension, namely most of us, are not included in the average.
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Post by macrockett on May 6, 2010 7:52:31 GMT -6
That's misleading...they qualify for SS if they work in the private sector. Anyone who works in the private sector and pays into SS for the required minimum period of time will receive SS benefits. Again, misleading. This average is for people receiving a pension. Those who don't have ANY pension, namely most of us, are not included in the average. thanks for the comment asmodeus. Unfortunately I don't have time to comment on many of the details in these articles. I am focused on the macro impact of these pensions and the actuarial assumptions that, in my opinion are severely flawed. For those that think this is simply a failure to fund clearly miss the point that if the funding did take place, Illinois would be more closely linked to the Calpers situation. There, Calpers lost approximately a third of its assets between 2008-2009 and hasn't recovered. It currently sits at asset levels of 2005-2006. I suspect the return on investment of its funds are close to the LA municipal experience. So whether it is funded or not, the returns are not meeting the actuarial assumption of 8%. Therefore, the problem with these pension funds are not the underfunding so much as the failure of the actuarial assumptions. With the deleveraging of assets that is going on in the world, this error will only exacerbate the problem. Like the financial crisis, many are out there pointing this out, like the Kellogg person, Gross of Pimco and Blackrock (Pimco and Blackrock manage over $5 Trillion in assets between them) but no one is apparently listening. |
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Post by macrockett on May 8, 2010 10:11:20 GMT -6
If you are a taxpayer in Illinois or most other states and, for all of us, at the federal level, you are on the hook for public employees pension obligations. Here are three charts that depict the S&P Five Hundred returns over the last 12 years, including a monthly, weekly and daily chart (the later showing the meltdown in the last 7 trading days due to the debt issues in Europe and the possibility of it spreading to the US. winsome.cnchost.com/MAC/SP500_1.png monthly winsome.cnchost.com/MAC/SP500_2.png weekly winsome.cnchost.com/MAC/SP500_4.png daily As a taxpayer, you carry the burden of making good on those pension obligations. 100% One more chart. winsome.cnchost.com/MAC/SP500_7.pngThis last chart has a straight blue line showing the trend of the S&P 500 from the mid 80s through the mid 90s. You can see that subsequent to that we have had major booms and busts, which are, in part, due to the use of leverage to enhance returns. Enjoy the ride. |
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Post by macrockett on May 18, 2010 17:40:40 GMT -6
" The problem with socialism is that eventually you run out of other people's money ." Attributed to Margaret Thatcher
Would it help Illinois if I asked the EU for membership? Maybe they could bail us out too!
MAY 17, 2010, 11:42 P.M. ET Wall Street Journal
French Pension-Reform Plan Stirs Union Ire
Government proposal aims to fix debt-laden pension system; adding a tax on high earners
By DAVID GAUTHIER-VILLARS
PARIS—The French government said it plans to increase the retirement age, setting up a battle with unions who want the French to continue retiring earlier than most other Europeans.
The government said it plans to introduce a bill to raise the retirement age from the current minimum of 60—though it didn't say to what age—and create a new tax on high earners, to try to fix the nation's debt-choked pension system.
Unions have scheduled a nationwide demonstration on May 27 to protest the proposed overhaul.
The sparring comes as France and other European countries are under pressure to rein in their budget deficits after the Greek debt crisis caused financial chaos. France has the same high credit rating as Germany, but some economists are concerned that Paris could suffer a downgrade unless it demonstrates budget discipline.
"It's a litmus test," said economist Christian Saint-Etienne, head of the Générations Citoyennes think tank. "France's creditworthiness is at stake."
Facing the same trends of slow growth and longer lifespans, several European Union countries have in recent years increased their retirement ages and cut pension payments. In 2007, Germany opted to gradually increase its standard retirement age to 67 from 65. Last year, Italy pegged future retirement ages to rising life expectancy.
France has reduced some pension benefits in the past, but in its effort to avoid cutting monthly pension payments it has also piled up debt. If no changes are made, the annual deficit of state-run pension funds could shoot up to €103 billion ($127 billion) by 2050, from an estimated €10 billion this year, according to a council advising the government.
Concerned that the system isn't sustainable, the government of President Nicolas Sarkozy sent a memo to unions, which it released on Monday. The government said the main response to "demographic imbalances" should be demographic. That implies raising the retirement age and the number of years of contributions to the state-run system needed to receive a full pension.
"We can't accept that," said Eric Aubin, a national delegate with the CGT union. "People can't find jobs when they are 55. Increasing the retirement age will push them into poverty."
Details, notably the proposed new retirement age, would be outlined in June, the government said. A pension bill could be presented in Septermber to parliament, where Mr. Sarkozy's ruling UMP party has a majority.
The government ruled out some possible solutions, such as an increase in payroll taxes or the creation of a special sales tax, on the basis that they would hurt French corporate competitiveness.
However, the Sarkozy government said it was considering slapping a new tax on wealthy households—something that might go against an election pledge by Mr. Sarkozy not to increase taxes and to provide some tax relief for the rich. Government officials said the new tax would be "symbolic" and yield between €2 billion and €3 billion a year.
Union leaders said they feared that without significant new tax contributions, the overhaul would result in lower pensions for workers who don't pay into the system long enough.
White-collar union CFE-CGC is one of the few unions to support the idea of raising the retirement age. But the union's national delegate in charge of pension issues, Danièle Karniewicz, said she will be able to convince members to back a pension overhaul only if the government finances it through other methods, such as a new sales tax. "The French are ready to make efforts," Ms. Karniewicz said. "But they need to know what they will get in return."
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