One Contract Followed; Another Disregarded

Magna Carta Neglexerunt

My pastor likes to speculate about watershed historical moments, and the enormous and varied breadth of his reading provides more than adequate examples.  Sometimes these little chestnuts will pop up during coffee or while folding beds for his charitable church’s programs. 

Last week’s coffee provided this observation, which he attributed to an obscure paper offered by an equally obscure academic:  “I believe it was W. H. Munro who pointed out that the real promise of civilized treatment began with the development of the contract.”

Would that be the contract between Noah and God not to flood the earth again; signature by rainbow?

“No, of course not.  God and gods need not adhere to contracts, nor would those with divine rights.”

What about the General Assembly?

“Ha!  Yes, I should add ‘nor those who believe they are acting divinely.’  The Magna Carta might be as good a starting point as any.”

Wasn’t that way back in 1200 or so?

“Indeed, 1215.  The Barons trumped the King’s power to have them arrested without reason by forcing his signature/seal at Runnymede in 1215 to a document protecting the rights of those accused.  They vowed to swear allegiance to the King if he would acknowledge it officially.”

Did he?

“Yes, and they kept their end of the contract.  Quite a moment indeed.  I believe that House of Lords Member Denning in the late 1800’s remarked it was “the greatest constitutional document of all times – the foundation of the freedom of the individual against the arbitrary authority of the despot.”

Constitutional?  Constitutions are contracts?

“Now you’re catching on.  Constitutions carefully describe the basic principles and laws of a nation, state, or social group, and in turn determine the powers and duties of the government and the guaranteed rights to the people in it.  That, my friend, is a contract written for present and future generations.”

So, Quinn’s latest refusal to pay legislators until they brought in an appropriate pension reform bill was breaking a contract?

“In a sense, for you see a judge can be interpreter as well as arbiter.  Judge Neil Cohen found the clause stating legislators’ salaries ‘cannot be changed while serving’ to mean ‘cannot be diminished, not just increased.’  That was originally meant to prevent their voting a fiscal escalation for themselves.  The judge used, shall we say, the other side of the sword.”

Thane Madigan

And yet the very legislators who were vindicated this week have returned to working on cuts to promised pensions for retirees and public workers?

“Yes, from what I understand Pension Committee members have said they are still working toward a deal, using a framework that would end the automatic 3 percent cost-of-living increases, compounded annually, that retirees currently receive.”

But isn’t that hypocrisy?

“No, it’s acting divinely.”

Bye-Bye, Bill Daley: The Enormity of Your Problem

Bye-Bye, Bill Daley:  The Enormity of the Office

Last night, the man who has constantly criticized the current “populist” Governor for not being a leader decided he didn’t want to be a leader either. 

According to the Chicago Tribune, Mr. Daley  “abruptly ended his bid for the Democratic nomination for governor Monday, saying a lifetime in politics had not prepared him for the ‘enormity’ of his first run for office and the challenge of leading the state through difficult times” (http://www.chicagotribune.com/news/local/breaking/chi-bill-daley-governors-race-20130916,0,17259.story).

Enormity, which actually means a huge scale of moral wrong, is probably the first time Daley misused the word correctly to describe the kind of leadership he would have brought to the race. 

You’ll remember that Mr. Daley, having accomplished so little in both his leadership of the Al Gore campaign and his position as Chief of Staff for President Obama after Rahm Emanuel, turned his attention from banking to the Governor’s office this last year.  In fact, many thought he was a guaranteed Democratic runner with the backing of President Obama and the Mayor of Chicago.  When Lisa Madigan dropped out, Daley was considered the probable lead in a coming battle with Quinn. 

Despite gathering some serious money in the few months of his bid, Daley has not necessarily received the outspoken backing of the powerbrokers in the state.  Indeed, it has been suggested that the ersatz Democratic Mayor of Chicago Rahm Emanuel is actually putting his money and influence behind Republican Bruce Rauner.  According to conservative writer Bill Kelly, “That was part of the original deal-swap: Emanuel gets Chicago, President Obama taps Daley for White House Chief of Staff” (http://illinoisreview.typepad.com/illinoisreview/2013/08/kelly-rahm-wants-gop-pal-rauner-not-bill-daley-for-illinois-governor.html). 

Tit for Tat.  And now no more.

As for enormity, listening to Bill Daley get an earful from callers on a local talk show in July was revealing to say the least.

Revealing for Bill Daley too. 

Given an observation by a listener to the Dick Kay program, one that included the following: “It’s about time to tell the truth about the pensions, Mr. Daley.  We don’t have a pension problem; we have a revenue problem.  We’ve had this problem for decades and these problems were made worse when Jim Thompson had had pension holidays in which they paid nothing into the pension fund. You had Blagojevich doing that twice, not paying into the pension fund.  Furthermore, we have never collected enough taxes to cover the normal costs of government, which we would call education, public safety, infrastructure, and health.  So we rob – we took – the money that was supposed to go into the pension funds –and we use that to cover any shortfalls we’ve had in the state.  And now, lo and behold, we have this shortfall and you expect the pensioners to pay for it. That’s sort of like making the victim pay for the crime.  Illinois needs to deal with its revenue problem.  It needs a graduated tax rate system.“   (Thanks, Carl).

Bill Daley was silent. 

Later, Daley stumbled for an answer, which included banal phrases like, “lots of people are suffering in the state (not just pensioners). The tax increase that went in to effect two years ago impacted a lot of people (like pensioners will be affected).  Our local governments are struggling with a loss of tax base. We’re all in this boat together.  It’s not just the pensioners’ problem, nor should it be… (http://www.doogiesplace.com/).

Yep.  The enormity of the problem, Bill.  The moral wrong done to these people for decades is, well, it’s an enormity. 

Looking at the current field of Governor wannabees, it’s hard to imagine another person who will correct the moral wrong…morally.

Of course, there’s still time for Lisa to re-enter the field – no, don’t laugh; after all, this is Illinois.

Pension Committee Reigning in Long Time Workers' Earnings?

Pension Committee Works to Reign in the Elderly Workers' Alternate Earnings: (Money Purchase Options)

Last week, we looked at the terms, annual required contribution, age entry normal cost method, and projected unit credit cost method.  This week we look at a rare but more likely outcome given educators, who may decide to remain working out of necessity for much longer periods of time given Illinois' educational climate.

Background: Very recently, Senator Daniel Biss of Skokie has identified an opportunity to be found in a leak of information from the Pension Committee of Ten, on which he serves.  His comments follow:

“This brings me to my second topic: a leaked media report about some of the committee’s deliberations. On Friday, August 23, several news outlets published a list of items under consideration by our committee…

These ideas are in fact all under discussion by the conference committee, but nothing has been finalized yet and our conversations remain in a state of flux. That means that this is an ideal moment for you to share your feedback on these items, as well as any other thoughts you have on the pension issue. I look forward to hearing your thoughts as we hopefully enter the late stages of our deliberations, and I very much hope that we will be able to reach a compromise that, while painful, will be manageable for all stakeholders and will put our pension systems on a clear path to stability” (http://senatorbiss.com/).

This Week: One of the bulleted leaks in the Senator’s memo considers “Changing interest rates used to calculate the money purchase option formula.” 

Money Purchase Options (often called PBO’s for Purchase Benefit Options) are simply another mathematical method to calculate the pension payout due to a retiree after so many years of service. 

Most teachers and state employees determine their pension earnings through a calculation that regards average salary combined with number of years teaching.  According to the most recent TRS information, “Average salary is the average of the four highest consecutive annual salary rates within the last 10 years of creditable service.” The number of years teaching is based upon a multiplier, usually 2.2% for the Early Retirement Option. “Years of creditable service determine the percentage of the average salary to which you are entitled” (http://trs.illinois.gov/members/pubs/tier1guide/retirementbenefits.pdf ).

But some educators/workers who have been teaching before July of 2005 may calculate their pension payout using the method called a money purchase option.  Senator Biss communicates the Committee wants to change the interest rates that determine this number – the change will be to lower it.  Here’s why:

Chris Wetterich in the State Journal Register explained, “The money purchase option is typically for teachers who taught for extraordinary lengths of time.  A member is eligible if the sum of his or her contribution and his or her employer’s contributions, plus interest determined by state statute, would provide a greater monthly benefit” (http://www.sj-r.com/top-stories/x2128843634/TRS-report-raises-questions-about-timing-of-pension-vote). 

The report continues, “For example, an 81-year-old teacher recently retired who was eligible for the money purchase option after teaching for 58 years. That teacher would receive a pension of roughly $68,000 a year under the regular formula. Under the money purchase option, he would receive $174,000 a year, according to TRS spokesman David Urbanek.”  

By the way, this was back in fall of 2011.

Money purchase options were an unexpected devilish detail that proved a problem for then-House Minority Leader Tom Cross during his push for SB512, but don’t think they’ve forgotten in the General Assembly.  The Committee is working to circumvent this possibility by lowering those statutory interest rates – and by using the other bullet in Senator Biss’ memo: a decrease in employee contribution by 1%.  Lowering the contribution rate becomes another factor in blocking an alternate, higher payout for longer years of service.

Memo from Sen. Biss - Important Vocabulary

Memo From Senator Biss: Important Vocabulary (see below)

Very recently, Senator Daniel Biss of Skokie has identified an opportunity to be found in a leak of information from the Pension Committee of Ten, on which he serves.  His comments follow:

“This brings me to my second topic: a leaked media report about some of the committee’s deliberations. On Friday, August 23, several news outlets published a list of items under consideration by our committee…

These ideas are in fact all under discussion by the conference committee, but nothing has been finalized yet and our conversations remain in a state of flux. That means that this is an ideal moment for you to share your feedback on these items, as well as any other thoughts you have on the pension issue. I look forward to hearing your thoughts as we hopefully enter the late stages of our deliberations, and I very much hope that we will be able to reach a compromise that, while painful, will be manageable for all stakeholders and will put our pension systems on a clear path to stability” (http://senatorbiss.com/).

Pension funding terminology can be as arcane as the mind-numbing attempt to understand even a small bit of it.   Several terms come to the forefront of this leaked information, and terms reiterated by the Senator beg some simplification for those of us in the classroom, involved in daily life, or trying to live after retirement.  Below is an explanation of the concept of “cost methods” in predicting actuarial costs.  Other terms will be necessary to understand before one can assess the improvement such a change might be.  They are included here.   

I will make some effort this week to elucidate the other terms as well.   This post will try to explain Normal Age Entry Cost Method.

ARC (a.k.a. Annual Required Contribution)

and

Two Types of Actuarial Funding Methods

Noun: the annual amount necessary to fund a state pension plan by the employers (in our case, the State of Illinois) and to sufficiently match employees contributions and, thus, achieve a 100% funding level each year

Nota Bene: As usual, what might sound simple become multiple shades of gray when considering how such promises are ultimately carried out in actuarial terms.  Actuarial mathematics is a complex and difficult task at best, a labyrinthine attempt to hit multiple targets based upon present versus estimated future costs.  You’ll note that even estimates of the State of Illinois’ unfunded liability vary widely and are serviceable to political spin and bias.  Complicating such variable reporting, the Governmental Accounting Standards Board has no real authority to enforce its recommendations; therefore, its proposals may be helpful but not necessarily followed.

A Quick History: The Governmental Accounting Standards Board (GASB) emerged in the 1980’s and endeavored to generate a common language providing some likeness in the communication of pension information from various states. Because each of the states had its own system of computational determiners, uniformity was difficult to attain; however, in the 1990’s GASB presented a structure for mathematical presentation by which to find commonalities. For example, GASB created a singular language to express needs in accomplishing funding over three to four decades, a determination of what it would take to cover the cost of benefits in a current year, and what it would also take to pay the unfunded future actuarial liability. In short, a state (employer) can pay out a matching contribution based upon what a current retiree will receive OR based upon what a projection of future payments of that same employee might be expected to be. Future payments would include such variables as longevity of life, increased salary, inflation, etc. Such factors would make a significant difference in the amount that a state pays in its ARC as a matching contribution each year. 

What are these very different two actuarial methods?

Age-Entry Normal Actuarial Cost Method: This pension funding method recognizes “a larger accumulated pension obligation for active employees and generally requires larger annual contributions.” Like the Illinois Municipal Retirement Fund, an age-entry actuarial payment means that the cost of the benefit earned in that particular year is recognized and funded at the time the worker performs the service, not (later) when the pension is paid in retirement.  Age-Entry Cost Methods take into consideration future variables and increasing expenses – added longevity of life, cost of living changes, future salary increases of current workers.  In short, it is a more expensive and accurate estimate of present and future costs. The State of Illinois does not use this method. It uses the projected-unit credit actuarial cost method. In addition, Illinois also uses the practice of smoothing market gains and losses over a five-year period since 2009.

Projected-Unit Credit Actuarial Cost Method: “…plans that use a projected-unit credit costing method are 28 percentage points more likely to miss their ARC payment” (Center for State and Local Government Excellence, Why Don’t Some States and Localities Pay Their Required Pension Contributions? May 2008). Why?  Unlike the projected unit credit method, “…up to the point of retirement, the entry-age method recognizes a larger accumulated pension obligation for active employees and requires a larger contribution than the projected-unit credit. Thus, given comparable funding ratios, plans using the entry-age normal method have recognized more liabilities and accumulated more assets than those using the projected-unit credit” (Center for State and Local Government Excellence, The Funding of State and Local Pensions: 2009 – 2013, April 2010). 

It would seem the Committee of Ten is moving forward one step.  On the other hand, other information suggests a series of backward steps as well.  I trust your school year has started well.