the illinois pension problem what is wrong with illinois pensions?

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The Illinois Pension Problem What is Wrong with Illinois Pensions?

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Page 1: The Illinois Pension Problem What is Wrong with Illinois Pensions?

The Illinois Pension Problem

What is Wrong with Illinois Pensions?

Page 2: The Illinois Pension Problem What is Wrong with Illinois Pensions?

State Retirement Systems

• Illinois controls the benefit levels and operates 5 State retirement systems

1. Teachers’ Retirement System2. State Universities’ Retirement System3. State Employees’ Retirement System 4. Judges Retirement System5. General Assembly Retirement System

Page 3: The Illinois Pension Problem What is Wrong with Illinois Pensions?

Pension Funds• The Illinois General Assembly also controls the benefits and

funding requirements of other public pension funds but makes no direct contribution.

1. Chicago Teachers’ Retirement Fund2. Chicago Police and Fire Funds 3. Chicago Municipal Employees and Laborers’ Funds4. Chicago Park District Fund5. Cook County and Cook County Forest Preserve Funds6. Metropolitan Water Reclamation District Fund7. Illinois Municipal Retirement Fund8. Downstate Police and Fire Funds

Page 4: The Illinois Pension Problem What is Wrong with Illinois Pensions?

What is a Defined Benefit Pension?• A type of pension plan in which an employer promises a

specified monthly benefit upon retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, with no consideration on the risk of investment returns.

• (Years of Service X Benefit Formula) X Final Average Salary = Annuity

Page 5: The Illinois Pension Problem What is Wrong with Illinois Pensions?

Teacher Benefits

RetirementAge

BenefitFormula

MaximumAnnuity

Final Average Salary

COLAEmployee

Contribution

Age 62 with 5 years of service credit.

Age 60 with 10 years of service credit.

Age 55 with 20 years of service credit (discounted

annuity or Early Retirement Option)

Age 55 with 35 years of service credit.

2.2% of final average salary for

each year of service credit

earned after June 30, 1998

75% of final average salary

Average of the four highest

consecutive annual salary rates within the last 10 years ofservice.

3% compounded

9.40%

Page 6: The Illinois Pension Problem What is Wrong with Illinois Pensions?

Example of a Teacher Benefit• A teacher who has worked 35 years and retires making

$100,000• (35 x 2.2) x $100,000 = An annual annuity of $75,000 that has

an annual compounding cost of living adjustment of 3%

Page 7: The Illinois Pension Problem What is Wrong with Illinois Pensions?

Who Pays for the Benefit?• Every paycheck an employee contributions a certain

percentage of income towards their pension. For a teacher it is 9.4%

• The additional cost of the benefit is paid by the State.• Any risk like investment returns and actuarial assumptions is

assumed by the State.

Page 8: The Illinois Pension Problem What is Wrong with Illinois Pensions?

The Illinois Pension Problem • Illinois has $96.8 billion in unfunded liability in its 5 State

pension systems.• This is the amount of money needed to cover benefits that

have already been earned. • The City of Chicago has an additional $24 billion in unfunded

liability.• The Cook County Pension Fund has an unfunded liability of $6

billion. • IMRF is behind $5.2 billion.• The Water Reclamation District is unfunded at $1 billion.• Local governments owe the over 600 police and fire pensions

funds countless billions.• That’s well over $125 billion in debt for pension benefits

already earned!

Page 9: The Illinois Pension Problem What is Wrong with Illinois Pensions?

Current Funding     Accrued   Net   Unfunded   FundedSystem Liability Assets Liability Ratio   TRS $90,024.9 $36,516.8 $53,508.1 40.6%   SERS $33,091.2 $10,960.7 $22,130.5 33.1%   SURS $33,170.2 $13,705.1 $19,465.1 41.3%   JRS $2,021.7 $578.0 $1,443.7 28.6%   GARS $303.5 $52.7 $250.8 17.4%   

TOTAL$158,611.

5 $61,813.3 $96,798.2 39%                 

Page 10: The Illinois Pension Problem What is Wrong with Illinois Pensions?

Systems Breakdown

Active Members

RetireesFY12

Benefits Paid

TRS 133,752 94,868 $4,553.8SERS 62,729 50,000 $1,627.4SURS 71,056 45,548 $1,757.7GARS 176 294 $19.3JRS 968 725 $106.6Total 268,681 191,435 $8,064.1

Page 11: The Illinois Pension Problem What is Wrong with Illinois Pensions?

The Illinois Funding Plan

• In 1996 the State started its first organized pension funding schedule, it has commonly been referred to as “the funding ramp”.

• The funding plan called for the State to make contributions as a level percent of payroll in fiscal years 2011 through 2045, following a 15-year phase-in which began in fiscal year 1996. The contributions are required to be sufficient, when added to employee contributions, investment income, and other income, to bring the total assets of the systems to 90% of the actuarial liabilities by Fiscal Year 2045

Page 12: The Illinois Pension Problem What is Wrong with Illinois Pensions?

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0.0

$500.0

$1,000.0

$1,500.0

$2,000.0

$2,500.0

$3,000.0

$3,500.0

$4,000.0

Total Contribution as Projected in 1996

Total Contribution as Projected in 1996

Page 13: The Illinois Pension Problem What is Wrong with Illinois Pensions?

How It Really Was Funded• In 2003, 2010, and 2011 the State has had to issue bonds in

order to make the pension payment.• In 2006 and 2007 the State contributed less than what was

required by the 1996 law.

Page 14: The Illinois Pension Problem What is Wrong with Illinois Pensions?

Benefit Increases• To make matters worse the General Assembly passed

numerous pension benefit increases that were never properly paid for.

• For example, the COLA in Illinois used to be 2% simple interest now its 3% compounding, all without raising employee contributions.

• Another example is that teachers are allowed to use 2 years of sick days to count towards their pension, again no employee contribution increase was required for this new benefit.

Page 15: The Illinois Pension Problem What is Wrong with Illinois Pensions?

Market Forces• Every unexpected change in actuarial assumptions and

investment return changes the cost of a pension and the State assumes all the risk in a defined benefit pension plan.

• In 2007 the unfunded liability totaled $42 billion, after the market collapse in 2008 the unfunded liability has now risen to $96.8 billion.

• Actuarial assumptions, like life expectancy, also play a role. For every year longer a person is expected to live, the longer they will collect a pension, and the more expensive the pension benefit is.

Page 16: The Illinois Pension Problem What is Wrong with Illinois Pensions?

Future ContributionsFuture State Contributions

$4,038.80

$7,033.2$8,319.80

$9,794$11,489.30

$14,460.30$16,053.90

$17,634.60

$0.00

$2,000.00

$4,000.00

$6,000.00

$8,000.00

$10,000.00

$12,000.00

$14,000.00

$16,000.00

$18,000.00

$20,000.00

2010 2015 2020 2025 2030 2035 2040 2045

Year

Amou

nt