Retired Illinois Teachers May Pay the Price of State Insolvency

Retired Illinois Teachers May Pay the Price of State Insolvency
April 13, 2012

Vicki Alger

Vicki Alger, Ph.D. (heartlander@vickialger.com) is a senior fellow at the Independent Women’s Forum... (read full bio)
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A confidential memo from the director of Illinois’ largest state pension system said decades’ worth of unfunded liabilities may require the state to cut benefits for current and retired teachers. With the state currently owing $43 billion to the fund, Illinois Teachers Retirement System Director Dick Ingram cited forecasts predicting the pension fund could be insolvent by 2029.

“If that is the case, the only other option available that would significantly change the amount owed is to reduce past service costs for active members and retirees,” Ingram wrote in the memo, obtained by the State Journal-Register. In a subsequent interview, he said, “I’m really stuck. I have to say that the math is not trueing up with what is constitutional or fair or earned or whatever else.”

A 1995 law requires the state to bring pension funding up to 90 percent by 2045. Ingram recommends scrapping Illinois’ current law and following Ohio’s lead by raising the retirement age, increasing member contributions, and reducing annual cost-of-living adjustments from 3 percent to 2 percent.

“What we’re saying is that the number is so bad is that you have to start having those conversations,” Ingram said.

Coming to Terms
There is growing consensus Illinois’ teacher pension system must be fixed, “a huge change of position” from past thinking, said Collin Hitt, senior director of government affairs for the Illinois Policy Institute.

Two years ago, he says, studies by Northwestern University, Carnegie Melon, and Boston University showed Illinois’ teacher retirement fund was going broke. Yet officials sought to discredit those findings rather than reduce the lavish benefits, he said.

An Illinois teacher who retired in 2010 after 30 years of service, for example, receives a starting annual pension of $60,000 with continuous annual raises, Hitt said.

“This is an extremely generous benefit continued at taxpayer expense,” he said.

Difficult Solutions
“You’re in a whole different arena with retirees,” says current Illinois House Republican leader Tom Cross. “I’ve never had members of the General Assembly advocate [changing already retired teachers’ benefits].”

Illinois Education Association lobbyist Will Lovett says altering retirees’ benefits is unconstitutional. “That is crystal clear,” the teachers union representative said.

Yet the state cannot afford to raise taxes enough to make the teacher fund solvent, says George Clowes, a senior fellow in education policy for The Heartland Institute, which publishes School Reform News. That would bring state per-pupil funding to more than $14,800, among the highest in the country, he said. Teacher pension costs would account for 15 percent of that amount, more than $2,200.

Both Clowes and Hitt say Illinois’ 3 percent annual cost of living increases for retirees must be reduced, but that is only the first step.

‘Nobody’ Paying Their Share
“Legislators will have to consider other options, too,” said Clowes, “including raising the retirement age, requiring higher employee contributions, and converting the system from a defined-benefit system to a defined-contribution system.”

Defined-benefit systems state what percentage or dollar figure in real dollars an employee will continue to receive for the entirety of retirement, which now averages more than 20 years. Defined-contribution systems pay back what employees and employers have saved up for the employee during his or her employment. The latter are similar to 401(k)s, whereas the former are standard post-World War II-type pensions.

“Nobody is paying their own share [of retirement],” Hitt said. A return to fiduciary responsibility is critical to real reform, he continued.

“While legislators have been only too willing to vote for increased benefits for teachers and other government employees, they have been unwilling to exercise their corresponding fiduciary responsibility to adequately fund those benefits,” said Clowes. “I fail to see why current taxpayers should be asked to foot the cumulative pension contribution bill for two decades of nonfeasance by Illinois legislators. Everyone should fund his or her own pension, especially if that pension is greater than that provided by Social Security, which is certainly the case for most teacher pensions in Illinois.”

 

Image by Bernard Pollack.

Vicki Alger

Vicki Alger, Ph.D. (heartlander@vickialger.com) is a senior fellow at the Independent Women’s Forum... (read full bio)