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Hock of Gray: More State and City Pension Problems

The Cook County Pension Fund and the Illinois Teachers Retirement System confront their futures, and they’re a lot alike. One of the biggest problems is the unfortunate fact that people are living longer than they used to.

senior citizens

 

Bridget Gainer, who replaced Mike Quigley on the Cook County Board of Commissioners, just released a report announcing that the Cook County Pension Fund will be insolvent by 2038:

Even if the county fund generally is in better shape [than city and state plans], Gainer said, that doesn’t mean the county can continue to ignore a funding gap that had grown to $5.2 billion by the end of 2010. That’s seven times the size it was a decade earlier, before a 2003 early retirement plan, rising health care costs, higher life expectancies and fund investment downturns swelled that gap.

It shouldn’t be that big a surprise. Gainer’s analysis is basically what the Civic Federation found last November when it looked at the county pension fund. Their analysis does a good job of demonstrating the scope of the problem.

* In 2001, the county contributed 76.3 percent of its “annual required contribution,” which isn’t a legal requirement but a financial measure of sound accounting.

* A full ARC would have represented 16.6 percent of the payroll; the actual employer contribution was 12.6 percent.

* From 2001 to 2010, the percentage of the ARC contributed by the county fell from 76.6 percent to 32.3 percent.

* Had the full ARC been made, the percentage of the payroll it represented would have gone from 16.6 percent to 38.3 percent. Instead, it was 12.6 percent in 2001 and 12.4 percent in 2010.

* The county’s contribution peaked at 19.1 percent of payroll in 2007 ($261.5 million), i.e. just before the economy collapsed; then it dropped to 12.8 percent in 2008 ($188 million). So just at the time the county ramped up its contributions, the pension fund investments lost 25 percent of their value. Then the contributions went down again.

* The county actually contributed $20 million more in 2010 than it did in 2001. But the ARC more than doubled in that time, from $211 million to $572 million.

Gainer’s report has some intriguing math of its own, though:

In 1990 a 60 year old person was expected to live for an additional 20.9 years. By 2007 a 60 year old person was expected to live 22.5 more years, an additional 1.6 years. While seemingly a small difference individually, the collective impact causes the fund to pay an additional 24,532 years of pension benefits for existing retirees only. The average pension benefit for a Cook County employee in 2010 was $32,620. Paying that benefit for an additional 1.6 years per retiree would cost $800 million. Cook County employees are expected to live until age 82 for males and 85 for females. With a retirement age of 60 a retiree will collect a pension for over 20 years, with survivors and dependents possibly collecting their benefit even further into the future.

It’s a good example of how these things scale: the age difference isn’t that big, and the average pension benefit isn’t Jed Clampett money. But across a system, it adds up.

The county has consistently made its legally required contributions, as the Civic Fed noted. But another reason they’ve had trouble keeping up with what the math requires was that the math changed:

In 2002 the legislature opened an early retirement period between Nov. 30, 2002 and March 31, 2003 for employees over age 50 with 20 years of service…. 1,983 County employees took advantage of the early retirement offer and the County reduced payroll by $34 million dollars and eliminated 273 full time positions, however, it is estimated that the cost to the pension fund was far greater than any savings.

[snip]

The available information does reflect that in 2001 the funded status was 88.88% and by 2003 the pension funded status had declined to 67.52%. This 20% decrease is a combination of the early retirement offer and less than assumed investment returns.

Early retirement saves on payroll, but it increases pension costs while decreasing the amount of money going into the pension system, because employee contributions go towards existing pension costs.

Meanwhile, in other pension plans, the State Journal-Register got a scoop from a confidential memo:

The Illinois Teachers Retirement System could be insolvent as soon as 2029, leading executive director Dick Ingram to raise the politically explosive possibility of reducing pension benefits for already retired teachers.

One of the ideas floated by Ingram is reducing COLA increases, a suggestion shared by Gainer. But even Tom Cross won’t touch that one.

It’s likely that COLA, should anyone be willing to target it for cuts, will come down to a legal battle outlined by Monique Garcia in the Tribune today:

The Senate president envisions a scenario in which negotiations take place that involve sacrifice from the state and union workers. If it works, employees would agree to benefit cuts of some sort in return for potential perks that could be as tangible as better pay or as simple as ensuring the pension system is shored up enough that workers will actually get benefits when they retire.

Cross’s proposal is tied up in n-dimensional political chess:

While that measure is co-sponsored by Democratic House Speaker Michael Madigan, it has stalled since being introduced last year. Cross contends Madigan refused to provide votes for the bill, while Madigan has dismissed that suggestion as political posturing.

After the Teachers Retirement System news broke, Ingram wrote a letter to the State Journal-Register to clarify what the fund is facing (via Rich Miller):

Last year, TRS reported that the system’s financial status was good. For the last several years, the state has been able to make its legally required annual contribution to TRS. As long as the state makes that payment, TRS can “tread water” indefinitely and be viable well into the future. The system has carried an unfunded liability since 1953 and has never missed a check.

Miller’s reaction is that “it’s doubtful that the General Assembly would allow the TRS to become insolvent. These were pure numbers games.” Insolvency is more of an apocalypic scenario; it’s not like the whole unfunded liability has to be paid off at once, unless we decide we don’t want this whole “state” thing, cut everyone a check, and move to Indiana like Mitch Daniels wants. The bigger problem is the ever-increasing costs of keeping the system running; the more money going out to pay for past work, the less available for present government functions.

 

Photograph: laRuth (CC by 2.0)

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