Your State's Pension Liability

[imoldernu]

You may want to check your state's current Pension Liability. Here is a by-state website that shows unfunded liability by state from the year 2011.

State Pension Plans: Liabilities, Funded Ratios

Here in Illinois, we are coming into a very serious financial situation that was exacerbated on Friday, by the state court's rejection of a proposed pension reduction change for state employees. The total implications are yet to be determined, but will most assuredly result in a reduction in the state's credit rating. Current debt repayments are already being affected, and estimates for future tax increases to cover the shortages show numbers that as yet haven't hit the front pages.

Despite Illinois being in the lead in underfunding, other states are also in focus.

Politics have played a big part in failure to properly fund the pension plans, and pension promises in the past, that were offered in lieu of pay increases, are coming home to roost. In checking my own retirement year of 1989, in terms of a Chicago employee's pension of the same year... a $20,000 pension at that time, would be $43,000 today funded at the minimum 3% compounded annual increase. Add to that some other "perks" that were offered to some specific public servant sectors... (pensions based on final year's salary, including overtime and multiple year "saved" vacation pay). A policeman sargeant of my own acquaintance who retired at the same time as me, in 1989... began his retirement with a $90K pension. He continues to do quite well based on his 25 years' service.

The court ruling will doubtless be challenged, and the governor is already proposing a constitutional amendment to bypass the current rules.

Not having a pension or even having a pension that is adequately funded does not insure that there will be no effects from longer term municipal or government pension liabilities.

Look for more legal challenges that will inevitably be decided by the Supreme court.

http://www.nytimes.com/2015/05/09/us/illinois-supreme-court-rejects-lawmakers-pension-overhaul.html

 

[ERD50]

...

The court ruling will doubtless be challenged, and the governor is already proposing a constitutional amendment to bypass the current rules. ...

I think an amendment is going to be required. Although 'something must be done', I think it was correct for the IL Supreme Court to strike down that legislation. The IL constitution seems clear, pensions cannot be 'diminished'. It's not clear to me how the legislature/governor thought that law would hold up, or did they? Three theories:

1) They had the skids greased in the SC - Madigan knows the SC members, and a deal was struck that the SC would allow it?

2) Simple incompetence?

3) They were pretty sure the SC would knock it down, but it would take time, so this was just one more can-kicking exercise that gave them the opportunity to claim they were doing something?


A couple options that would affect retirees in IL:

Raise taxes in general.

Tax retirement income. Currently, IL has no income tax on SS, pensions, IRA withdraws, etc. But I bet that even this would be claimed to be a 'diminished' of the public pensions (and it is, just not directly). Would they tax retirement income, but exempt IL public pensions? That would be a divisive move I think.

I don't know, but the problem grows and the battles continue, everyone naturally wants to protect their own turf. I'm not sure when I decide to pull the trigger and get out, but I expect that is what I will need to do. This sure looks like a sinking ship, financially.

-ERD50

 

[steelyman]

Often, I'm not too sure I agree with ERD50's viewpoints (most public was my wishes concerning one Ms. Bullock), but this time I do regarding taxation of retirement income. A viewpoint on the constitutionality of that was given by an Illinois professor who believed it would be viewed as a tax policy decision, not a constitutional matter.

Remember: politics will earn you some time facing the corner here. Maybe a visit from Dr. KePorkyian too.

 

[Mulligan]

I forget the specifics from a weekend article, but the rejected law did have a few tweaks in it that they were hoping would convince court it was legal, but yes they knew it would be tricky to win the case. Apparently the court blasted the government for its decades of not contributing their part to the system.
Irony of it is court sided with pensioners, but it may ultimately be to their detriment of unintended consequences. As a pensioner myself ( though not their system) and aware of their daunting budget woes, I think I would have preferred the court to approved the plan.


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[MichaelB]

Moving the thread to the politics forum and enabling the hot topic button.

 

[theoldcoach]

I am not sure where Running Man's numbers come from. Illinois Department of Revenue shows 2012 as just over $21 Billion in Income Tax, and just under $10 for Sales Tax.

My problem (as a future pensioner in TRS) is that they are attempting to change the rules in the middle of the game. For over 25 years, I have accepted salaries and paid my required contributions based on the pension game as described.

In 2011, they had the right idea by instituting Tier II, but they tried to design it based on the current system. If they want to make a substantive change in the system, they need to start with those just entering the system. Those people can then choose to stay in the business based on the new system.

The State of Illinois was counting on their Emergency Powers to allow them to violate the Constitution and change the pension system. They said that because the system was in crisis, they should be allowed to use those powers to change the system, regardless of Constitutional requirements.

First the Circuit Court, and now the Illinois Supreme Court basically said that there would be no crisis if the State had done its job. Instead of making their pension payments, they declared "pension holidays" so that they could spend the money on other projects.

For decades, everyone in Illinois has been getting a level of services from the state that was in excess of what they should have received based on tax rates. This was due to the State shortchanging the pension systems. Now that bill for services is coming due, and everyone is realizing what the politicians have done.

For the record, I would have no problem paying state income tax on my pension when the time comes.

End ranting first post.

 

[utrecht]

This is the age of the internet with lightning speed information. Why are we looking at 4 year old data?

 

[Mulligan]

I feel for you old coach. If I was in that pension system I probably would be very dependent on it and probably unaware of the problem in my early years working when I could have altered plans.
The numbers are so daunting its hard to comprehend. Throw in the other separate unrelated state funding issues and it is very serious.

The decree puts new Republican Gov. Bruce Rauner and Democrats who control the General Assembly back at the starting line in trying to figure out how to wrestle down a $111 billion deficit in what's necessary to cover its state employee retirement obligations. The hole is so deep the state has in recent years had to reserve up to $7 billion — or one-fifth of its operating funds — to keep pace.

I wonder how much funding relief would even be provided from taxing retirement benefits?


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[gauss]

What I found interesting was the Governor's proposed constitutional amendment to address the pension issue upon the SC overturn.

I thought at first they were going to retroactively reduce the value of the accrued pensions as was attempted by the legislature.

Instead, on my reading of summaries of the amendment, only future accruals would be effected.

I know that when my corporate pension was frozen a few years ago, I was quite ticked off enough that it contributed to my decision to resign early. On the other hand, the company was open about it all along that this was a possibility and that only past accruals were protected by Federal Law.

I guess I am curious what the Illinois constitution currently says about pensions. Are future accruals currently protected, or is it not that specific?

If people have been working their whole career under the constitutional assumption that their full pension would be earned and paid with never any changes to the plan as time progresses, that is one thing and it should be upheld IMHO.

If on the other hand that the constitutional promise was that accrued benefits could not be reduced retroactively, then that is an entirely different matter.

The nature of most DB pension formulas is inherently risky to the participant in that the final avg balance causes the yearly accrual to increase exponentially with time. You could work 2/3 of a career, such as in my case, under one plan, but have your pension impacted by much more than 1/3 if the terms are modified.

-gauss

 

[Mulligan]

Gauss, I think it boils down to this below since benefits are protected under the state constitution.

It would have crimped pensions perks in several ways in an effort to erase the shortfall by 2044. Perhaps most significantly, it would have erased the 3 percent compounded cost-of-living adjustment added in 1989, replacing it with a formula that gave the increases on a portion of benefits, depending on years of service. Some would have had the option of freezing their pensions and contributing to a 401(k)-style plan.

It also would have delayed the retirement age for workers aged 45 and younger, on a sliding scale. Workers would have had to contribute 1 percent less to their retirements and the pension agencies would have been allowed to sue the state if it didn't contribute its full annual portion to the funds. Those were additions to help the matter survive a court challenge.

At the March argument before the high court, the opponents to the law argued that the constitution's language was clear — promised pensions could not be reduced.
http://www.stltoday.com/news/local/...cle_799ab6d2-da2e-5515-bac4-58217d422e7d.html


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[Fermion]

How bad are the figures, really? Is it solvable with small changes, slight increases in taxes or are we talking about squeezing blood from a turnip?

There was mention of past services being excessive relative to the taxes received, but how does this relate to current residents? The people who received those past services, schooling, police protection, may be dead or moved away from the state. Is it the burden of whoever remains to pay the bill? What if everyone who can afford to pay can afford to leave?

 

[theoldcoach]

I think Gauss hit Governor Rauner's point right on the head. Even as a candidate, he said that we must pay for accrued benefits.

I'm sure that if his current proposal makes it through, there will another court challenge. This one will be a bit more interesting. Only political chicanery would have saved SB1.

Here is Article 13, Section 5 of the Illinois Constitution:

"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."

It was obvious from Mulligan's description that benefits would have been both diminished and impaired. This was the major point of those that filed against the bill.

 

[gauss]

There was mention of past services being excessive relative to the taxes received, but how does this relate to current residents? The people who received those past services, schooling, police protection, may be dead or moved away from the state. Is it the burden of whoever remains to pay the bill? What if everyone who can afford to pay can afford to leave?

Well in the worse case you could be in for a Detroit like scenario. Even though Michigan, like Illinois, protects public pensions via the constitution, pensions were indeed reduced -ever so slightly, supplemental health care plans eliminated.

The interesting legal trick here was that the union members voted in a majority to agree to the terms to reduce the pension.

The bankruptcy trustee did a very good job of twisting up the interests of the unions with other actors (financial creditors, Art/Museum interests, philanthropists etc) in the region so that it looked like from everyone's perspective if the deal was not approved, the pain would be worse.

My hope is that other municipalities will get the same level of consideration.

-gauss

 

[gauss]

I think Gauss hit Governor Rauner's point right on the head. Even as a candidate, he said that we must pay for accrued benefits.

I'm sure that if his current proposal makes it through, there will another court challenge. This one will be a bit more interesting. Only political chicanery would have saved SB1.

Here is Article 13, Section 5 of the Illinois Constitution:

"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."

It was obvious from Mulligan's description that benefits would have been both diminished and impaired. This was the major point of those that filed against the bill.

Okay, then given that union contracts are renegotiated every few years, I would interpret from the current constitution that future pension accruals are not protected. The amendment to clarify this seems like a reasonable proposal to limit legal and financial risk going forward.

The unions attempting to require the state to continue pension accruals for the rest of their careers is analogous to requiring payment at a certain hourly rate for the rest of the career. If this is the case then what exactly is the contract negotiating suppose to be for?

As long as past accruals are not being reduced then I think this is reasonable. If anyone doesn't like the new contract they are free to leave. It is when the terms are changed after the work has been done (ie retroactive reductions as proposed by the legislature) that I have real heartburn with.

Thanks for the clarification!

-gauss

 

[Chuckanut]

This is the age of the internet with lightning speed information. Why are we looking at 4 year old data?

Good point. One would think that with three more years of a generally rising stock market, we might see a few more green states on the map. Or maybe not.

 

[Dash man]

I'm not a lawyer, but I would think this would violate the equal protection clause of the fourteenth amendment. It protects government employees but not private employee's pensions, yet the private citizens will be the ones paying for it through higher taxes. Like I said, I'm no lawyer, but this doesn't seem fair.

 

[ERD50]

Okay, then given that union contracts are renegotiated every few years, I would interpret from the current constitution that future pension accruals are not protected. ...

But I think the wording is a bit vague. I believe that people on one side of the issue are saying that it not only protects past accruals, but future accruals must not be diminished either. That is what benefits them (well, at least in the short term), so that is the interpretation some will push.

I am trying hard here to abide by forum rules, I will express no opinion on that matter, or it's fairness or anything else, though I do feel your observations are a reasonable view (though others may see it differently). I am only trying to discuss the implications for us IL residents.

From a pure mechanical basis, it seems an amendment would absolutely allow for any sort of change that can be passed, but I doubt that they could gather enough votes that would change past accruals, but could make it clear that future accruals are subject to change, and if you don't like the new offers, you can find work elsewhere, like most workers are subject to.

And/or they can raise taxes, but they do end up facing a potential dwindling tax base (those with money often have more options available for moving), requiring more rate hikes, dwindling the tax base further, etc, until bad stuff happens.

And/or they cut services and/or get more efficient with their service spending.

Hopefully, some combo can get the job done. Can't say I feel very optimistic.


-ERD50

 

[Mulligan]

But I think the wording is a bit vague. I believe that people on one side of the issue are saying that it not only protects past accruals, but future accruals must not be diminished either. That is what benefits them (well, at least in the short term), so that is the interpretation some will push.



I am trying hard here to abide by forum rules, I will express no opinion on that matter, or it's fairness or anything else, though I do feel your observations are a reasonable view (though others may see it differently). I am only trying to discuss the implications for us IL residents.



From a pure mechanical basis, it seems an amendment would absolutely allow for any sort of change that can be passed, but I doubt that they could gather enough votes that would change past accruals, but could make it clear that future accruals are subject to change, and if you don't like the new offers, you can find work elsewhere, like most workers are subject to.



And/or they can raise taxes, but they do end up facing a potential dwindling tax base (those with money often have more options available for moving), requiring more rate hikes, dwindling the tax base further, etc, until bad stuff happens.



And/or they cut services and/or get more efficient with their service spending.



Hopefully, some combo can get the job done. Can't say I feel very optimistic.





-ERD50

Willful neglect of the funding issue aside ( only because that problem is obvious) pension systems (including mine) took advantage of the 80s-90s market boom to sweeten existing and future pensions instead of keeping status quo and saving for the inevitable rainy day. 3% Colas for an early retiree compounded over 30 years is a BIG number.
I remember being about 5 years into my career when my state legislature approved higher multipliers and bonus payouts to existing retirees because system was 110%. All of this really meant nothing to me at the time as that was an old person issue and I will never be old.
But now our system is about 85% funded and contribution rates have jumped from 10.5% both employer/employee to 14.5% each just to try to keep from sliding further. My general point is I wonder if all existing troubled pensions had not added sweeteners and stuck with the traditional plan would there be as serious of funding issues some now have?


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[steelyman]

I can only speak with some knowledge regarding state university academic employees of Illinois (because that's what I was - the only time I've ever been in a union was as a Teamster forklift operator for a while after high school).

Future benefit reductions have already been put into effect for a while under a plan known as "Tier II", created a few years ago and applicable to anyone hired after a certain date.

If a promising graduate student came to my office today and had a job offer in hand from Illinois, I would advise them to not consider it. Might be "brain drain", but that's what I'd say.

 

[Bamaman]

My father was a retiree of the Tennessee Valley Authority, the giant utility that's owned by the U.S. Government.

He received a good pension and a great retirement insurance package.

At one point, TVA realized they couldn't cash flow future pensions and insurance liabililties, and they shrunk their headcount from 34,000 to 10-12,000 workers. Powerplant maintenance and other jobs were subcontracted out. They closed all divisions that were not power related.

TVA now finds themselves $3-4 billion behind in funding their future retiree pensions and insurance liabilities. Their current electricity rates don't allow them to begin to make any headway toward being 100% funded on retiree benefits.

But state employee retirees in places like Illinois and California have been promised a pie in the sky by elected politicians passing the buck to the next administration. And things are coming to a head quickly. Let me just say that the bankruptcy completed last year of the City of Detroit will be a minor little case compared to what Illinois is going to see. This is some serious business with the lives of 100's of thousands of people in the balance. The outlook appears dismal, and I truly feel for what could happen.

 

[Greencheese]

As a young Illinois resident I can say from personal experience that the brain drain risk is quite real. More than one of my acquaintances has debated leaving or has left over the looming pension crises. While Chicago does have that big city allure that many young residents and corporations desire, I think a lot of secondary cities have done an excellent job of replicating that lifestyle through smart urban development. Whether or not we'll see any large corporations/demographics move in the future over the budget is yet to be seen. However the surrounding states have continually courted IL businesses and current state budget solution ideas such as a Chicago casino are simply not going to be the fix needed. No matter what the solution is though, it will be unpleasant for many parties sadly.

 

[pb4uski]

Yes, you have quite the mess in Illinois. The pension mess and four of your last seven governors have been incarcerated! (as of 2013). Not many other states can make that claim.

My sister has a home there and they can't wait to get out once my BIL retires in a couple years. I suspect that ultimately we'll hear a giant sucking sound of people leaving, which unfortunately exacerbates the problem.

 

[ERD50]

As a young Illinois resident I can say from personal experience that the brain drain risk is quite real. More than one of my acquaintances has debated leaving or has left over the looming pension crises. ...

I don't doubt this at all, but it is a tough thing to quantify, since we can't separate this effect from the other positive and negative effects you mention. It would be fascinating if we could do that.

I listened to the pension news/opinion/debate on Chicago Tonight (PBS) last night. Was disappointed as even they didn't seem to clearly break down the issue between:

A) Benefits earned to date cannot be diminished, versus...

B) Future benefits (not yet earned) for current employees cannot be diminished, versus...

C) Future benefits cannot be diminished period (as one rep said - does this apply to the unborn, and the unborn of the unborn?)

AFAIK, the issue of hiring new employees into the Tier 2 system (lower benefits then the old system) was not challenged by the SC, and if so that means that my "C" above does not apply.

But then I heard more this morning on a local radio talk show - they said that the Tier 2 system benefits fall behind Social Security at some point ( a few years in - maybe some crossover point in years/benefits?), and that means that IL cannot opt out of Social Security (some legal issues here that I don't fully understand, but it looks like to opt out, the state plan must be greater than or equal to SS?). And if they have to pay into SS, that's another added expense.

Looking bleak.

-ERD50

 

[Chuckanut]

But then I heard more this morning on a local radio talk show - they said that the Tier 2 system benefits fall behind Social Security at some point ( a few years in - maybe some crossover point in years/benefits?), and that means that IL cannot opt out of Social Security

The SS opt out makes me curious. I wonder if there is any correlation between the states with well funded plans and the being in the SS system? I ask that because my state is well funded and we all had the opportunity to pay into SS. I didn't care much for this in my 30's, but today I am glad that others had more wisdom than I.

What I have noticed is that both Detroit and Illinois (along with several lesser government institutions) are having pension funding problems and also opted out of SS. So, the poor workers not only have their pensions at risk, but they never had the opportunity get the one pension backed by the folks who own the money printing press. Not so good.

 

[ERD50]

The SS opt out makes me curious. I wonder if there is any correlation between the states with well funded plans and the being in the SS system? ....

I suspect there is a correlation. I also suspect that discussion of that is beyond the 'hot button' warning we are getting.

So I'll stick to the effects, not the causes.

-ERD50