Teachers and pension cuts

In a reversal, Illinois' biggest pension fund says it may have to reduce benefits to today's retirees

Wednesday, April 04, 2012

"The Tribune's July 5 editorial 'Rescuing public pensions' is centered on the false premise that Illinois' current pension plans for public employees are 'doomed' and unsustainable. The truth is that the state's pension plans are sustainable."

— Dick Ingram, executive director of the Illinois Teachers' Retirement System, in a letter to the editor published July 14, 2011

The politicians who run Illinois, along with many pension fund officials and union leaders, have spent years denying that their failure to demand big pension reforms threatens the retirements of public employees. That denial — often an effort to dodge blame — now stands disgraced: With insolvency looming in as little as 17 years, the head of the state's largest pension fund is warning that pension benefits promised to teachers, starting with thosealready retired, may need to be cut.

In a statement on its website, the Teachers' Retirement System of Illinois warns: "Preventing insolvency may include significant changes for TRS — new revenues must be generated and if they are not, benefits may have to be reduced."

A situation so dire that it threatens benefits to retirees ought to alarm every citizen of Illinois and every public worker who receives or expects to receive a pension. And remember, the $43 billion in unfunded pension obligations that burdens TRS is just one facet of the severe underfunding that officials at state, county and city governments have created for Illinois taxpayers. TRS today is only 46 percent funded; 54 percent of its future financial obligations do not exist.

What's more, TRS assumes it will achieve annual investment returns that average 8.5 percent — even though its returns averaged only 3.7 percent from 2001 to 2010. If TRS doesn't average 8.5 percent, its challenges will grow steeper.

The Springfield State Journal-Register reported Saturday that, in a confidential memo dated Feb. 9, TRS Executive Director Dick Ingram had warned TRS board members that they may need to cut benefits. Given TRS' past assurances, that's a shock for more than a third of a million people: more than 100,000 retirees or their beneficiaries, about 162,000 educators now working, and 100,000 retirees not yet old enough to claim pension benefits. "(I)t is prudent to assume that we will not be funded at the levels provided in statute ..." Ingram wrote. "However constitutionally sound or logical these provisions may be, they cannot print money."

The revelation that TRS has reversed field and now sees state government as too deeply indebted to meet its future pension costs could disrupt the cozy relationships that created this debacle:

•Teachers and other unionized public workers need to ask labor leaders why they didn't object when legislators and governors repeatedly failed to make full payments into the pension system. Employees also need to demand to know why their unions have been fighting, rather than insisting upon, major pension reforms.

•Union officials probably will try to deflect that criticism on incumbent pols whom, in many cases, the unions themselves have supported with campaign labor and huge donations. That mutual back-scratching has helped the pols and the union bosses at the profound expense of rank-and-file workers.

•And, with a general election only seven months away, citizens need to hold the politicians accountable for promising far more in pension benefits than this state's taxpayers ever could afford.

Ingram is the first pension fund official to rebel against Illinois politicians, union bosses and his peers at other funds. His board has issued its own statement warning that, "The fiscal situation of the State has deteriorated to the point that the Board no longer has confidence that the State of Illinois will be able to meet its existing funding obligations to TRS." Buck Consultants, which performed three actuarial "stress tests" for TRS, calculates that depending on the level of future contributions from the state, TRS faces insolvency in 2029, 2037 or 2049. In this case insolvency means TRS will have exhausted its invested assets and will only be able to pay benefits from then-current income.

That information pushed Ingram and TRS to issue its warning.

TRS' website now includes an indictment of numerous deceits that TRS labels "Illinois Pension Math." In that Alice-in-Wonderland arithmetic long practiced by politicians here, "Future savings over several decades from reform measures are counted now before they are actually realized." That's a whack at politicians who have boasted about creating far-off savings pegged to the retirements of workers hired after Jan. 1, 2011. The problem, by contrast, is today.

Gov. Pat Quinn is pushing for much more ambitious action. He says he wants pension reforms, as well as Medicaid reforms, passed by legislators this spring. We don't know whether lawmakers finally will agree to bold moves, such as reducing the pension benefits earned going forward by current employees.

Maybe TRS' declaration that it may be unable to make payouts as planned will jolt the Legislature from its evident strategy of delaying any action until after the Nov. 6 election. The TRS board isn't suggesting any specific remedy to the lawmakers who write pension policy. It has though, strongly encouraged Illinois pols to calibrate future payments into the pension system according to its actuarial obligations, rather than according to what's politically useful in any given year. For too long, Ingram told us Tuesday, "Political science has trumped actuarial science." He's right.

With TRS now warning of benefits cuts for today's retirees, the deniers can no longer pretend that Illinois doesn't have a pension crisis. The game just changed.