Saturday, March 30, 2019

Why Teachers Have Compounded COLA of 3%.

Compounded Cost of Living for Teachers?  How Did That Happen?

If you read the editorial pages of the Chicago Tribune or follow the voices of many of their right-bent guest writers, the 3% compounded cost of living (COLA) provided to retirees in Springfield was a smoky backroom deal done in the dark of night by unknown legislators looking to feather their own retirements.  Unknown, except for Madigan, who is deemed the Master Illuminatus controlling all past and present evils in the General Assembly.  

The real story is actually a bit more interesting and, believe it or not, an attempted bit of fiscal compassion.    

Mr. Peabody: “Set the Wayback Machine, Sherman, for 1980.”  Sorry, Millennials, this is a reference to a short series included in the original Rocky and Bullwinkle series on TV…oh well, never mind.

1980:  a year when Fax machines became operational, Rubik’s Cubes went on sale, John Lennon was sadly killed, and PacMan hit the arcades.  

More importantly - Following previous years of equally high inflation, 1980 delivered an additional blow to consumers with a country wide annual rate of 13.58%.  

Despite the median price of a home at $63,000, interest rates were running so high that people were taking out balloon mortgages that offered lower beginning rates but were tethered to an arrangement which required a full payment at the end of a specified time. That last payment was called “the bullet.”  No amortization, just a total payment for the balance later.

(If that sounds familiar, then you are too knowledgeable about pension ramps in Illinois).

Sorry, Millennials, I digress…again.

The inflation rate for our past year 2018 was 2.44%.  

But starting in the mid 1970’s and into the 1980’s, inflation rates were stubbornly high.  



1975 – 11.3%
1976 – 5.75%
1977 – 6.5%
1978 – 7.62%
1979 – 11.2%
1980 – 13.58%
1981 – 10.35%
1982 – 6.16%
1983 – 3.22%
1984 – 4.3%
1985 – 3.55%
1986 – 1.1%
1987 – 3.66
1989 – 4.83%





As past Illinois Teachers’ Retirement System Trustee Bob Lyons observed, “In the 21 years from 1969 through 1989 there was only one year that inflation was less than 3.3% and the average annual rate of inflation was just over 6.2%.  In making the decision in 1989 to change our annual increase from three percent simple to three percent compounded, the members of the General Assembly made what they felt was a reasonable assumption that inflation would continue and that it would grow at the rate that it had been for more than 20 years.  Since state pensions had not kept up with inflation they would provide a necessary increase, but they did not ask anyone to pay for it because they assumed it would not really be expensive.  The change would cost the state, but they assumed it would still run behind inflation. And growing inflation would mean the state would collect more tax revenue.”

Anticipating further elevated inflation rates, the General Assembly granted a change from 3% simple to 3% compounded COLA in 1989 to the retirees in TRS. 

Since 1990, (high of 4.1% in 2007 and low of .1 in 2008) the average inflation rate for the country has been overall 2.4%.   As Mr. Lyons writes, “The reality is that the change from 3% simple to 3% compounded did just what it was supposed to do and it has more than protected us from inflation.”

And he’s right.  On average, thus far, we are looking back nearly 30 years with a .6% positive break.  And in our current media environment of people turning on each other rather than to each other, this COLA correction seems unacceptable to those who criticize the Illinois “Pension Problem” as simply an issue of too many benefits. The finger pointing by the Tribune and other anti-union organizations ignore the truth: the cost of pension would not be so overwhelming if there were no debt payment as a result of decades of avoiding payments.  

Eric Madiar, the past Chief Legal Counsel for Senate Leader John Cullerton and author of a thorough exegesis “Is Welching on Public Pension Promises…,” speaking before the City Club of Chicago, once reminded his audience: “Our current pension disaster cannot be blamed on salary or pension cost increases.  Between 1985 and 2014, pension funding liabilities grew by $97 billion.  Benefit increase only counted for 8%, or $8 billion of that growth.  Pay increases were actually less than actuaries had assumed they would be. And the actually helped bring down the unfunded liability by $1.3 billion.  The state's failure to fund the system accounts for 49 or 47% of that growth.  So simply out, the main reason we are in this mess is for insufficient pension contributions” (City Club of Chicago). 

But like any Zen Balance question, we are all awash in what may decidedly come again in another inevitable wave.  Okay, so now maybe we are .6 ahead.  Now.  But in the 15 years before the 3% compounded (1975-1989), we were battling an average of 6.7% inflation – or a 3.6% disadvantage even if pensioners had compounded COLA’s.  

Maybe the General Assembly didn't foresee a lessening of inflation or the Great Recession, but they understood what continued rampant inflation was doing to state retirees.  

And, it’s not pensioners that created the fiscal problems at the state or municipal levels; it is and will always be the avoidance of funding the pensions that now comprise the interest-laden debt which must be serviced yearly.  As Bob Lyons also wisely points out, “The truth is that this year 76% of the 8.5 billion going to pensions is to make up for the continuous past underfunding of the five systems.  If Illinois pensions were fully funded, all it would take to fund the pensions for all current employees would be just a little more than two billion dollars. The so-called pension problem in Illinois has in reality not been caused by the cost of our pensions, but by the failure to fully fund them.”

The next time someone suggests that retirees’ benefits are the cause for the “pension problem,” “pension crisis,” or the “pension’s unsustainability,” please help them see the truth.


Thank you, Bob Lyons.

Thursday, March 28, 2019

Mark the Calendar. April, Vote for Doug Strand

Doug Strand for Trustee of TRS

You’ll remember that the Illinois Retired Teachers' Association was the legal spearhead in the battle to prevent the stripping of pension benefits under SB1’s argument of financial necessity (aka sovereign powers argument). It was the IRTA that legally held the line and secured the unanimous decision by the Illinois Supreme Court in May of 2015 that the Pension Protection Clause in the Illinois Constitution cannot be ignored.  Cannot be brushed aside out of a state’s sudden needs, especially when the state’s underfunding was causal for the “emergency.”

Now, the Illinois Retired Teachers Association has unanimously endorsed Doug Strand for Trustee of the Teachers Retirement System.  

Here’s some background: 

Mr. Strand holds two Bachelors and one Master’s degree.

He was an accounting intern during his undergraduate years at Luther College with Price Waterhouse in Chicago, Illinois.  

After college, Mr. Strand worked as an account auditor in Minneapolis, Minnesota. 

After that experience, Mr. Strand worked as an educator for forty years until his retirement at United Township in East Moline, teaching history, consumer education, and economics.

Mr. Strand served as a member of the East Moline’s Police Pension Board and the East Moline City Council.

Currently, Mr. Strand serves as Vice President of the Blackhawk College Board of Trustees.

Mr. Strand also sat on the Board of the Service Plus Credit Union, a credit union founded by educators of East Moline High School.  

And the IRTA, a stalwart and resolute defender of retirees’ pension benefits, has selected this individual to steward and protect our funds and benefits. That’s more than a significant reason to vote, and make sure to vote for Mr. Strand.  

But you should listen to Mr. Strand himself.  You’ll see what the IRTA liked too.

Remember to Vote! 




Wednesday, March 20, 2019

Vote Doug Strand for TRS Annuitant Trustee

Why to Vote for Doug Strand for TRS Annuitant Trustee

I gladly borrow this retrospective from Glen Brown and sadly attest to its accuracy.  Recent communiques from TRS as well as the IRTA indicate that little or less is being done to correct the continued exploitation of the Illinois Pensions System by legislators in Springfield.  We need stalwart representation in order to sincerely protect our earned benefits.  I too will vote for Doug Strand.

From Glen Brown

It was under the IEA leadership and agreement of Bob Haisman when the flawed “Pension Ramp” (Public Act 88-0593) was signed into law in 1995. It was later discovered that "the Statutory Funding Plan's contribution schedule increased the unfunded liability, underfunded the State's pension obligations, and deferred pension funding. The resulting underfunding of the pension systems enabled the State to shift the burden associated with its pension costs to the future and, as a result, created a significant financial stress and risks for the State..." (In re Pension Reform Litigation (Doris Heaton et al., Appellees v. Pat Quinn, Governor, State of Illinois, et al., Appellants)). 

It was under the IEA leadership and agreement of Ken Swanson when SB 1946 passed on March 24, 2010 in approximately 10 hours, a senate bill where Tier II members would begin subsidizing both Tier I and Tier II benefits, where the state would eventually not owe any annual contribution to TRS because the Tier II members would be paying down the entire cost, where Tier II members will receive a TRS pension that will be less than Social Security, and where school districts will be responsible for making up the difference. 

It was the IEA leadership of Ken Swanson and Cinda Klickna that “proudly supported” Senate Bill 7 signed into law in June 2011, the bill that ensured that teachers’ evaluations and their tenure were tied to the Performance Evaluation Reform Act (Public Act 96-0861), the bill that ensured a so-called “streamlined process for the dismissal of teacher tenure,” the bill that also required an authorization of 75% for a strike vote in Chicago, to name just a few complications that confront today's teachers.

It was on July, 2, 2012 when Fred Klonsky, John Dillon, Michael Cousineau, Catherine Lenzini, and I met with Cinda Klickna and other IEA leaders to discuss our concerns about the IEA's willingness to negotiate teachers' and retirees' constitutionally-guaranteed pension benefits and rights. Of course, the IEA leadership did not heed our advice. 

Instead, 10 months later we witnessed the folly of the IEA leadership's agreement to a reduction of pension retirees’ benefits and rights in Senate Bill 2404 in May, 2013.  The IEA leadership believed SB 2404 would have thwarted any further attacks on the Pension Protection Clause. Fortunately, Michael Madigan never called for a vote on this bill.  What soon followed, however, was Michael Madigan’s Senate Bill 1 in December 2013, another diminishment and impairment of teachers’ and retirees’ constitutionally-guaranteed benefits. Senate Bill 1 was ruled unconstitutional by the Illinois Supreme Court on May 8, 2015.

It is the current IEA leadership under Kathi Griffin that recently endorsed candidates, such as Michael Connelly, Don Harmon, Sue Rezin and others, who had voted to diminish and impair teachers’ and retirees’ pension benefits.

It is the current IEA leadership of Kathi Griffin that recently stated: "...It’s refreshing to have a governor not only focused on what is best for students and Illinois’ future, but who is willing to work collaboratively to get the best results... We applaud Gov. Pritzker for looking at various funding sources because funding has to play a role in the future he’s building for Illinois. A starving state cannot grow. And, we find the Governor’s pension proposal an interesting start to the conversation..."Both the Illinois Retired Teachers’ Association and the Teachers’ Retirement Association have emphatically disagreed with Pritzker's proposed state budget.  

Monday, March 18, 2019

Impeach Trump? Think Carefully, Please.

Impeach Trump?  Think Carefully, Please.

The New Yorker’s Adam Gopnik in his March 18th essay “The Pros and Cons of Impeaching Trump” offers serious considerations about the wisdom of pursuing sudden energy to impeach a man as notably ill-equipped in politics, a education, and morality as the current President of the United States.  If you have not read the article, you’d be most wise to do so.  It may be true that Pelosi’s observation that he isn’t worth it may also be a prescient warning as to why it is not worth it for such an activity to proceed on many, many levels. 

I take the liberty to provide three observations by Adam Gopnik.  I believe you’ll find these separate observations quite enough to bring you to reading and thinking about his judicious opinion at The New Yorker.  

There is, however, a real and reasonable argument among congressional Democrats—and, indeed, among the public—about whether pursuing Trump’s impeachment, even assuming that we get the facts, is a wise idea. The arguments against it range from the hyper-practical point that a President Mike Pence would be worse, to the procedural-minded one that, since impeaching Trump would mean that two of the four most recent Presidents would have been impeached, and since articles of impeachment can be passed by a simple majority in the House, every President from now on would risk facing it the moment the opposition has a majority. This would create perpetual governmental paralysis, and, while Trump might not care about safeguarding democratic institutions, the country should.

Any one of a dozen things that Trump has done overtly would have resulted, if done clandestinely by another President, in near-universal cries for impeachment, if not for immediate resignation. Just for a start, his firing of the director of the F.B.I. and then confessing to both a journalist and the Russian foreign minister that he did it to end an investigation into his own campaign’s contacts with Russians follows the exact form of one of the impeachable offenses—obstruction of justice—that was applied against Richard Nixon. The “smoking gun” tape smoked because it showed that Nixon had tried to stop the F.B.I. from investigating the Watergate break-in on phony “national security” grounds.

Pragmatism is not a way of negating principle but, rather, the realist’s way of pursuing principle. The arguments against impeachment today are primarily pragmatic, the arguments for it primarily principled, but the principled course could, before long, turn into the only practical course. Impeachment may be too good for Trump. It may yet prove just the thing for the country.

Please read the entire article.  Let's work together and save our Constitution together.



Saturday, March 9, 2019

What's Right About a Fair Tax in Illinois?

"Why must royalty pay more, my friend?"
Graduated or Gradient? – Looking for Accuracy in a Fair Tax for Illinois*

This season affects me most – psychologically,”my wealthy friend Ernesto uttered between sips of cognac the other evening.  

“It has been a brutal winter, Ernesto,” I offered hopefully, “but the end is coming with each day’s increasing sunlight.”

“I am talking taxes, my friend,”Ernesto responded, glowering.  “I am imprisoned by your government’s exasperating 33% income tax.    And, I suppose, you are now part of that progressive rabble that wishes the same - a graduated income tax in Illinois?”

“Goodness, Ernesto.  Thirty-three percent indicates a significant income.  I am happy for your success.  May I ask what portion of your income is subject to this rate?”

“Why, all of it…just as you and your union bosses would wish in Illinois.”

“Actually, Ernesto, if Illinois were ever to move to a “Fair” tax system, one you would call progressive or graduated, the increases in taxation would occur as they do on the federal level – at thresholds or gradients.  In other words, Ernesto, if you achieve $3000 above the threshold for 33% taxation (which is $226,850), you pay 33% on that $3000, not your entire earnings.

“In fact, Ernesto, you pay your federal tax like everyone else for all of our services for each of the thresholds as you move through them, my friend.  That means you pay only 10% on your first $18,000, 15% on your next $56,000, 25% on your next $75,000, and so on.  You don’t fall into a category where you pay 33% for all of your earnings.  That’s why I use the term gradient tax system (or fair tax) rather than graduated when I talk about it. “ 

“You don’t know my pain…”

“In truth, Ernesto, you pay the same percentage tax as me until you move well beyond me…and then you pay extra for only those amounts above our joint threshold.” 

“I see. Don’t you have anything better than Hennessey?  Paul Ferrand or Skye?”

“Sorry, no. And that is how a fair tax would work in Illinois, Ernesto.  We, both of us, would be taxed at higher levels for the amounts we earned above thresholds of income, not for all of it.”

“Ahhh, my friend.  But you’re still stealing from me for being successful, are you not?”

“Well, not actually, Ernesto.  In truth, you and I might actually be stealing from the greater population in Illinois who pay more dearly for their services – education, protection, healthcare, roads and transportation – than we ever will.  And, if we’re not stealing, we’re certainly getting a better deal for it all.”

“Ridiculous.”

“Not so, Ernesto.  The average earner in Illinois pulls in $47,485 annually.  At 33%, I know that you pull in much more, and I’d venture nearly ten times that amount.  Nevertheless and without denial, let’s review our numbers.  Suppose Mr. Average needs a new car for his family and purchases a solid sedan at $25,000.  I see by your scowl that such a concept is impossible.  Will you accept $40,000? “ 

“Only if I have to…”

The taxes on this family’s precious purchase will be several – New Vehicle Tax, Cook County Home Rule Tax, Cook County Sales Tax, possible Chicago Home Rule Tax…and others. Those taxes, Ernesto will run to nearly $3,000 – or almost 7% of the earner’s annual salary. “ 

“And…?”

“For an income earner like you?  A mere .6% of your salary.   Ernesto, you would need to purchase at least ten of these vehicles to begin to feel that same impact on your income.  That is something, I might add, you would not and never need do.  But it does illustrate a significant difference in our relationship with tax requirements, doesn’t it?  We gest away with a lot, my friend.

“Add to your and my advantages the costs of milk, gasoline, clothing.  Costs of living and taxes for these average workers, Ernesto, drain huge portions of their ability to live, and we are not talking disposable income.  

“Indeed, what you and I pay for the protection of police and fire, for our schools, for transportation, health services, and other benefits is a steal, Ernesto. Don’t we owe it to make it more even?”

Silence.

Note to self: Purchase Paul Ferrand for next get-together.

*
In the last two days, new-elected Governor Pritzker has finally offered up a schema for his proposed graduated income tax for earned income in Illinois.  It is his hope that such a plan will provide Illinois with enough additional revenue to offset some of the $billions in overdue bills and ultimately long-term pension underfunding.  His plan, like the necessary act of putting an amendment to change the constitution remains a wishful work in progress.  Likewise, his preliminary specifics/numbers offer a starting point for serious debate over the schedule of payments to be made by income earners.  Let us not forget that the addition of a non-marginalized payment of 7.95% for anyone earning over $1million annually is just a starting point as well.  While the Tribune and the IPI will quickly jump on that distractive possibility, legislators would have to hammer out the actual payments after a successful adoption of a change to the Illinois Constitution.  I resurrect this adapted discussion I had with my friend some years ago to point out the inadequacies and penalties of a flat tax in Illinois.

Tuesday, March 5, 2019

The Illogical Argument of Kristen McQueary on Pensions, etc.

Correlative Fallacy and the Illogical Argument of Tribune Editorial Board member Kristen McQueary


Correlative Fallacy: An argument that tries to redefine a possible correlation (from a multiple of options) so that one possibility encompasses the others, making only one alternative possible. 

Example: Many men who lift weights and work out are bald.  Therefore, lifting weights and/or working out will cause hair loss.

In the Tribune today, Kristen McQueary’s opinion piece ends with an exaggerated font and bold recap stating: “There’s nothing ‘fair’ about politicians spending recklessly for decades, failing to pay what the government owed into pension funds, raising the flat tax rate with no reform, refusing to advocate for changing the pension clause of the Illinois Constitution – and then blaming the rich folks for not pulling their weight.”

There’s lot to unpack here. 

I think McQueary would find most public sector workers in Illinois agreeing with her first two clauses. But they would likely link them both. 

“Spending recklessly,” meant diverting money from pension payments to public sector workers for services without asking taxpayers to make the kind of concessions other people in other states were paying for, like improved roads, health services, public education, etc.  Over the decades as a result, the debt (also known as the unfunded liability) has now reached a whopping $131 billion.  

That’s a lot of unpaid bills over a very, very long period of time.

But Illinois seemed little concerned about that, and even though the state (Edgar) put together an emergency plan in 1995 to pay it all off by 2045, they were only buying more time.  And by skipping or skimping in pension payments, the then fault-filled design did little to help.  In fact, the Commission on Government Forecasting and Accountability, the fiscal research arm of the General Assembly, concluded in 2013 that the largest cause of the unfunded liabilities was inadequate contributions from the state. Underpayments between 1985 and 2012 totaled $41.2 billion...” 

McQueary’s right.  That’s not fair to the thousands of public sector workers who made their nearly 10% payments to expect a pension when they retired. 

As for McQueary’s complaint in the opening comments of her opine that Indiana pays all their bills within their required deadline, but Illinois must put off bill paying for inordinate lengths of time?  And pay interest? 

But trying to link Indiana’s payment of bills within the timeline set by their legislature and Illinois’ rate of delinquency cannot be connected (as she would have us believe) with the unfunded pension liability.   That’s due to much history but more recently to Rauner as it might be to balding men in his administration.  

Rauner’s hardline impasses created all sorts of havoc, devastating nonprofit social services, state-run universities, contractors of all types and vocations. “Meanwhile the backlog of unpaid bills shot up again.  Illinois was spending about the same amount it had spent when the income tax had been higher, but the state was n jo longer collecting enough money to sustain the spending.  By last November, Illinois was $16.7 billion behind in its payments.”  

After her love for Indiana, McQueary argues that Illinois voters should reject a graduated income tax rate because, well, because it was done in 30 other states “and Illinois could have – should have – done so a long time ago.”  But now, Illinois is doing this to make the systemic revenue shortage work to pay the bills while other states (Iowa and Wisconsin) did so for fairness to taxpayers and to stabilize budgets. And unlike other states “(they) have not jacked up the rates irresponsibly as a way to claw out of abysmal financial management.”

So….  Even though Illinois faces a budget deficit after decades of a flat tax, a graduated income tax which would offer more fairness and budgetary assistance is not allowed because you asked too late.  As my dear old mother used to say when we were trying to explain what had happened to her best and now destroyed outdoor plant, “Well, you cannot argue with logic like that.  Now, go face the corner and figure out how silly you sound.”  

McQueary throws some tea party history at the reader in the end, resurrecting the Stamp Act of 1765 and complaining that “Taxpayers deserve respect.”  And in one of her continuous tropes, she equates the inefficiencies of government taxes with pensions to begin with. McQueary wants “relief" on the constitution’s pension clause.  

She somehow correlates the protections reinforced by the Illinois Supreme Court in May of 2015 with the history of skipped payments we both agreed on in the beginning of her essay. Quite the jump.  Especially in that even if she did get her way to strike the pension clause, Illinois would legally still owe every bit of the part it never paid.  That $131 billion that is still owed.  Governors like Big Jim Thompson loved to tell we people that he gave them all these services without increasing taxes.  But it was pensioners who gave their money, not the State of Illinois.  And now we all (emphasis on all) have to pay.

An amendment to provide for a more fair and better balanced state budget through a graduated income tax, or one to strike a pension protection clause which will still be owed? I am pretty sure on where I’d place my energy.