Local Districts - Pt. One
Caught Holding the Bag
Idiom: The phrase Holding the Bag is an idiom describing the person caught or penalized while others get away free. If a group of brigands held up a person, and the authorities were soon to arrive, veteran criminals would give the witless outlaw the swag to hold physically. This not only distracted the less thoughtful but allowed for the veterans to slink away or lay the blame on the bag-holder. That brings us nicely to the General Assembly.
Given the neurotic need to tinker by the General Assembly, by the time 2035 rolls around, Illinois public teachers may find themselves part of a Tier 8 or Tier 9 program, but let’s concentrate for a moment for those caught up in Tier 2.
Tier 2 teachers are the result of SB1946, passed in 2010, which designed an entirely different benefit schedule for those hired after January of 2011. That change in benefits included increased retirement age (67), a maximum pensionable salary calibrated to social security, a simple COLA with lesser increases, and the same payment of 9.4% in contribution despite reduced benefits.
In fact, the overwhelming support for SB1946 (only one vote against in the House, unanimous in the Senate), and the rapidity with which it passed seemed to indicate the General Assembly’s conviction to do something about pension expenses. In fact, however, the bill was also a demonstration for bond-rating companies, as Illinois was eager to float nearly $100 billion in additional bonding to help pay expenses for the state. As an infamous deadbeat state, politicians needed to show they could recoup that money politically. Thus, enter stage right, Tier Two.
Back to 2035, or the next year –when the state will no longer have to pay for pensions for teachers hired after January 1, 2011. That’s right. The State of Illinois will no longer need to pay the normal costs of teacher retirement benefits after 2036, as a direct result of the overpayments made by Tier Two teachers.
According to Kathleen Farney, a director of research at TRS, “The Tier Two members are paying more than the benefits are worth. So they are not only paying their own benefits, but they’re actually helping reduce the unfunded liability ($100 billion) that was accrued before they were even hired” (Wetterich - http://www.sj-r.com/top-stories/x1274367255/Tier-2-teachers-helping-pay-off-states-pension-debt).
The normal costs of pensions (payments to active retirees) will end, thanks to Tier Two employees in 2036, and the cost of paying down the unfunded debt using the 1995 ramp-up to achieve 90% by 2045 will begin to fall precipitously. “In 2045, the state is projected to have to pay $9.9 billion in amortization costs (payment for the unfunded debt). It will be able to subtract $876 million in negative normal costs from that amount (money not needed to pay current retirees due to Tier Two overpayments). In 2046, the year after the state is projected to meet the 90 percent funding goal, its amortization costs will fall to $1.8 billion and its normal costs will be negative $900 million, resulting in a (miniscule) $881 million pension payment” (Wetterich).
Note: SB1946 will more than reverse the unfunded liability on the backs of Tier Two teachers by 2045. In fact Tier Two will make the payment of normal costs for active retirees unnecessary, as they have paid for their own retirement benefits and more.
In most state systems, private businesses that handle pensions (except those like American Airlines who declare bankruptcy to pay higher salaries to CEO’s), or federal employers with pension programs – the idea is to match the actuarial expected expense with the employee and company/state matching payment to provide retirement income.
Tier Two was designed to fix the contributions well beyond that amount; indeed, it requires future retirement recipients to pay far, far more than they will ever receive in benefits.
Note Again: A Bucks Consultants Report of 2011 sustains these numerical projections of less for paying more, although a spokesperson for Governor Quinn suggests interpretations of such information might be a “rush to judgment.”
Note Also: But Madigan is still unsatisfied. According to his close colleagues Representative Senger and Representative Nekritz in their news conference video, Madigan’s SB1 will create an additional windfall of $30 billion affecting the unfunded debt immediately. They argue that Cullerton’s bill SB 2404 will only reap $5 billion at the onset. They also warn that if SB2404 passed, there would need be further, additional measures to assure the payment of the unfunded liability. They’ll be back! (http://preaprez.wordpress.com/2013/05/22/watch-as-representative-nekritz-and-senger-discuss-how-sb1-compares-to-sb2404-when-it-comes-to-robbing-pensioners-video/).
PART TWO: If they will be awash in Tier Two money in 2045, why this desperate need by Nekritz, Biss, and others to take even more with SB1 or SB 2404? If they will be inundated in funds in 2045, why is Madigan pushing the cost shift to local districts again? Perhaps this "crisis" is an opportunity to recoup more than the original bill itself?
Back to 2035: Finally, if a Tier Two worker is paying far more into a system that has capped his eventual earnings at social security earnings, why wouldn’t he sue? Maybe because the guilty party and object of the suit would be the local district – even if unknowingly?