PENSION BUYOUT OFFERS

Pension Buyout: “Tell ‘Em What They’ve Won, Governor!”

Any teacher who has considered retirement in the foreseeable future has witnessed the constant plots of the General Assembly and the histrionics of the current Governor to find methods to short those people leaving state employment:  Adding a Tier Two and now Tier Three, extending service requirements, subtracting payments for not doing so, restricting pay raises in the last years of employment, etc. 

Now comes the Pension Buyout as part of the “apparently successful” budget process in Springfield.  The birds of a feather in the Capitol Building started counting chickens after the passage of Representative Michael Fortner’s HB 5625.  They estimated an annual savings of $500 million by offering individuals leaving the systems to choose a one-time buyout.

In fact, they’re counting on it and the sale of the Thompson Center for $300 million plus. 

That $800 million and a few budgetary shuffles and voila, you have a pretend “balanced budget.” 

Good luck on both those.

The Thompson Center, aptly named for a Governor who rocketed pension debt from manageable to extra-terrestrial by shorting funding to pay for roads and services, is a white elephant needing “at least $326 million in deferred maintenance,” according to the Chicago Tribune.  I doubt we’ll find any developer seeking a $300 million purchase followed by a more expensive renovation.  But the General Assembly and Rauner seem to think it’s likely – therefore, “balanced” budget.  And poor Rahm thinks he’ll get the windfall.

The other egg awaiting pipping is Representative Fortner’s Pension Buyout plan.  Another Representative remarked once to a friend and me that Mike Fortner was one of those really interesting academic guys who, when asked what time it is, will explain to you how to construct a watch.  “Complicated, mega-mathematical, intellectual, scientific.”

And HB5625 has a number of moving parts, but let’s stay focused on one at a time. 

First, what’s in it for the teacher who says, “that’s what I want!”

The single buyout will be an actuarially determined guess as to 60% of the amount of total payout that would be made IF the retiree had elected a traditional pension.

Example: Teacher Johnson is earning $65,000 at the end of her career. She is retiring at age 67.  She has completed 35+ years of work in DuPage County and will receive her full pension of nearly 75%. She would normally receive an annuity of  $48,750 in her first year of retirement.  Actuarially, she will be expected to live until age 83. 

She would be offered a 60% of her expected total earnings ($780,000) before her expected eventual death, and the buyout will be a single pay out of $468,000.  

That’s a lot of money.  But Teacher Johnson cannot get the cash.  It will need be rolled into a sponsored investment option like a traditional IRA through a state sanctioned sponsor and available in increments or perhaps more with tax consequences. 

By the way, members who went inactive while raising a family or entertaining another responsibility will also be eligible under this new law.  Also eligible are Tier I and Tier II members with 5 and 10 years of service respectively. 

It’s all voluntary.

But you wonder…where in a cash strapped state like Illinois are they going to find the money to pay for these buyouts?  You’re way ahead of me as usual.

Of course, we’ll borrow the money with bonds and pay it back later.  Moody’s was not particularly sanguine about Illinois’ “balanced budget”:

“Moody’s cited the budget’s “substantial implementation risk” when the state’s Baa3 rating was placed on review last week for a possible downgrade to junk. Analyst Ted Hampton said risks include revenue and cost-saving assumptions built in to the budget for the fiscal year that began July 1.”

(https://www.reuters.com/article/us-illinois-budget-idUSKBN19V2PS)

In other words, how do we pay this bill on our Mastercard?" "Visa?"

Once an Illinois retiree elects in…there’s no getting out. 

But Representative Fortner also has an additional offer for those cash challenged Tier I members who are awash in fiscal white caps:  An Accelerated Pension Benefit Payment for Retiring Tier One Members.

Just renounce your rights to a compounded annual increase in your pension benefit after age 67, agree to an annual increase of 1.5% instead that is simple (not compounded) and you win a LUMP SUM “ACCELERATED PENSION BENEFIT PAYMENT” which will reflect 70% of the monetary difference between your current compounded and the 1.5% simple.

Math? I taught Fine Arts, Dude.

I warned you Rep. Fortner was, well, mathematical.

Once again, it’s not cash; instead, another traditional rollover for a state approved investment company to assist you. 

Let’s go back to Teacher Johnson if she accepts this.    If she were receiving the guaranteed compounded 3% rate of interest from the start until 2033, she’d be receiving around $78,000 annually by her life’s expected end. That means that an initial single 70% buyout would give her a bit over $20,000 without much increase in her payments.   I’m not an actuary, but the increases in a compounded rate leading up to an eventual $78,000 will wash over an investment opportunity of $20,000 like a monetary tsunami.

The Pension Buyout Program will exist until June 30, 2021, but we can expect another program or iteration to be developed by that time. And NO MATTER WHAT THEY DO, THE $130 BILLION IN DEBT WILL STILL BE THERE BECAUSE THEY ARE NOT ADDRESSING THE REAL ISSUE: THE STATE'S CHRONIC REVENUE SHORTAGE. 

Maybe Moody’s isn’t impressed with the complicated methodology of the Pension Buyout Plan in Illinois, or they find Illinois’ borrowing again to save money later laughable, or maybe, just maybe, they know that teachers by and large are a pretty smart lot.

And teachers wouldn’t take this ridiculous canard at all.