I increasingly find that the world resembles nothing so much as one of those “How Many Things Can You Find Wrong in This Picture?” puzzles. My latest example is a statement by the executive directors of the Teachers Retirement System, the pension fund for retired Illinois teachers (other than Chicago teachers who have their own fund):
You can click here to open the document (PDF) in another window.
If you’re not familiar with some of the terminology being used the strategy that the state legislature adopted in an attempt to keep the pension fund solvent was to divide teachers into two “tiers”, those who had contributed to the TRS before January 1, 2011 and those who began contributing to the fund afterwards.
Is it my imagination or is the director’s message very long on whining and very short on solutions?
Here’s a summary of the situation:
- The TRS doesn’t have enough money to keep paying all of those to be paid from the fund unless something changes.
- The Illinois Constitution prevents the state legislature from reducing the fund’s commitments.
- Those who’ve contributed to the fund prior to January 1, 2011 aren’t willing to reduce what they expect to receive so that newly hired teachers, staff, etc. can receive more.
- The people of Illinois aren’t willing to pay more taxes to pay into the fund.
I could go into a lengthy explanation of how we got into the fix we’re in but I’ll just summarize it this way: we didn’t pay enough into the fund, particularly while Rod Blagojevich was governor. There were other priorities.
I’d have my own priorities for fixing the present system. For example, I’d put a ban on “double-dipping”, collecting more than one pension from the state, and I’d amend the constitution to do it if necessary. I’d also put a cap on the wages that can be paid by the state and on the size of a pension to be paid by the state, amending the constitution to do it if necessary. Right now in some cases the state is paying salaries in seven figures and pensions high into six figures.
That would be a start. There are all sorts of other commonsense steps that could be taken but right now we’re at an impasse. Our problem in Illinois is not a Democrats vs. Republicans thing. It’s a politicians’ perfidy thing.
How do you go from the problem is we didn’t pay in enough, especially under Blagojevich, to priority fixes of reducing payouts and both sides do it?
The fact of the matter is this place is a Democrats wet dream. Near one party rule, strong government with highly compensated union employees, and increased taxes as the only conceivable ( in their eyes) solution.
I know Dave knows this quantitatively as well as qualitatively, but for those who don’t….
An 8% return is a pipe dream as it is. If the Fed indeed pulls the plug on QE the stock market could see a 20-30% re pricing. Bonds won’t help. A one percentage point increase in rates on a portfolio with a five year duration would trigger a low double digit repricing in bonds. The state is losing people and businesses.
Technically speaking, someone is fucked.
I wasn’t saying “both sides do it” there. I was saying that this isn’t a result of the machinations of those bad, nasty Republicans. It can’t be blamed on Republicans. It isn’t a result of party politics. However, I think it’s obvious that Illinois’s Republicans have not been campaigning on increasing taxes to pay the state’s bills. In fact the newly-elected governor ran on opposing making the increase in the state’s income tax permanent.
I think I’ve made my views clear: I think that raising taxes in Illinois is a losing proposition for the state. It will merely drive people and businesses out, something the state can hardly afford.
I didn’t realize the extent to which Tier II is paying Tier I; I simply assumed that Tier II was calculated to pay for itself, and turnover would eventually resolve it. I don’t think teachers are the only employees that were “tiered,” but I do think from comments I’ve read elsewhere that (for example) municipal employee pension problems are expected to stabilize at some point because turnover projections are significant.
I’m skeptical of the claim that the Tier II track might be unconstitutional. I don’t think its possible to reduce to certainty the idea or the amount that is being overpaid or underpaid. These are just different degrees of risk.
Not heard about potential loss of SS exemption though.
@Drew, the attached document states that the 30-yr rate of return has been 9.72 percent. It also claims that 8 percent is the long-term expectation. I wonder if I call my broker, if he will tell me 8 percent is reasonable as well. A lot of public pensions are reducing return expectations, like my city. But how would one decide what returns are reasonable without looking to past rates? I think the problem is irregular contributions by the state. When investment returns were high, contributions were deferred.
The situation now is bad for the Democrats. These people were elected to make positive changes for their constituents. There are fewer jobs to give to constituents, and less resources for services. Each session is about what to cut, as the pension legacy crowds out current needs.
The fact of the matter is this place is a Democrats wet dream. Near one party rule, strong government with highly compensated union employees, and increased taxes as the only conceivable ( in their eyes) solution.
Sounds identical to who and and how California is run!
PD
9-10% is a long term equity return. But a properly constructed pension portfolio cannot be nearly that weighted in equities; it must include lower yielding fixed income securities. (I’ve gone into that before but can again if you like). 8% simply cannot be achieved without breaching fiducially sound practices.
To put gas on the fire, the Fed has made a mess of the markets. Fixed income markets have been engineered to very low rates and unless the portfolio holdings are of very low duration principal will get hammered with a rate rise. Similarly, equity markets have been artificially pumped and PE multiples are at near all time highs. (And earning above norms).
Given that, there is no period in history where equities will return over an extended period of time the sort of returns in your document off of “peakish” levels. And no, this time won’t be different. When will it all mean revert? I have no idea, but suspect in the next two years. It will be very ugly.
Oh, if your broker tells you 8% is reasonable without explaining and caveating the representation per my remarks ask him/her what they were saying in 1999 and 2007, and then get a new broker.