Fred Klonsky Calls Out Tier III

From Fred Klonsky:

What they just did to the Illinois Teacher Pension System

On Friday evening those of us who are members of the Illinois Teachers Retirement System received an email blast informing us that "significant changes" had taken place to the pension system as a result of the budget resolution, SB9.

The TRS notice explained that the legislature had created a new Tier III which would allow for younger teachers and future teachers (in Illinois but not Chicago) to opt to invest their retirement savings in a private annuity, like a 401k.

The conversion of our Defined Benefit system (DB) to a Defined Contribution (DC) has been a part of the Rauner Turnaround Agenda since he was elected.

Let's take a step back.

In order for there to be a "Tier III" there had to have been a "Tier II".

In 2010 the Illinois Democratic legislature, in a nearly secret vote pushed through in less than 24 hours with no hearings or input from anybody, a law that created Tier II for any teacher hired after January 1, 2011.

It was a disaster.

Pension blogger Glen Brown posted in 2015:

According to Bob Lyons, TRS Trustee, “the financial inequities of the Tier II funding and benefit structure must be fixed. Current law requires Tier II members to pay 9.4 percent of their salary and that subsidizes both Tier I and Tier II benefits. The Tier II contribution is 50 percent higher than the benefit’s value, which is 6 percent of their pay.
“In 20 years, when Tier II members are a significant majority in TRS, the subsidy they pay will cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. This is fundamentally unfair to Tier II members.

“These new positions will cost the state more money with an increase of the FY 13 contribution and a reduction of contributions from Tier II teachers. We believe that a funding requirement can be written that will make the payment guarantee a benefit that can be protected by the constitution, and that too will cost the state money” (Insolvency by Bob Lyons, TRS Board, March 2012). 

An actuarial analysis of Senate Bill 1 shows the bill would create Social Security chaos, eventually leading to massive local property tax hikes and making the proposal an unfunded mandate of historic proportions.

Take the time to read Glen's entire post.

It is widely assumed that when the first Tier II teacher reaches retirement age, law suits will fly and the "Social Security chaos" will ensue.

Meanwhile the current $130 billion state pension liability will grow.

Is the new Tier III some feeble attempt to address the Tier II fiasco?

I contacted my State Representative Will Guzzardi. He explained:

• Tier III is strictly optional, both for current Tier II members and future enrollees. Any new hire will have the option to choose Tier II if he / she so prefers.

• As I thought, the anticipated cost savings to the state come primarily from the fact that the employer contribution of the DC portion of Tier III will be picked up by local districts instead of the state.

• For some employees, depending on anticipated length of service and other factors, Tier II may be preferable to Tier III. For those who don't want any stock market risk in their retirement, they can keep a strictly defined-benefit plan under Tier II. For those who prefer the portability of a DC plan or see the combined package as preferable, they can opt in to Tier III.

I apologize for not contacting you sooner about this. As I began to say yesterday, some of these ideas have been kicking around the capitol for a while, but in the final few days of the special session they were included in the budget deal in an (ultimately successful) effort to get the mutinous Republicans on board. They felt they needed to do something on pensions; we were firm that we weren't going to diminish anyone's benefits. 

It was clear what had happened. The Republicans wanted to introduce a DC plan into the public pension system and in order to get the state's first budget in two years the Democrats needed Republican votes. Once again, pensions became a bargaining chip.

It is voluntary now. But who believes it will end there.

The thought is that perhaps offering Tier II teachers the Tier III investment option it will solve the problem Tier II teachers' pension will not meet the safe harbor requirement of the federal government - benefits equal to Social Security.

I talked to my colleague John Dillon yesterday. John blogs at Pension Vocabulary.

"If this is an option for the Tier II teachers who have been getting hoodwinked into paying down the unfunded liability to now jump to something that might promise a better retirement, we know all the research shows it will not be."

Speaker Madigan has been pushing for a pension cost shift to local district for years. Representative Guzzardi confirms that the cost of funding Tier III will be shifted away from the state to local school districts. That is where the so-called savings to the state are coming from.

As John Dillon pointed out to me, "Those poorer districts like Markham or Hillcrest or Ford Heights? Sorry. We have to pay those defined contributions to TRS and now no more track. Or Art. Or Music."

And the next time the teachers union sit down at the bargaining table, where will money come from in those already cash-strapped districts come from to pay for teacher salaries?

Now our younger active teachers and incoming teachers can play Wall Street casino. Even a guaranteed simple compound throws a bone to a starving retiree once in a while. But for Governor Rauner, even that is not enough. He took this opportunity to bring a major population into his field of play.

John Dillon:

"Fred. The General Assembly has taken every opportunity to avoid the costs of earlier theft by mostly Republican governors from the pension systems, as well as Blago and others. Instead of the hard work of real innovative and sensible fiscal changes - a progressive income tax, full funding payments, service taxes, etc - you drop the pathetic band-aids for devious and murky designs to avoid the moral path back to re-establish a retirement benefit promised in the Illinois Constitution."

Whether or not Representative Guzzardi is correct and that Tier III does not represent a diminishment or impairment of pension benefits may or may not be decided by judges in a court.

But when I asked retiring member of the TRS board of trustees Bob Lyons that question, he responded, "Considering we think that if the state would ask the IRS about Tier II - that it would not pass the safe harbor standard and that the only way Tier III goes into being (makes) it considered safe for retirees, can anyone argue (whether) it is a diminishment? You can oppose simply because it is not safe and it will take some amount of money away from TRS.  And even if the state will eventually have to replace those dollars, they certainly qualify as a 'slow pay.'"

Tier II made a mess of things.

Tier III took that mess and made it worse.

Governor Rauner is smiling.