Teacher Tenure/Unions/Government/Pensions

[Arch]

NIU must have also done IL's economic forecasting.

[macrockett]

Here's how to bring pensions under control
Raise retirement age, cap yearly increases, enact tax
Comments

September 13, 2009

BY MARK BROWN Sun-Times Columnist

I would like to draw your attention to Article XIII, Section 5 of the Illinois Constitution, titled "PENSION AND RETIREMENT RIGHTS."

"Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."

Rarely has so well-intentioned a legal concept been the source of so much abuse of the taxpayer.

You see, it's this constitutional provision that has allowed many devious state legislators and other public employees to exploit loopholes in the state's pension laws to amass some of the ridiculously generous government pensions you're seeing detailed in the Sun-Times' "Pension Bonanza" series.

Originally intended to make sure government bodies honored legitimate pension promises to their employees, the Pension and Retirement Rights clause has become the legal shield for every scheme to sharp-shoot the public pension systems at taxpayers' expense, as well as the excuse to do nothing to reform the mess.

That's because the clause has been interpreted to mean that any obscure provision of the pension code is a contractual obligation of the public that can't be revoked from current government employees, no matter how twisted the result -- the worst example being legislators drawing pensions two and three times greater than what we paid them to do their jobs.

Even when a loophole is closed, as that one has been, it's always with the proviso that anyone already on the public payroll is grandfathered in -- meaning the same abuses can continue far into the future.

Like a lot of you, I often wish we could just throw a few of the worst abusers in jail -- along with a couple of the scheming school superintendents who figured out how to manipulate the system to become pension millionaires before most people can reach retirement age -- or take away their pensions entirely. But that's never going to fly.

I would respectfully suggest instead that if the public employee unions don't step up to the plate and join as advocates for real pension reform in this state, then we're going to need to reconsider that constitutional protection.

I say that knowing I am sticking my head in a hornet's nest. I really don't want to get a reputation as a public employee basher and don't believe I am one. I'd prefer to think the majority of public employees are as outraged about the abuses as the rest of us, since their pensions are more modest than the jaw-droppers exposed by the Sun-Times' Watchdogs crew.

Relatively few of the rank and file, for instance, have the clout to take advantage of the double-dipper twist highlighted in today's installment -- in which mostly city workers retire at a young age and begin drawing a pension while going on another government payroll.

So here are some suggestions on bringing benefits under control.

We could start by raising the retirement age, which now allows public employees to retire as young as 50 in some government pension systems and 55 in others. That's totally out of line with the private sector, and we can't afford it. Plus, it just encourages the double-dippers who leave one job to take another.

Retirement plans were designed to provide economic security to people when they were no longer able to do their jobs, not so they could double their income at the public's expense.

Next, we could get rid of the automatic 3 percent annual increases for government retirees and replace it with a capped, inflation-based cost-of-living factor.

An alternative possibility would be a maximum pension benefit. The federal Pension Benefit Guarantee Corporation protects private pensions up to a maximum annuity of $54,000. We've already got 4,000 public pensioners in Illinois bringing home more than $100,000 a year.

Here's something else that ought to be on the table: taxing these pensions. As it stands, Illinois is one of the few states that don't tax retirement income -- either public or private. In the process, the state forgoes $1 billion in annual revenue, only in part for valid public policy reasons of protecting seniors on fixed incomes.

While it would be unfair to tax only public pensions, another approach would be to exempt the first $50,000 to $75,000 in retirement income and to enact a minimum age for the exemption, both of which would capture some of the excessive public pension income -- as well as more well-to-do private sector retiree benefits.

And we wouldn't have to wait for any grandfather clause to expire.

[southsidesignmaker]

money.cnn.com/galleries/2009/fortune/0909/gallery.witnesses_meltdown.fortune/4.html

It has been a year since we really looked into the financial abyss. I know this last year has brought many changes in folks business and personal lives. Here is a refreshing perspective from a gentleman that could have personally profited but chose the proper path.
------------------------------------------------------------------------------------------------------------------------------------------------------
When Wall Street nearly collapsed

Bob Willumstad: Walked away from $22 million
• Read an expanded version of Williamstad's account
CEO of AIG, June-September 2008

For me, AIG was not necessarily a pleasant or happy experience, but I knew what I was getting into. I thought I was doing the right thing for the shareholders by stepping in and trying to fix the company.

After I was replaced, I was actually unaware that I was entitled to a $22 million severance package. When I was told two days later, my reaction was, "How could I possibly take $22 million for three months' work?" People assumed that I didn't take it because of the public scrutiny, but I refused the bonus before it was known to the public. I didn't think it was right to take it after all that had happened.

I wish I had been able to stay on and help. We had prepared a thoughtful plan to sell assets and de-risk the company. Had the world not come to an end that weekend, so to speak, I think we could have implemented our plan. That week was tragic for employees who had been at AIG their whole lives. They built a great company and now have been financially and emotionally devastated.

[southsidesignmaker]

Macrockett,

The provisions you have outlined appear reasonable and non detrimental to most "fair minded pension holders". My question is do you think it is enough?, or as I fear will we be revisiting this subject decade after decade. Have you thought out things such as ever increasing life spans. Average rates of returns for investments, what a deflationary period of say 10 years would do.

Are we not better off saying to new hires, the offering is 401k type products, end of story. Pay the employee a better wage (now just market wage, which may well be less than current starting salaries) and leave it at that. No more worry about retiring at 50, if the employee feels the proceeds from a 401k are sufficient to retire so be it. If not, well then one must work a bit longer. It is very cut and dry in the private sector, unpleasant at times yes... But very cut and dry.

I see pensions as a throw back to a bygone era, one that looked great on paper but had many unintended consequences. Many of which you have spoken of.

[Arch]

Wait a second, this just dawned on me after reading the sun site:

The pensions are paid with future dollars so we're cool. In fact, if I read some of the arguments correctly, they did the public a favor by not funding them with present dollars.

We should be grateful.

[doctorwho]

Sept 19, 2009 21:21:04 GMT -6 southsidesignmaker said:

Macrockett,

The provisions you have outlined appear reasonable and non detrimental to most "fair minded pension holders". My question is do you think it is enough?, or as I fear will we be revisiting this subject decade after decade. Have you thought out things such as ever increasing life spans. Average rates of returns for investments, what a deflationary period of say 10 years would do.

Are we not better off saying to new hires, the offering is 401k type products, end of story. Pay the employee a better wage (now just market wage, which may well be less than current starting salaries) and leave it at that. No more worry about retiring at 50, if the employee feels the proceeds from a 401k are sufficient to retire so be it. If not, well then one must work a bit longer. It is very cut and dry in the private sector, unpleasant at times yes... But very cut and dry.

I see pensions as a throw back to a bygone era, one that looked great on paper but had many unintended consequences. Many of which you have spoken of.

My 2 cents is that's the way to go...tell people up front. I wish I had the time to start over. My place told people forever ( for my first 24 years- "we pay 'around' the market salary but look at the great pension you will have " - then when you're in your mid 40's they come back and say - " hey we were just kidding- no more pension for you". My company is far from the only one who did this- and for those already that far along- you can NEVER make up for that lost time..

Also realize there are plenty of companies that no longer offer a 401K match of any kind - some of these might surprise you.

the examples Mike has posted here outline a few things : 1/ as if we don't know it well enough already as a resident of 204 - being legal isn't always moral or ethical 2/ when people ask " where does all that tax money go ? " - now you have an answer 3/ turning over more control of our personal finances or personal life to governmental boies will only work out for you if you find the loopholes and are a crook 4/we will ALL be paying for many of these federally insured pensions plans that are grossly underfunded and where someone either ignored actuarial tables - or just decided to spend the money elsewhere regardless of what's right (funny how 204 comes to mind on a few of these examples)

[macrockett]

Sept 19, 2009 21:21:04 GMT -6 southsidesignmaker said:

Macrockett,

The provisions you have outlined appear reasonable and non detrimental to most "fair minded pension holders". My question is do you think it is enough?, or as I fear will we be revisiting this subject decade after decade. Have you thought out things such as ever increasing life spans. Average rates of returns for investments, what a deflationary period of say 10 years would do.

Are we not better off saying to new hires, the offering is 401k type products, end of story. Pay the employee a better wage (now just market wage, which may well be less than current starting salaries) and leave it at that. No more worry about retiring at 50, if the employee feels the proceeds from a 401k are sufficient to retire so be it. If not, well then one must work a bit longer. It is very cut and dry in the private sector, unpleasant at times yes... But very cut and dry.

I see pensions as a throw back to a bygone era, one that looked great on paper but had many unintended consequences. Many of which you have spoken of.

------------------------------------------------
First sssm, I want to make clear that all of the above posts came from the Chicago Sun Times series on Pensions. Some of the posts don't include the attribution.

Second, I have to applaud the CST for an excellent job of compiling such a compelling body of journalism.

As to your questions.

First, it is important to understand that IL pensions are a contract with the state, pursuant to the Constitution. From a legal standpoint most who have commented on the subject have said that a state cannot go bankrupt to void this contractual liability.

Municipalities, on the other hand, can (ie Valejo, CA 2008). Municipalities can, therefore, void contracts according to the judge presiding over the case (appeals likely I am sure, haven't looked lately.)

Back to IL. We are all aware that, at present, there is an unfunded liability estimated at over $50 billion for the five public pension plans. That liability will continue to grow exponentially and look like a hockey stick sooner rather than later, meaning the unfunded liability will dwarf all other obligations of the state.

As a hedge fund manager, who is the current chief financial adviser to Governor Swarzenegger, recently said on CNBC, the pension problem is the single biggest issue out there, because that liability is so big it will crowd out every other program in short order.

See
www.ioc.state.il.us/FiscalFocus/article.cfm?ID=222

trs.illinois.gov/subsections/press/history.htm

www.illinoisbusinessroundtable.com/.../Website-Pension%20Report%202005.doc

Personally I believe that just the existing obligations as they stand today will overwhelm the Illinois taxpayer. In other words, no way no how this "contract" can every be satisfied without significant concessions from the recipients in the future.

So any talk of changes, or even the complete elimination of defined benefit pensions going forward for new hires, is a mute point imo, as the horse is already out of the barn.

If you google IL pensions you will find a fair amount of material to read on the subject. Once you start to get the big picture on subject I think you will come to a similar conclusion. Like most things, too, they continue to kick the can down the road. For example, when I got some idea of how old recognition of this problem is I cracked up. www.lib.niu.edu/1979/ii790719.html

Finally, the pensions themselves on only part of the problem. There is also this: www.bondbuyer.com/article.html?id=20080421BIUSVH7I , the unfunded liability for retiree health care benefits.

Then there is the issue of the State falling farther and farther behind in paying it obligations today! Forget about the future liabilities. www.wh1.ioc.state.il.us/FiscalCondition/

Also, consider that many in Illinois are living paycheck to paycheck. www.careerbuilder.com/share/aboutus/pressreleasesdetail.aspx?id=pr525&sd=9%2f16%2f2009&ed=12%2f31%2f2009&siteid=cbpr&sc_cmp1=cb_pr525_&cbRecursionCnt=1&cbsid=cb998e9b9ae14b268b53e79391051f22-306747779-we-6

Even if they raise taxes, who is going to be able to afford the taxes to fund the shortfalls? But if we have to do something, the suggestions in the CST are certainly a start, and moving to 401ks so government enployees have to live like the rest of us is certainly something I prefer.

[Arch]

My Solution: Mass exodus to other states.

[asmodeus]

Let's say IL is $50 billion underfunded for its major pension groups. If we were to enact the following immediately:

1. Minimum retirement age of 67
2. Maximum pension amount of 75% of average of highest three years of salary
3. Annual increases indexed to CPI

How much would that save?

[macrockett]

Sept 20, 2009 23:22:58 GMT -6 asmodeus said:

Let's say IL is $50 billion underfunded for its major pension groups. If we were to enact the following immediately:

1. Minimum retirement age of 67
2. Maximum pension amount of 75% of average of highest three years of salary
3. Annual increases indexed to CPI

How much would that save?

------------------------------------------------
Not enough Asmodeus

The problems with defined benefit plans are at least 3 that I can think of:

1--when you guarantee a payout, you set yourself up to extreme exposure as a result of the fluctuations in value of your underlying investments (think Sept 08 and 2001-03). Past performance is no guarantee of future returns.

2--the exponential character of salaries that create the base for the pension can blow this through the roof

3--the exponential character of the cpi ditto

Clue to all this? Why do you think virtually all private pensions have been eliminated? I can pretty much guarantee that all private pensions will be gone in less than 10 years.
« Last Edit: Today at 9:41am by macrockett »

[doctorwho]

Sept 21, 2009 10:05:03 GMT -6 macrockett said:

Sept 20, 2009 23:22:58 GMT -6 asmodeus said:

Let's say IL is $50 billion underfunded for its major pension groups. If we were to enact the following immediately:

1. Minimum retirement age of 67
2. Maximum pension amount of 75% of average of highest three years of salary
3. Annual increases indexed to CPI

How much would that save?

------------------------------------------------
Not enough Asmodeus

The problems with defined benefit plans are at least 3 that I can think of:

1--when you guarantee a payout, you set yourself up to extreme exposure as a result of the fluctuations in value of your underlying investments (think Sept 08 and 2001-03). Past performance is no guarantee of future returns.

2--the exponential character of salaries that create the base for the pension can blow this through the roof

3--the exponential character of the cpi ditto

Clue to all this? Why do you think virtually all private pensions have been eliminated? I can pretty much guarantee that all private pensions will be gone in less than 10 years.
« Last Edit: Today at 9:41am by macrockett »

my best friend is a SR VP major firm- comp& ben and has been for years- sits on presidential HR council-- he told me long before mine went away what the trends were going to be in industry.
He agrees with you on private pensions but would tell you 3-5 years- nowhere near 10 to be gone.
For major corps - non union- they are long since already gone

[macrockett]

my best friend is a SR VP major firm- comp& ben and has been for years- sits on presidential HR council-- he told me long before mine went away what the trends were going to be in industry.
He agrees with you on private pensions but would tell you 3-5 years- nowhere near 10 to be gone.
For major corps - non union- they are long since already gone

I always hedge my bets Doc, you learn that after you get run over a few times... ;D

[southsidesignmaker]

And finally some good news regarding political pensions.

I will have to hand it to the regulars on blue, I was not sure how far back I would be forced to go, but here is some refreshing news!



Harry Truman


Harry Truman was a different kind of President. He probably made as many important decisions regarding our nation's history as any of the other 42 Presidents. However, a measure of his greatness may rest on what he did after he left the White House.

The only asset he had when he died was the house he lived in, which was in Independence Missouri . His wife had inherited the house from her mother and other than their years in the White House, they lived their entire lives there.

When he retired from office in 1952, his income was a U.S. Army pension reported to have been $13,507.72 a year. Congress, noting that he was paying for his stamps and personally licking them, granted him an 'allowance' and, later, a retroactive pension of $25,000 per year..

After President Eisenhower was inaugurated, Harry and Bess drove home to Missouri by themselves. There were no Secret Service following them.

When offered corporate positions at large salaries, he declined, stating, "You don't want me. You want the office of the President, and that doesn't belong to me. It belongs to the American people and it's not for sale."

Even later, on May 6, 1971, when Congress was preparing to award him the Medal of Honor on his 87th birthday, he refused to accept it, writing, "I don't consider that I have done anything which should be the reason for any award, Congressional or otherwise."

As president he paid for all of his own travel expenses and food.

Modern politicians have found a new level of success in cashing in on the Presidency, resulting in untold wealth. Today, many in Congress also have found a way to become quite wealthy while enjoying the fruits of their offices. Political offices are now for sale. (sic. Illinois )

Good old Harry Truman was correct when he observed, "My choices in life were either to be a piano player in a whore house or a politician. And to tell the truth, there's hardly any difference!

_________________________________________________________________________________________


I do expect someone to work in the time value of money formula!

[macrockett]

Time value of money re 204 in under another thread sssm

ipsd204.proboards.com/index.cgi?action=display&board=news&thread=2801&page=4

reply #48

[macrockett]

www.marketwatch.com/story/public-pensioners-have-taxpayers-as-a-backstop-2009-09-22

Sept. 22, 2009, 12:01 a.m. EDT
Public pensioners have taxpayers as a backstop
Although government plans have taken a hit, benefits mostly secure

By Ruth Mantell, MarketWatch

WASHINGTON (MarketWatch) -- When it comes to retirement security, it pays to have something that is good enough for government work.

While private-sector workers can only hope their 401(k)s and IRAs recoup their big losses of the last year, government employees are at less financial risk because their pensions are generally guaranteed by law -- with taxpayers on the hook for benefits.

"Pensioners aren't going to be pained in the short run," said Steven Foresti, managing director with Wilshire Consulting and head of the investment research group.

That doesn't mean the financial crisis hasn't taken a toll on the pension plans of state and local government workers. Funding levels for public pension plans have dropped, and are expected to fall even further as more investment losses are recognized, experts said.

"What plans have working for them is they are long-term propositions, there's time to make up for losses. But it is naïve to think that costs haven't increased because of the cycle we've been through -- there are long-run consequences," Foresti said.

A pension plan's funding ratio measures assets to liabilities. For fiscal 2008, Wilshire estimated that the funding ratio for state retirement systems fell to 84% from 96% in the prior year. For 2009, Foresti expects a level of less than 80%. But experts say retirees and already-vested workers can rely on plans to honor promises.

"Current employees are guaranteed benefits by contract law and many state constitutions mandate that benefits cannot be changed," said Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County, and Municipal Employees. "Current workers would challenge any attempt to illegally deny them benefits that they expect and deserve."

There are about 7.5 million beneficiaries receiving payouts from state and local retirement systems, another 14.4 million employees who are system members, and 4.2 former employees and others who have retained retirement credits, according to 2007 Census data. Among the two primary types of federal retirement -- the Civil Service Retirement System and the Federal Employees Retirement System -- there are about 1.86 million annuitants, and 610,000 survivor annuitants, as of Oct. 1, 2008, according to the U.S. Office of Personnel Management.


Newer employees may take a hit

While those who have retired or are vested can feel reasonably secure, the news may be less optimistic for newer workers, experts said. Newer public workers face smaller benefits as more governments establish tiered benefits systems, said Keith Brainard, research director of the National Association of State Retirement Administrators.

"It's more typical to see benefit changes made to new hires, and that's a way to reduce the cost of the plan," Brainard said. "We are likely to continue to see those develop."

Foresti agreed: "As different states or municipalities are looking at their particular situation, what their tax base looks like, there is going to be some pressure to change what's in the benefits package."

A retirement system could even convert from a defined-benefit to a defined- contribution plan, Ferlauto said.

"That would put security at risk," Ferlauto said. "For people who are not vested, or more likely for new employees, the terms of the contract could change in a way that would make them a lot less secure."

According to a report from the National Conference of State Legislatures, this year's "principal theme" in pension legislation "was the need to make future pension costs manageable in the light of states' straitened fiscal circumstances and the enormous losses most retirement trust funds have experienced."

The report said:

Few benefit increases were enacted

There were various forms of reductions in states

Some states enacted early retirement incentives to reduce work forces

Some states revised benefit packages for future employees to require longer service or higher ages for retirement, discourage early retirement even with reduced benefits, limit future cost-of-living adjustments, and tighten standards for disability retirement.

"For the most part benefits cannot be rolled back for current retirees or employees, so changes would affect new employees," Ferlauto said. "Most changes would involve increasing the employee contributions into the system, or raising the retirement age, which is happening in a number of places."

Beth Almeida, executive director of the National Institute on Retirement Security, said public pensions were "in really good shape" before the crisis hit, but some administrators are reviewing plans.

"They had plenty of money to pay for benefits for decades," Almeida said. "That said, there is a process going on where states and localities are taking a look at their pension programs, and making sure that the plans are sustainable for the next 50 years."

Despite the market's volatility, there have been some cool heads, she added.

"What we are really seeing around the country are not knee-jerk reactions to dramatic events. You are seeing a more deliberative reaction," Almeida said. "The public pensions have been through market cycles before. They know that they are going to have some good times and some bad times."
Pressure on taxpayers

While many workers are protected by pension contracts, taxpayers may be forced to foot more of the bill in the near- and long-term -- or watch some government services get eroded -- as investments gone awry exert even more pressure on pension systems. According to the report from the National Conference of State Legislatures, states such as Nebraska and New Mexico have increased contribution rates for "a number of state-sponsored retirement plans for both employers and existing employees."

"The bad news for stakeholders, like taxpayers, are the costs of meeting benefits in the future," Foresti said. "You'd expect those to be higher now. The shortfall needs to be filled in in the form of higher contributions. It's not reasonable to assume that investment returns are going to take care of everything."

Contributions to public pension systems typically come from three groups: employers, employees, and investment returns.

"Given this shared funding model, it's logical that recovering from recent investment losses may require shared sacrifice," Almeida said. "This may mean re-examining contributions coming into the system or benefits coming out of the system."

Healthy pensions need to achieve a certain return over the long run to keep costs at a reasonable level for taxpayers.

"Because of the booming stock market in years past some government employees thought that they could bypass regular contributions into the pension systems," Ferlauto said. "For states that properly paid their annual contributions we expect little long-term impact on tax rates, for states that avoided contributions when they should have been made there is a need for more tax dollars, but that is to make up for dollars that should have gone into the systems."

While a fully-funded plan is not necessary to pay promised benefits for many years, such a goal helps smooth taxpayers' expenses over time, Brainard said.

"If you are extremely underfunded, the cost of carrying that can be large and burden future taxpayers," Brainard said. "Full funding is not conservative. It is appropriate. It helps to promote intergenerational equity."

Robert Wylie, executive director of the South Dakota Retirement System, said his state has a conservative investment approach to ensure that benefits don't grow faster than assets. However, administrators may have to slow down benefit increases -- an option that many other plans don't have, he said.

"It might be in a few pieces so that not one group is feeling all of the pain," Wylie said.
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This article peaked my interest so I did some digging regarding federal employees. Post to follow...