Illinois Pension Reform Is Without Legal and Moral Justification

A Response to the Chicago Tribune

Tax Reform! Not Pension Reform...Tax Breaks for the Wealthy

Illinois Pension Reform Mania

Biopsy of an Attack on Teachers

A Revenue/Pension Discussion with Eric Zorn of the Chicago Tribune

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STANDPOINTS (Updated November 8, 2012) The Old Dilemma Is The New Dilemma

A View of the Illinois Public Pension Dilemma, Pt. I

 

Despite the fact that the State of Illinois entered into “an enforceable contractual relationship” (Article XIII, Section 5 of the state’s constitution) in 1970 of which benefits “shall not be diminished or impaired,” the State of Illinois has underfunded the Teachers’ Retirement System (TRS) since 1953 and has used this money as if it were its own private savings account to pay its other arrears and particular interests.

Teachers have contributed responsibly to their pension fund, currently at 9.4 percent of their annual compensation. Most teachers will not receive Social Security and only if they have worked in the private sector; nevertheless, they will receive a pittance of what they have earned because of the Windfall Elimination Provision that was “enacted as part of the 1983 Social Refinancing Act” and signed into law by President Ronald Reagan.

Most teachers have worked for lower wages (and without gratuities commonly distributed in the financial private sector) throughout their career for the promise of a guaranteed defined-benefit pension plan and not for a 401 (k) savings account that will not sustain their retirement beyond a few years. The “earned” and “deferred” compensation of a defined-benefit plan was originally established to keep college-educated people working in an often difficult and stressful job without the higher salary, benefits, and bonuses commonly rewarded to comparably-educated workers in the private sector. It is significant to note that nearly 60 percent of all TRS pension annuitants are paid less than $50 thousand each year; a little more than half of this group (33 percent) is paid less than $20 thousand (TRS).

 

To challenge and to attempt to change a teacher’s constitutionally-guaranteed rights and benefits is an encroachment of their right to human dignity and justice that the state and the country’s laws protect. It is unethical, injudicious and discriminatory for policymakers to default on those promises. Moreover, to call it a “shared sacrifice” as Tyrone Fahner of the Civic Committee of the Commercial Club of Chicago did at the “Fixing Illinois Public Pensions forum on April 9th when “billions of tax dollars [across the nation] have been directed to the rich, leaving local government services starved for funds and jobs” (Pulitzer-Prize Winner David Cay Johnston) is a travesty of justice and hypocrisy.

 

It is true that at the time of the 1970 Illinois Constitutional Convention, the state’s pension systems were no better funded than they are today (Eric Madiar, Chief Legal Counsel to Illinois Senate President John Cullerton and Parliamentarian of the Illinois Senate). Any dialogue about TRS and other public pension systems being underfunded is misleading because it refers only to the retirement systems’ long-term unfunded liability (the current value of future financial obligations minus available assets). It is evident that Illinois policymakers, members of the Civic Committee and Civic Federation, and journalists of the Chicago Tribune, et al. want to terminate the constitutional promise to public employees (Click on the sidebar link "Senate Bill 1673 Is Without Legal and Moral Justification" for an analysis).

 

The unfunded liability of the pension systems grew exponentially because of the state’s inconsistent funding methods, unreliable accounting methods, and “special deals” made by legislators and other union and business community stakeholders that were to be funded with future monies. The scapegoating of public employees, especially teachers, exacerbated when greed and corruption, particularly flagrant in the financial sector, exploded into the Great Recession. This, of course, came after eight years of inordinate military spending for two “costly” wars, deregulation and unprecedented tax cuts for the wealthy by the federal, state and local governments. This tsunami of debt intensified every state’s budget deficits. In Illinois, add fiscal irresponsibility, incompetence, avarice, and corruption, and we have the formula for this state’s financial debacle.

 

Consider the funding records of these Illinois governors to the Teachers’ Retirement System since 1949. The following is the total employer’s (the state’s) contribution as a percentage of the actuarial requirement (TRS):

 

Adlai Stevenson (1949-53): a steady decline to an approximately 40 percent funding;

 

William Stratton (1953-61): a roller-coaster funding record to approximately 60 percent;

 

Otto Kerner (1961-68): a roller-coaster funding record to approximately 70 percent (Kerner was imprisoned for conspiracy and perjury);

 

Sam Shapiro (1968-69): a decline in funding to approximately 65 percent;

 

Richard Ogilvie (1969-73): a roller-coaster funding record that was as low as 33 percent to as high as 60 percent;

 

Dan Walker (1973-77): a steady climb of funding to approximately 80 percent (Walker was imprisoned for bank fraud);

 

James Thompson (1977-91): a roller-coaster funding record from a high of approximately 90 percent then down to 30 percent;

 

James Edgar (1991-99): a roller-coaster funding record down to approximately 25 percent to as high as 70 percent;

 

George Ryan (1999-2003): a roller-coaster funding record to approximately 65 percent (Ryan is currently in prison for fraud and racketeering);

 

Rod Blagojevich (2003-09): a roller-coaster funding record down to approximately 35 percent and then as high as 70 percent (Blagojevich is currently in prison for 18 corruption charges);

 

Patrick Quinn (2009- ): the state has funded the Teachers’ Retirement System, though it has borrowed the money to do so; thus, the state’s debt service continues to grow.

 

A View of the Illinois Public Pension Dilemma, Pt. II

 

What would happen if the current proposals for pension reform are passed?

· For every one-percent increase in the contribution rate by current teachers, approximately $100 million will be collected. The State of Illinois “owes $43.5 billion to the Teachers’ Retirement System in accordance with the payment schedule mandated by current law… The cumulative unfunded liability for all five state-sponsored systems currently stands at $83 billion” (the Center for Tax and Budget Accountability April 2012).

 

· The cost of mandatory social security for teachers opting out of the defined-benefit plan would be substantially higher than the costs for teachers remaining in the defined-benefit pension plan. These costs would inevitably reduce funds available for education programs and other services; local government costs would also increase because of the Federal Insurance Contributions Act (FICA tax). “A wage or salaried employee [would] pay only half of the FICA bill, 6.2 percent for Social Security plus 1.45 percent for Medicare… [The] employer [would] contribute the other half” (What is FICA?).

 

· Migration into a Tier III, defined-contribution savings plan will accelerate the state’s obligation to pay down the unfunded liability. The defined-contribution savings plan will reduce membership contributions to the TRS and jeopardize retirement security for those teachers. If members in the defined-contribution savings plan receive social security and the state does not pay it, every school district would have to contribute 6.2 percent per teacher. The state will also have to pay down the $43.5 billion unfunded liability more quickly as a result of any movement into the Tier III defined-contribution savings plan option.

 

· If Illinois policymakers pass a bill to shift its responsibility of paying the “normal costs” to the local school districts, many school districts will not be able to afford to pay these costs, even if they are “phased in for a few years.” What will be the probable effects? In cash-strapped school districts, of which there are many, teachers will not receive increases in their salaries; many teachers will lose their jobs; student programs will be reduced or eliminated; class sizes will increase; it will be more difficult to recruit, as well as retain and attract, the best teaching candidates without offering an equitable and solvent defined-benefit plan (Education Sector Policy Briefs).

 

· “A shift would create a new and large financial requirement for school districts, which would be difficult for many to meet. Moreover, Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes. Shifting the state’s normal cost obligation onto school districts would only mean that an even higher proportion of school districts’ revenue would come from property taxes” (the Center for Tax and Budget Accountability March 2012).

 

What would be some other outcomes of these proposals? The public school system in Illinois will be jeopardized; the public school teacher’s dignity and guaranteed retirement security will be imperiled, and their students’ right to be taught by the very best teachers available in Illinois will be at risk. The passing of a few of these abovementioned proposals will create a dispossessed class of teachers in Illinois and guarantee that many of the best, potential teaching candidates will not consider working in the State of Illinois.

 

It is noteworthy that the exploitations of governmental policies, that are often written or subsidized by the Civic Committee of the Commercial Club of Chicago, create a financial deprivation for the vast majority of people in the State of Illinois. Each new tax break for the wealthy, for instance, means less money to run the state’s government and; thus, it requires policymakers to get money elsewhere or to cut essential services (of course, the Chicago Tribune, the Civic Committee and its obverse Illinois Is Broke website, et al. will continue to blame the teachers’ pension for cuts to services). Despotic governmental policies will not revive the Illinois economy and produce jobs. They will have, however, a negative economic impact on the state’s economy because retirees and most other middle-class taxpayers will be forced to reduce their spending.

 

Consider that of the nearly 88,000 retired teachers in TRS, there are approximately 52,000 pensions below $50 thousand; more than 17,000 of them are less than $20 thousand (TRS). These people do not receive social security and, if they do, it is minimal. To further reduce the COLA for these people would lead to the impoverishment and destruction of their right to self-preservation. Reflect upon the fact that a “simple” COLA will not be sufficient for keeping pace with inflation for current teachers when they retire, and that members of the Civic Committee, Civic Federation and General Assembly will never have this concern.

 

It is incongruous that nothing in these proposals will address the revenue problem in the State of Illinois. What will be most certain if these proposals are passed are costly lawsuits at the taxpayers’ expense to defend what is explicitly stated in the Illinois Constitution’s Article XIII – General Provisions, Section 5. 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,” and in Article I – Bill of Rights, Section 16. Ex Post Facto Laws and Impairing Contracts: “No ex post facto law, or law impairing the obligation of contracts or making an irrevocable grant of special privileges or immunities, shall be passed.” If one were to proceed even further with litigation, it would also be understood that according to The Constitution of the United States of America, Article I, Section 10: “No State shall… pass any ex post facto Law, or Law impairing the Obligation of Contracts…”

 

A View of the Illinois Public Pension Dilemma, Pt. III

According to the Institute on Taxation and Economic Policy (ITEP) and the Center for Tax and Budget Accountability (CTBA), pension reform should not be the focus or the conversation. The dialogue should be about tax reform, where fairness, long-term revenue stability and a graduated tax rate become the State of Illinois’ priorities and solutions for its budget problems.

The State of Illinois is one of a few states that do not tax equitably.  It is in the top 10 regressive state tax systems, where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners (ITEP).

The State of Illinois is one of seven states that use a flat-rate tax. In other words, the income of the wealthiest people is taxed at the same marginal rate as the poorest wage earners; thus, the highest taxes paid are by its poorest citizens at 13 percent (ITEP).

Furthermore, according to the Institute on Taxation and Economic Policy, the top five percent of income earners in Illinois pay the least amount of sales, excise, property and income taxes because of federal deduction offsets or substantial tax savings (regressive tax loopholes) from itemized deductions, such as capital gains tax breaks and deduction for federal income taxes paid that are coupled with a flat-rate tax structure. “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor rarely save at all – the taxes are inherently regressive” (ITEP).

“At the core of the budget crisis facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy…  [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy).

The wealthiest people should pay tax rates commensurate with their incomes, but they do not in Illinois. Attempting to balance the state’s budget by scapegoating public employees and their pension plans ignores the fact that Illinois has an inequitable tax structure. Close the corporate tax holes and direct that money to public school districts and their communities so our schools and our neighborhoods will not be deprived of the essential resources they need.

As stated by the National Council of State Legislatures, “a high-quality revenue system relies on a diverse and balanced range of sources.”  Furthermore, the Chicago Metropolitan Agency for Planning also asserts that the “Illinois tax system does not reflect today’s economic realities… Changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures.” As said by the Center on Budget and Policy Priorities (CBPP), “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… States that do not tax services [Illinois] probably could increase their sales tax revenue by more than one-third if they tax services purchased by households comprehensively.”  Increasing the individual’s state income tax was not the correct solution for increasing revenue in Illinois.

There needs to be a modernization of state and local budgets and their revenue systems. “The structural problems that have built up over time in these systems need to be addressed” (CBPP).  According to the Center for Tax and Budget Accountability (CTBA), policymakers need to “consider implementing a new revenue source targeted to repaying pension liabilities that is independent of base revenue streams from income, sales, and excise and utility taxes.”  What also needs to be considered? “The State of Illinois does not raise enough General Funds revenue to fund critical public services. Its rate of growth is lower than what is needed to simply maintain existing levels of services after accounting for inflation and population growth” (CTBA). 

Because the State of Illinois cannot evade its unfunded debt, policymakers need to create a graduated tax rate that 43 other states in this country now utilize; they also need to design a broad-base tax base and a better timing of tax payments. The State of Illinois needs to increase taxation on the wealthy and put an end to their “corporate welfare,” in particular, their extortive tax breaks and loopholes. Moreover, the State of Illinois needs to recognize that “the pension ramp was designed in such a way that it’s unfeasible” (CTBA).  Hence, there needs to be a required annual payment from the state to the pension systems; the debt needs to be amortized for a longer frame of time just like a home loan that is amortized (CTBA).  According to the National Association of State Retirement Administrators, policymakers must also “keep in mind that state and local pensions accumulate and pay out assets over decades. They have an extended investment horizon.”  Therefore, the focus should be on revenue and not pension “reform.”

It is absurd and deleterious to propose an elimination of the teachers’ compounded Cost-of-Living Adjustment (COLA) “meant to reduce inflationary erosion of the purchasing power of retirement benefits” (National Council of State Legislatures),  or the extension of  a teacher’s years of employment, or a salary cap on the amount of money earned for a teacher’s retirement, and the shifting of the state’s normal costs to school districts as an exchange for a “contractually-binding funding schedule” (Senator John Cullerton).  It is preposterous and irresponsible that policymakers of the State of Illinois have reneged on their constitutional promises for six decades.  It’s ironic and incompetent of legislators to give Governor Quinn and the General Assembly the aforementioned propositions to solve the state’s budget deficits.

Would we call our mortgage loan officer tomorrow and ask him or her to help us pay down our mortgage “going forward” as a “shared sacrifice?”  Would we ask him or her to cap his or her salary, to work longer hours and more years before collecting retirement, to reduce his or her compounded COLA, and to increase his or her property taxes so we can default?  Should we ask the General Assembly and members of the Civic Committee of the Commercial Club of Chicago and the Civic Federation, et al. to eliminate their compounded COLA, to extend their retirement age before they can collect “all” of their full “pensions,” to cap their exorbitant (lawyer and corporate) salaries, and to pay the unfunded liability out of their bank accounts, gratuities and “yearly incomes?”  Should we also ask the federal government to enact the Windfall Elimination Provision and the Government Pension Offset Provision for all of the abovementioned “going forward?” 

--Glen Brown

References used for this post and for more information, please read:

“The Escalation of Attacks on the Illinois Public Pension Systems” (April 7, 2012): http://teacherpoetmusicianglenbrown.blogspot.com/2012/04/escalation-of-attacks-on-illinois.html

“Why Are We Still Focusing on the Wrong Issues?” (March 30, 2012): http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/why-are-we-focusing-on-wrong-issue.html

“Senator John Cullerton’s Speech” (March 24, 2012): http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/illinois-senator-cullertons-speech.html

“COLA (Cost-of-Living Adjustment): Is It Guaranteed in Illinois?” (March 14, 2012): http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/cola-cost-of-living-adjustment-is-it.html

“Windfall Elimination Provision and Government Pension Offset” (March 11, 2012): http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/windfall-elimination-provision-and.html

“Understanding Illinois’ Budget Deficit and Solutions” (March 2, 2012): http://teacherpoetmusicianglenbrown.blogspot.com/2012/03/solutions-for-illinois-budget-deficit.html

“Plain and Simple” (February 15, 2012): http://teacherpoetmusicianglenbrown.blogspot.com/2012/02/plain-and-simple.html

“Antedated Court Cases: Challenging the Pension Clause, etc.” (May 18, 2011): http://teacherpoetmusicianglenbrown.blogspot.com/2011/05/antedated-court-cases-challenging.html

 

 

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