Another rocket scientist

[doctorwho]

and we wonder why those running our schools sometimes can't see the forest for the trees. Let's just hope this ugy Wallace below was never a math teacher.

'Wallace pointed out that one of the benefits of letting teachers retire early is being able to replace more expensive, veteran teachers with younger, lower-paid teachers.'

Yep retiring a teacher making say $90,000 - so that we can pay $72,000 in a pension and their benefits- to replace them with a 'younger' teacher making $40,000 and benefits -- yep that adds up to a savings all right.


so instead of $90k & benefits we pay $112k and 2 sets of benefits...great math there from someone likely making $300K per year.

let's force em all out at 55 so we can add even more money to the pension ranks..

I know a 70 year old teacher at our school that I am positive could run rings around whoever this super is...teaches at a very high level , extremely respected by students and parents alike, and coaches a varsity team, this year to Sectionals....there at the crack of dawn every day available for extra help for students... the last 15 years or so of students are lucky guys like this aren't making decisions for us too.





--------------------------------------------------------------------------------
www.dailyherald.com/story/?id=369220&src=76

Still teaching at 67? School, union leaders question pension reform
By Kerry Lester | Daily Herald 3/29/2010

Illinois' budget mess has left schools hurting more than just about any government entity.

Suburban school leaders have spent recent weeks slashing millions from their budgets, collectively firing thousands of teachers, and hacking away at the special education, music and sports programs that draw so many families to the suburbs.

While superintendents and union leaders alike are crying out for a funding fix, they remain opposed to many aspects of a sweeping pension reform plan that was speedily approved by state lawmakers on Wednesday.

"Probably the most concerning part of the reform for me, is that it happened in such a knee-jerk fashion. This really should have happened a long time ago. We end up now having to do strong reactionary measures instead of what could have been planned and paced and controlled changes," West Chicago District 33 Superintendent Ed Leman said Friday.

The reform, which still requires Gov. Pat Quinn's signature, will require anyone hired by schools, universities, the state or local governments after Jan. 1, 2011 to work until 67 to get full retirement benefits.

It also caps the maximum salary for figuring a pension at $106,800. Annual pension cost-of-living increases, now an automatic 3 percent, would be limited to half the rate of inflation or 3 percent, whichever is less and based on the beginning pension amount, not compounded every year.

Here's a look at how some suburban educators are reacting to the overhaul:

On hiring and the future of the profession

Shirley Forpe, longtime president of the union representing Palatine-Schaumburg High School District 211 teachers, believes the changes will hurt recruitment. "Teachers face so many pressures as is. You want to make this an attractive job. You want to appeal to those professionals who could make big bucks in the corporate world. We want to attract them to education," she said.

Over the past several years, Leman says he's noticed a difference in the outlook of new candidates anyway. "There aren't as many who have viewed this work as a lifetime's work. There tends not to be the same kind of long-term planning or processing or commitment."

Still, he said, about cutting maximum pension amounts and increasing the retirement age, "I can't help but think that it's a little hypocritical to clamor for the best and the brightest and then resent the salary and benefits and slash them and still expect the best and the brightest to be willing to commit long-term."

Teachers at 67?

"It's pretty clear that the state had to do something (to reform the pension system)," Maine Township High School 207 Superintendent Ken Wallace said. "I just think the age 67 is a little problematic. ... The stamina it takes to be at the top of your game as a teacher -- It's a much more demanding job than a lot of people realize."

Contract negotiations

The next time districts and unions head to the bargaining table, they will deal with two different retirement packages for teachers hired before next January, and those hired after.

Round Lake Unit District 116 educational employees union co-president Kim Kearby says, "throwing in another whole section of the contract" is going to be exceedingly complicated. Yet Wallace believes problems from the two-tier system won't really emerge until several years out, when teachers hired under the new pension system are retiring in tandem with others that were hired under the old system.

Will it bust district budgets?

It could, some officials say.

With teachers currently able to retire at 55, the school salary structure is set up so that pay maxes out while they are in their 50s.

The pension reform adds more years of work and caps the maximum salary for figuring a pension at $106,800. It does not, however, prohibit districts from paying teachers more than that amount.

Wallace pointed out that one of the benefits of letting teachers retire early is being able to replace more expensive, veteran teachers with younger, lower-paid teachers.

Forcing retirement at 67 instead of 55, "that puts someone at the top of the pay scale an extra 10 years in the district. There isn't any doubt about the economics of that," Wallace said. "From the state's side, they're not looking at that. But we are. Of course we have to."

[macrockett]

I wonder if that is Wallace's version of "everyday mathematics?"

[jimbob]

The cost savings to *the district* is about $300k over ten years. This does not reflect pension costs which are from TRS not the district.

Holding teachers to 67 will drive up class sizes because the older teachers' salaries will require the districts to constantly fire young teachers or never hire them. Young teachers will never make it to "tenure" because the district cannot afford to allow them to move higher in the salary ranges.

[doctorwho]

Mar 29, 2010 14:36:18 GMT -6 jimbob said:

The cost savings to *the district* is about $300k over ten years. This does not reflect pension costs which are from TRS not the district.

Holding teachers to 67 will drive up class sizes because the older teachers' salaries will require the districts to constantly fire young teachers or never hire them. Young teachers will never make it to "tenure" because the district cannot afford to allow them to move higher in the salary ranges.

Oh I knew darn well what he meant, even if he wasn't real clear - he was rid of the expense @ 55 - but the cost to the taxpayer does NOT reflect $300K of savings- it is a negative cost. It's the type of thinking that has the country where it is today...someone is still paying the person who retired at 55 - and that someone is US.

So here is the problem in a nutshell-- it's called pay for performance like everyone else- not pay for years. Automatic guaranteed raises and traditional pension plans have been gone for at least a decade - longer in many cases from almost all of the private sector.
Thereis a reason GM had to be bailed out by the taxpayers- because they are ( or were) a private company operating like a public entity. The structure is unaffordable.

I saw you highlighted 'district'- but once again, the district created that cost of the retiree @ 55-- they can't just pretend like the expense goes away..it doesn't.


Maybe it's the way school districts think - to separate costs until the bottom line says what they want. Like 204 spending $17M to get higher bond rates ( early) for MVHS-- and not claiming the money spent to secure the bonds, but counting the interest coming in against the school cost. That's how a referendum goes from $124M to $141M+

[jimbob]

And so what is that *negative* cost?

With the retirement age at 67, class size will likely double; might triple.

The 67 retire rule just shifted the cost back to the local property tax payer. At today's pay rates, that's about $1.2 million per teacher for the extra 12 years.

That doesn't matter. Nobody who pays local taxes today, even you and me DW, will be there to see the results.

So let's stick to the teachers with their overpriced administrators and make them suffer. Fire the b@$t@rd$. Who cares?

[macrockett]

Mar 29, 2010 15:54:20 GMT -6 jimbob said:

And so what is that *negative* cost?

With the retirement age at 67, class size will likely double; might triple.

The 67 retire rule just shifted the cost back to the local property tax payer. At today's pay rates, that's about $1.2 million per teacher for the extra 12 years.

That doesn't matter. Nobody who pays local taxes today, even you and me DW, will be there to see the results.

So let's stick to the teachers with their overpriced administrators and make them suffer. Fire the b@$t@rd$. Who cares?

jimbob, can you show me the math and your documentation?

On property tax, we do have a tax cap, remember? So how is that "shift" back going to work?

One other thing, aren't you looking at pieces, not the big picture when you talk about the District and the State? That is why we need the math, to lay out what you are saying.

[jimbob]

I'll recalculate it and share it on google docs. Also trying to answer DW's question about the cost to the state. My early calculation is that the state's pension cost is about $4,200 per year per household -- that's on a 2 billion contribution per year. Not sure about this amount. Have to dig some more first.

I'll have to look up the distict's salary schedule again to redo the calculation.

Thanks for asking

[doctorwho]

Mar 29, 2010 15:54:20 GMT -6 jimbob said:

And so what is that *negative* cost?

With the retirement age at 67, class size will likely double; might triple.

The 67 retire rule just shifted the cost back to the local property tax payer. At today's pay rates, that's about $1.2 million per teacher for the extra 12 years.

That doesn't matter. Nobody who pays local taxes today, even you and me DW, will be there to see the results.

So let's stick to the teachers with their overpriced administrators and make them suffer. Fire the b@$t@rd$. Who cares?

Ignoring financial facts by trying to appeal to the emotions of people has already been tried by the governor..it didn't change the math for him, nor does it for this discussion.

And your math may or may not be correct -- but you ignored the fact I included the fact that most people do NOT get step raises across the board - and I recommend paying for performance of a job. Most jobs have salary caps for certain levels-- they don't just keep plowing money in because the calendar turns over another year.


As for not being here to see it - true, but my kids will be and I don't want them saddled with the debt forever.

As for the over priced administrators, you and I see eye to eye on that one. We pay administrators very large sums of money- yet we rely on a 'volunteer' school board, many of whom have zero financial background- to make decisions for a $270M entity. Crazy, you bet.

This is not about being anti teacher ( sorry but I have one in my household that that would make no sense) - it's about a cost structure that just cannot support itself the way it is set up. The aging of America, coupled with pols theft thru ignnoring the underfunding of pension plans and using the money for other ventures, that has run the well dry.
Social security/ medicare/ pensions, totally comped benefit plans do not have the funds to support themselves.
Companies like mine would have closed also 10-15 years ago had they not changed. It sucked to have things taken away, but 12% unemployment- ( really closer to 20% accounting for those who have stopped looking- taken much lower roles)- and soon to be higher also does not make for an economy that wil survive.

[doctorwho]

Mar 29, 2010 17:03:47 GMT -6 jimbob said:

I'll recalculate it and share it on google docs. Also trying to answer DW's question about the cost to the state. My early calculation is that the state's pension cost is about $4,200 per year per household -- that's on a 2 billion contribution per year. Not sure about this amount. Have to dig some more first.

I'll have to look up the distict's salary schedule again to redo the calculation.

Thanks for asking

$4200 per year per household for pensions alone ? This is a structure that can continue- and raise exponentially each year?

If that math is correct and the median family income is $56,230 then the "TAX' on each household- just for pensions and nothing else is 7.5% per year. And anyone can make a case that this is affordable?

[Arch]

Mar 29, 2010 17:44:40 GMT -6 doctorwho said:

Mar 29, 2010 17:03:47 GMT -6 jimbob said:

I'll recalculate it and share it on google docs. Also trying to answer DW's question about the cost to the state. My early calculation is that the state's pension cost is about $4,200 per year per household -- that's on a 2 billion contribution per year. Not sure about this amount. Have to dig some more first.

I'll have to look up the distict's salary schedule again to redo the calculation.

Thanks for asking

$4200 per year per household for pensions alone ? This is a structure that can continue- and raise exponentially each year?

If that math is correct and the median family income is $56,230 then the "TAX' on each household- just for pensions and nothing else is 7.5% per year. And anyone can make a case that this is affordable?

Most people don't even get to put away 7.5% towards THEIR OWN retirement per year... let alone having to fund other people's due to a legalized ponzi scheme that needs to frozen and replaced with traditional 401Ks and roths, etc.

[southsidesignmaker]

I am going to go out on a limb here guys but assuming the teachers pension fund is still financed via real estate taxes, doesn't the $4200 seem a bit excessive. Especially considering that many households may not pay taxes on real estate holdings.

I would suspect that the pension portion of total taxes allocated towards schools is in the neighborhood of 8-10%. If your realestate taxes are $6000 x.80 (school portion) = $4800 x.10 = $480.

Please note that this figure may be higher as the pension portion on my real estate tax bill has has not been broken down to show pension portion for several years.


Where is Mac when you need him, doesn't he eat these kind of facts for lunch!

[EagleDad]

Mar 29, 2010 18:58:43 GMT -6 southsidesignmaker said:

I am going to go out on a limb here guys but assuming the teachers pension fund is still financed via real estate taxes, doesn't the $4200 seem a bit excessive. Especially considering that many households may not pay taxes on real estate holdings.

I would suspect that the pension portion of total taxes allocated towards schools is in the neighborhood of 8-10%. If your realestate taxes are $6000 x.80 (school portion) = $4800 x.10 = $480.

Please note that this figure may be higher as the pension portion on my real estate tax bill has has not been broken down to show pension portion for several years.


Where is Mac when you need him, doesn't he eat these kind of facts for lunch!

Why do you believe the pension fund is financed only by real estate taxes? Does it not come from all revenue source including sales taxes and income tax, or is there a special provision I'm not not ware of that ensures it only comes from real estate taxes?

Which "households may not pay taxes on real estate holdings."? I do not believe there are any that have exception from this. Renters pay via their rent (the landlords pay the property tax, it's just not broken out)

$480 - he, he, that GOOD

[southsidesignmaker]

Illinois State Pensions Continue to Put Pressure on the State Budget
Illinois’ state pension systems continue to be seriously underfunded with the latest calculations placing the unfunded liability at over $40 billion. As of June 30, 2006, the five pension systems primarily supported by the state (the Downstate Teachers’ Retirement System (TRS), the State Universities Retirement System (SURS), the State Employees’ Retirement System (SERS), the Judges’ Retirement System (JRS), and the General Assembly Retirement System (GARS)) had accumulated $103.1 billion in actuarial liabilities for pension, disability, and death benefits. The systems held assets valued at $62.3 billion leaving $40.7 billion in unfunded obligations, or a funded level of only 60.5%.

The systems currently have sufficient assets and income to easily meet obligations for the foreseeable future. In fiscal year 2006, the systems spent $5.3 billion for benefits, refunds, and contributions. Member and state contributions only totaled $2.3 billion; however, an additional $6.7 billion was earned in investment income from a healthy world equities market leading to a $3.7 billion increase in pension assets for the year.

However, pension systems by their nature need to plan for the distant future. Benefits being promised today to employees in their twenties and thirties may not actually be paid for forty or fifty years. Above average investment returns cannot be expected every year and actuaries have calculated there will be a steady and sizeable increase in required benefit payments as members of the baby boom generation retire and as life expectancies continue to rise.

Funding Policy for Illinois’ Pension

A look at the history of state contributions to the state pension systems indicates that the problem was aggravated by budgetary policy regarding state contributions between fiscal year 1981 and fiscal year 1995. Through fiscal year 1981, the budgetary policy for funding pensions was to have the employers’ contribution pay the benefits, while the employees’ contributions and investment income were dedicated to building a reserve for future payments. Although this funding plan had no relation to actuarial calculations of liability, it did guarantee a steady increase in state contributions.

During a period of fiscal stress, this policy was abandoned in fiscal year 1982 with repercussions notable today (see graph). State contributions declined sharply in fiscal years 1982 and 1983 and only increased modestly through fiscal year 1995. State contributions were $406 million in fiscal year 1981 compared to pension system expenditures of $431 million. Fourteen years later, state contributions were up 28% to $519 million. Over the same interval, retirement fund expenditures increased almost 4.5 times to $1.9 billion.

To correct this condition and limit future underfunding of state pension benefits, Public Act 88-593, effective July 1, 1995, created a fifty-year funding plan with an ultimate target of achieving 90% funding of system liabilities. The funding plan includes a 15-year phase-in period to allow the state to adapt to the increased financial commitment. Once the phase-in period is complete (fiscal year 2010), the state’s contribution is to remain a level percentage of payrolls for 35 years until the 90% funded level is achieved.

Thanks to a booming stock market, some progress was made in improving the financial condition of the Illinois pension systems between 1995 and 2000. The combined funded ratio, which had fallen to 52.4% in fiscal year 1995, reached 74.7% in fiscal year 2000. It should be noted that part of this improvement is due to an accounting change for valuing assets. The value of assets had been accounted for at the purchase price. A switch to market value added any price appreciation since purchase to the asset total.

Unfortunately, the period from fiscal year 2000 to fiscal year 2003 proved to be disastrous for the financial health of the state pension systems. With a decline in the value of equities, the value of system assets declined from $45.9 billion at the end of fiscal year 2000 to $40.7 billion at the end of fiscal year 2003. Over the same period, the steady increase in liabilities continued, in part due to benefit increases, with total system liabilities growing from $61.5 billion at the end of fiscal year 2000 to $83.8 billion at the close of fiscal year 2003. As a result, the value of unfunded liabilities almost tripled from $15.6 billion at the end of fiscal year 2000 to $43.1 billion three years later and the funded ratio declined to 48.6% at the end of this period.

The financial condition of the systems improved in fiscal year 2004 due to the receipt of $7.3 billion in excess of regular contributions from the proceeds from the $10 billion pension obligation bond sale. The funded ratio rose to 60.9% but has since dropped to 60.5%.

Recent Changes

During fiscal years 2006 and 2007, the state of Illinois has stepped away from the annual pension funding requirements set forth in the 1995 pension funding plan. Instead, pension payments were restructured with required contributions temporarily reduced from those amounts recommended by the plans’ actuaries in the fall of 2005. Required contributions for the five systems were lowered from $2.1 billion to $938 million for fiscal year 2006 and from $2.5 billion to almost $1.4 billion for fiscal year 2007.

Accompanying the pension payment adjustments was legislation enacting pension benefit changes. Reduced assets from lower contributions would be offset by lower liabilities from benefit reductions and increased contribution requirements for school districts and universities that were forecast to follow. Since pension benefits are established in the Illinois Constitution as a contractual obligation of the state, most of the benefit reductions applied to future Illinois employees. A more limited number of new Department of Corrections employees will be covered by the alternative higher benefit formula for specified high-risk employees than was previously the case. The money purchase option for computing pension benefits will no longer be available for new SURS and TRS members. The value of SURS and TRS pensions is equal to the larger of a formula based on years worked and salary or the money purchase formula based on the amount the member contributed, a matching state contribution, and the interest that was earned on the sum for employees on the payroll prior to the benefit changes.

The legislation also changed how costs associated with increased liabilities due to end of career pay raises are handled. To address the belief that some school districts and universities may have been inflating payments to employees in their last years of employment so as to provide them with larger retirement benefits with the extra cost of these benefits borne by the state budget, universities, school districts, and employees will now be liable for additional payments in certain cases where there are large pay increases in the later years of employment. For the years used to determine final average salary, SURS and TRS employers are to pay their respective pension system the present value of the increase in benefits resulting from salary increases above 6%. TRS employers are also to pay TRS the normal cost of benefits received from granting excess sick leave. Finally, the long standing Early Retirement Option for teachers was continued with increased contributions required from employees and employers to avoid discounted benefits.

Future Budget Concerns

A key concern for the fiscal year 2008 budget is how to get pension funding back on track with the 1995 funding plan and whether to fund this amount from the General Funds or to create a special funding mechanism (permanent or temporary) to meet state pension obligations. A large increase in pension payments is required under current statute as the state returns to the 1995 funding plan provisions. The 1995 funding plan is to resume with contributions ramping up between fiscal years 2008 and 2010 to a level where the funded ratio will reach 90% in fiscal year 2045. If the plan is followed, state contributions to the pension systems for fiscal year 2010 will be 2 1/2 times the level of fiscal year 2007 contributions. End of fiscal year 2006 actuarial valuations for each of the systems indicate state contributions, which include monies from unclaimed property deposited into the State Pensions Fund and from Highway, Special State, and Federal Funds that have state payrolls as well as payments from the General Funds, should increase from $1.4 billion in fiscal year 2007 to $2.0 billion in fiscal year 2008, $2.7 billion in fiscal year 2009, and $3.5 billion in fiscal year 2010.

Annual increases in required state contributions currently are expected to be $604 million for fiscal year 2008, $719 million for fiscal year 2009, and $759 million for fiscal year 2010. With the completion of the ramp-up in fiscal year 2010, the growth rate for required state contributions will moderate with an expected contribution increase of $142 million in fiscal year 2011 and $145 million in fiscal year 2012.

Conclusion

With ongoing demands for increased funding for education and health care among other state priorities, it will take serious discipline on the part of budget makers to meet the steep funding requirements set by the 1995 pension funding plan based on likely growth of current state General Funds revenues. The recent history of pension funding, as described in this article, shows how monies from alternative revenue sources (the proceeds from the sale of pension obligation bonds) have been used to satisfy the funding obligations. Other methods employed recently include shifting some pension costs to employees and other employers and reducing benefits to new employees.

It is quite possible that this pattern of limiting the use of General Funds monies to meet pension funding requirements will continue in future budgets or further attempts to limit benefits may be explored. Several reports have looked at possible policy options. These include the Pension Reform Report and Recommendations from the Governor’s Pension Commission (February 11, 2005) and Facing Facts, A Report of the Civic Committee’s Task Force on Illinois State Finance (December 2006). Among the choices possible is the sale of additional pension obligation bonds if interest rates remain favorable, using alternative sources of monies for pensions such as the proceeds from the sale of state assets, tapping employees, universities, and school districts for additional funds or reducing future liabilities by changing the benefit plan for new employees. None of these options are attractive to all parties, but as the history of the Illinois pension problem has shown, delay in dealing with the problem only makes its solution more difficult.






Illinois State Pensions Continue to Put Pressure on the State Budget
Illinois’ state pension systems continue to be seriously underfunded with the latest calculations placing the unfunded liability at over $40 billion. As of June 30, 2006, the five pension systems primarily supported by the state (the Downstate Teachers’ Retirement System (TRS), the State Universities Retirement System (SURS), the State Employees’ Retirement System (SERS), the Judges’ Retirement System (JRS), and the General Assembly Retirement System (GARS)) had accumulated $103.1 billion in actuarial liabilities for pension, disability, and death benefits. The systems held assets valued at $62.3 billion leaving $40.7 billion in unfunded obligations, or a funded level of only 60.5%.

The systems currently have sufficient assets and income to easily meet obligations for the foreseeable future. In fiscal year 2006, the systems spent $5.3 billion for benefits, refunds, and contributions. Member and state contributions only totaled $2.3 billion; however, an additional $6.7 billion was earned in investment income from a healthy world equities market leading to a $3.7 billion increase in pension assets for the year.

However, pension systems by their nature need to plan for the distant future. Benefits being promised today to employees in their twenties and thirties may not actually be paid for forty or fifty years. Above average investment returns cannot be expected every year and actuaries have calculated there will be a steady and sizeable increase in required benefit payments as members of the baby boom generation retire and as life expectancies continue to rise.

Funding Policy for Illinois’ Pension

A look at the history of state contributions to the state pension systems indicates that the problem was aggravated by budgetary policy regarding state contributions between fiscal year 1981 and fiscal year 1995. Through fiscal year 1981, the budgetary policy for funding pensions was to have the employers’ contribution pay the benefits, while the employees’ contributions and investment income were dedicated to building a reserve for future payments. Although this funding plan had no relation to actuarial calculations of liability, it did guarantee a steady increase in state contributions.

During a period of fiscal stress, this policy was abandoned in fiscal year 1982 with repercussions notable today (see graph). State contributions declined sharply in fiscal years 1982 and 1983 and only increased modestly through fiscal year 1995. State contributions were $406 million in fiscal year 1981 compared to pension system expenditures of $431 million. Fourteen years later, state contributions were up 28% to $519 million. Over the same interval, retirement fund expenditures increased almost 4.5 times to $1.9 billion.

To correct this condition and limit future underfunding of state pension benefits, Public Act 88-593, effective July 1, 1995, created a fifty-year funding plan with an ultimate target of achieving 90% funding of system liabilities. The funding plan includes a 15-year phase-in period to allow the state to adapt to the increased financial commitment. Once the phase-in period is complete (fiscal year 2010), the state’s contribution is to remain a level percentage of payrolls for 35 years until the 90% funded level is achieved.

Thanks to a booming stock market, some progress was made in improving the financial condition of the Illinois pension systems between 1995 and 2000. The combined funded ratio, which had fallen to 52.4% in fiscal year 1995, reached 74.7% in fiscal year 2000. It should be noted that part of this improvement is due to an accounting change for valuing assets. The value of assets had been accounted for at the purchase price. A switch to market value added any price appreciation since purchase to the asset total.

Unfortunately, the period from fiscal year 2000 to fiscal year 2003 proved to be disastrous for the financial health of the state pension systems. With a decline in the value of equities, the value of system assets declined from $45.9 billion at the end of fiscal year 2000 to $40.7 billion at the end of fiscal year 2003. Over the same period, the steady increase in liabilities continued, in part due to benefit increases, with total system liabilities growing from $61.5 billion at the end of fiscal year 2000 to $83.8 billion at the close of fiscal year 2003. As a result, the value of unfunded liabilities almost tripled from $15.6 billion at the end of fiscal year 2000 to $43.1 billion three years later and the funded ratio declined to 48.6% at the end of this period.

The financial condition of the systems improved in fiscal year 2004 due to the receipt of $7.3 billion in excess of regular contributions from the proceeds from the $10 billion pension obligation bond sale. The funded ratio rose to 60.9% but has since dropped to 60.5%.

Recent Changes

During fiscal years 2006 and 2007, the state of Illinois has stepped away from the annual pension funding requirements set forth in the 1995 pension funding plan. Instead, pension payments were restructured with required contributions temporarily reduced from those amounts recommended by the plans’ actuaries in the fall of 2005. Required contributions for the five systems were lowered from $2.1 billion to $938 million for fiscal year 2006 and from $2.5 billion to almost $1.4 billion for fiscal year 2007.

Accompanying the pension payment adjustments was legislation enacting pension benefit changes. Reduced assets from lower contributions would be offset by lower liabilities from benefit reductions and increased contribution requirements for school districts and universities that were forecast to follow. Since pension benefits are established in the Illinois Constitution as a contractual obligation of the state, most of the benefit reductions applied to future Illinois employees. A more limited number of new Department of Corrections employees will be covered by the alternative higher benefit formula for specified high-risk employees than was previously the case. The money purchase option for computing pension benefits will no longer be available for new SURS and TRS members. The value of SURS and TRS pensions is equal to the larger of a formula based on years worked and salary or the money purchase formula based on the amount the member contributed, a matching state contribution, and the interest that was earned on the sum for employees on the payroll prior to the benefit changes.

The legislation also changed how costs associated with increased liabilities due to end of career pay raises are handled. To address the belief that some school districts and universities may have been inflating payments to employees in their last years of employment so as to provide them with larger retirement benefits with the extra cost of these benefits borne by the state budget, universities, school districts, and employees will now be liable for additional payments in certain cases where there are large pay increases in the later years of employment. For the years used to determine final average salary, SURS and TRS employers are to pay their respective pension system the present value of the increase in benefits resulting from salary increases above 6%. TRS employers are also to pay TRS the normal cost of benefits received from granting excess sick leave. Finally, the long standing Early Retirement Option for teachers was continued with increased contributions required from employees and employers to avoid discounted benefits.

Future Budget Concerns

A key concern for the fiscal year 2008 budget is how to get pension funding back on track with the 1995 funding plan and whether to fund this amount from the General Funds or to create a special funding mechanism (permanent or temporary) to meet state pension obligations. A large increase in pension payments is required under current statute as the state returns to the 1995 funding plan provisions. The 1995 funding plan is to resume with contributions ramping up between fiscal years 2008 and 2010 to a level where the funded ratio will reach 90% in fiscal year 2045. If the plan is followed, state contributions to the pension systems for fiscal year 2010 will be 2 1/2 times the level of fiscal year 2007 contributions. End of fiscal year 2006 actuarial valuations for each of the systems indicate state contributions, which include monies from unclaimed property deposited into the State Pensions Fund and from Highway, Special State, and Federal Funds that have state payrolls as well as payments from the General Funds, should increase from $1.4 billion in fiscal year 2007 to $2.0 billion in fiscal year 2008, $2.7 billion in fiscal year 2009, and $3.5 billion in fiscal year 2010.

Annual increases in required state contributions currently are expected to be $604 million for fiscal year 2008, $719 million for fiscal year 2009, and $759 million for fiscal year 2010. With the completion of the ramp-up in fiscal year 2010, the growth rate for required state contributions will moderate with an expected contribution increase of $142 million in fiscal year 2011 and $145 million in fiscal year 2012.

Conclusion

With ongoing demands for increased funding for education and health care among other state priorities, it will take serious discipline on the part of budget makers to meet the steep funding requirements set by the 1995 pension funding plan based on likely growth of current state General Funds revenues. The recent history of pension funding, as described in this article, shows how monies from alternative revenue sources (the proceeds from the sale of pension obligation bonds) have been used to satisfy the funding obligations. Other methods employed recently include shifting some pension costs to employees and other employers and reducing benefits to new employees.

It is quite possible that this pattern of limiting the use of General Funds monies to meet pension funding requirements will continue in future budgets or further attempts to limit benefits may be explored. Several reports have looked at possible policy options. These include the Pension Reform Report and Recommendations from the Governor’s Pension Commission (February 11, 2005) and Facing Facts, A Report of the Civic Committee’s Task Force on Illinois State Finance (December 2006). Among the choices possible is the sale of additional pension obligation bonds if interest rates remain favorable, using alternative sources of monies for pensions such as the proceeds from the sale of state assets, tapping employees, universities, and school districts for additional funds or reducing future liabilities by changing the benefit plan for new employees. None of these options are attractive to all parties, but as the history of the Illinois pension problem has shown, delay in dealing with the problem only makes its solution more difficult.

[doctorwho]

Mar 29, 2010 18:58:43 GMT -6 southsidesignmaker said:

I am going to go out on a limb here guys but assuming the teachers pension fund is still financed via real estate taxes, doesn't the $4200 seem a bit excessive. Especially considering that many households may not pay taxes on real estate holdings.

I would suspect that the pension portion of total taxes allocated towards schools is in the neighborhood of 8-10%. If your realestate taxes are $6000 x.80 (school portion) = $4800 x.10 = $480.

Please note that this figure may be higher as the pension portion on my real estate tax bill has has not been broken down to show pension portion for several years.


Where is Mac when you need him, doesn't he eat these kind of facts for lunch!

not by any stretch does it come from real estate taxes only- I am sure portions of sales taxes, state income taxes etc go there-(basically general funds) as do taxes on profits from casino's-- remember when riverboats were going to fund education here ? Illinois ran commericals for that 25 years ago... where is all that money going ?

Also this should not be a surprise to anyone - this crisis has been coming forever; Read the attached article that chronicles the fact that the state of illinois pension system was woefully underfunded in 1995!! Yes 1995 is was only at 53% --

They then developed a PLAN to fix it by 2045 -- one of the hits that kept it from getting there - "Unfortunately, the funded ratio
decreased substantially over recent years due
to an expensive early retirement incentive
offered to employees by the state,....." - (so much for those savings by letting teachers go at 55) -

Thisis an interesting read I found while looking for the funding sources

Illinois’ Pension Funding Crisis ( October 2005)

www.voices4kids.org/library/files/BT05_pensions.pdf

[southsidesignmaker]

“Moral Imperative” – Public Pension Tax Relief for All Illinois Families

By Bill Zettler

Recently the Champion received an email from Assistant Professor at the University of Virginia’s School of Finance. In his email he questioned the assumptions made in some of the projections of Illinois Taxpayers Pension Liability for the Teachers Retirement System (TRS) as calculated in some of my spreadsheets.

Without getting too esoteric in our math I think it is fair to say that the professor and I mainly disagree on the rate of return on investment that Illinois pensions should assume going forward. The Virginia professor suggests 9.3%, the TRS says 8.5%; Warren Buffet says to expect no more than 6.5% over the next 20 years; I say 6%; and Stephen Johnson makes a good argument for 5%, and there is the historical 2.5% from the Dow Jones Industrial Average for the 40-year period 1929-1968. That 2.5% was in spite of the 23-year economic boom following WW II.

Reasonable men can differ reasonably on that issue. But the question that matters is: which reasonable men end up paying the tab if the return estimated by the professor and TRS is lower than estimated?

Something that appears to be a small difference can end up being enormous when compounded over many years. And since we are talking about Public Act 88-0593 which has a 50-year payment schedule (with 40 years left) and a newly hired 21-year old teacher that has a 62-year life expectancy, these differences can be very large.

For example, if you have a 9.3% return per year (the professor’s assumption) for 40 years on $10 billion worth of pension assets (Illinois has about $40 billion) you end up with $350 billion. If you have a 6.5% return (Warren Buffet’s assumption) you end up with $125 billion. As former Illinois Senator Everett Dirksen once said “A billion here a billion there – pretty soon you’re talking real money.”

In this particular example, if the professor is wrong and Warren Buffet is right Illinois taxpayers are stuck with the extra $225 billion difference because guaranteeing an annual pension amount is the same as guaranteeing a rate of return. This means that families with likely decreasing wealth and retirement assets (private sector workers with no guaranteed pension) have to come up with cash via taxes, to guarantee that public employees’ wealth and retirement assets do not decrease. That is unfair to say the least.

Keep in mind that state actuaries have already projected taxpayers contributions of $320 billion over the next 40 years assuming 8.5% returns. They have not made any projections based on an assumption of 6.5% returns.

I don’t want to get between Warren Buffet and a Professor of Finance, but I do know that if I asked the professor to guarantee a 9.3% return on my retirement funds he would say something like “You are nuts, I am not guaranteeing you anything. Your retirement investments are your problem.” My sentiments exactly – no one should be the guarantor of anyone else’s retirement including Illinois taxpayers guaranteeing Illinois Public Employees’ retirement funds.

Buffet has said “Pension managers continue to make investment decisions with their eyes firmly in the rearview mirror” meaning that past performance does not guarantee future performance.

John Maynard Keynes, the famous economist said it another way: “It is dangerous to apply to future arguments based upon past experience unless one can distinguish the reasons for the past experience.”

Let me outline some reasons why future returns may not match past returns:

1. The human population will never double again.

This has never been true before but demographers say the world’s population will level off at about 11 billion in 2100 from 6+ billion now. This is important because new workers are an important part of economic growth as they work, earn, consume and invest. By contrast, the population doubled between 1960 and 2000 the era of highest economic growth in history.



2. Major economic powers have birth rates below replacement rate.

Economic powerhouses China, Japan and Europe will all have decreasing populations in the next decades, another historical first. Economic growth will almost certainly slow from past decades.



3. Life expectancy is growing.

Related to number 1 and 2 above, this means more senior citizens supported by fewer workers. For example China’s life expectancy has gone from 45 to 80 in just the last 50 years. This means current actuarial assumptions for life expectancy are almost certainly too low, resulting in future pension obligations that will be larger than currently assumed.



4. People are retiring at an earlier age.

Earlier retirement age plus longer life expectancy means slower economic growth and more taxes on fewer workers. See 1, 2 and 3 above.



5. All of the above.

All of the above means more income/wealth will need to be transferred via taxes from fewer working/productive people to more non-working/non-productive people thus greatly decreasing investment and economic growth. A given dollar cannot go two places, investment and tax, at the same time.



6. Oil prices since 1973 have actually gone down.

During the greatest economic growth period in history, oil prices were decreasing in real inflation adjusted prices from $80/barrel in 1973 to about $65 with most of that period below $25. This has enabled economic growth because there is a direct correlation between BTU per capita and GDP per capita. If the cost of BTU’s go up the rate of GDP growth will go down. In 1998, during the greatest stock market boom in history, oil hit $10 per barrel. In the coming years, is it more likely that we will hit $10 or $110?



7. Economic engines China and India will slow over the next couple of decades.

As the middle class grows in India and China, the demand for more government services and subsequent taxes will have those economies reverting towards the mean for the growth rate of western countries, which is 0-4%. That leaves only the Muslim crescent from Bangladesh to Morocco and sub-Saharan Africa as potential economic growth engines. I rate the chances of those 2 areas becoming the next China and India as extremely low.



8. The terrorist risk premium.

A dozen terrorists with dirty bombs (let alone nuclear weapons) could simultaneously shut down Manhattan, Toronto, London, Paris, Amsterdam and Berlin causing complete financial chaos and bringing the world economy to a halt. I do not know whether that risk premium is one percent, two percent or more but I do know it is greater than zero.

Having said all that, the real argument is not investment return rates. It is the inherent unfairness of one group of people having to guarantee that rate for another politically connected group of people, i.e. public employees. Common sense fairness dictates all citizens should share the risk of economic benefit or detriment equally.

The professor suggested a 10.75% employer contribution rate (including Social Security) would be adequate for public employees and I would agree with that, no problem. But as we make that transfer to the retirement system with each paycheck our liability ends. From that point forward it is the employee’s responsibility. If he gets a 9.3% return, good for him. If he doesn’t it should not be our problem.

Tenure for public employees salaries while they are working is bad enough but pension tenure guaranteeing them an investment return is unfair, unacceptable and financially impossible long term. Social Security and 401K’s for all employees, public and private, is what’s fair and necessary.


Posted June 3, 2007.


^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Mr. Zettler has become a bit goofy (especially considering his newest video on Utube).

Of course after reading the article above he has a good argument on many levels. After noticing the date of the article (pre crash), it should make more stand up and take notice.