Why Isn’t the Illinois Teacher Retirement System Solvent? – Jointly published by Nancy J. Thorner and David W. Pennington, P.E.

July 18, 2010

For years the General Assembly and successive governors have failed to ensure the solvency of the Teacher Retirement System (TRS) as mandated by Illinois law, but instead have gone all out on spending sprees, as if oblivious of their responsibilities.  As a result, every Illinois household is now burdened with $4,423 in state government debt.  And the burden continues to go up, every day.

 Kevin Williamson of National Review On-line sums it up this way:  “Illinois is borrowing money it will have to repay eventually to repay the pension money it already spent to pay for other spending it couldn’t afford then and can’t afford now.” 

According to a recent Manhattan Institute report, the TRS has a funding gap of over $70 billion, by its own estimate, and TRS does not even include Chicago, whose better-funded system faces a shortfall of its own of more than $9 billion. 

When the Illinois and Chicago plans are considered together, Illinois has a greater teacher pension funding gap–at $79 billion–than any state except California, outstripping Texas at $72 billion; Ohio at $63 billion; and New York at $61 billion. 

In economic good times, teacher salaries and benefit packages are competitive with private sector compensation.  During economic downturns, members of the teaching profession generally enjoy steady increases in wages, although there are some layoffs.  In the private sector, by contrast, many employees are taking pay cuts and layoffs occur in larger numbers.  Then comes retirement, when educators have even more significant advantages over their private sector counterparts.  Their pensions start earlier and are about double in size.  When they retire at 55 — Social Security minimum is 62 — they are free to work full-time without penalty, something the SS recipient cannot do until age 66 (for current retirees). 

With these things in mind, we examined some of the elements and the structure of TRS.

The basic arrangement:

  • Teachers and administrators contribute 8% of their gross pay (compare that to Social Security’s 12.4%), and can then retire when they’ve accumulated 32 years of service AND have attained age 55.
  • With an actuarial life expectancy of 78, an educator can work 32 years, and live another 23 years in retirement.
  • The pension is 75% of the average of the last 3 years’ pay.
  • Once retired, an educator can work for a school district up to 1000 hours per year and still draw the full pension, or work full time anywhere else without affecting their pensions.

As part of the study, a teacher’s career was modeled, and an annuity-based pension was calculated. One result was to show that educators’ contributions to TRS are insufficient to make it self-sufficient, short of an investment miracle.  Returns on the investment of TRS funds would have to exceed 10% consistently, to simply fund ordinary, annuity-based pensions. But TRS pensions are not ordinary. There are additional benefits — extra cost add-ons — that are enough to undermine TRS self-sufficiency, even if miraculous levels of investment return were to be achieved.

These extra cost add-ons include:

  • Contracts often allow additional “end of career” raises of up to 6% to boost pension payments, raising the actual pension to nearly 85% of the unboosted 3-year average.
  • The pension payout is not a “fixed income”.  There are regular COLA increases.
  • The upshot is that a few years after retiring, annual pension income may actually exceed the final year’s salary.

According to a Chicago Tribune analysis of Illinois State Board of Education data, an extraordinary number of public school teachers in Chicago-area affluent school districts earned  $100,000 or more in 2009.  As a result school budgets and taxpayer wallets were strained, fueling debate over what teachers are worth and how they get raises.  Nancy Thorner’s School District 115 in Lake Forest ranks #2 out of the top 10 school districts with the highest percentage of teachers making $100,000 a year or more with 52 teachers.    http://www.chicagobreakingnews.com/2010/07/chicago-area-teachers-top-state-in-earning-six-figure-salaries.html

At some point retirement time will come for all teachers, along with increasingly high pension obligations for the already insolvent–by billions–Illinois Teachers’ Retirement System

Undoubtedly pension reform is one of the most important issues facing Illinois.  The Illinois Policy Institute is tackling the problem through the introduction of its Pension Funding & Fairness Act.   If embraced by the General Assemby, Illinois would be able to control spending excesses, budget responsibly, and meet its pension funding obligations.  

The time is right for creative and bold thinking.  Illinois is out of cash to pay its bills or to fund its pension systems.  Most Illinoisans, already burdened with high taxes, reject further confiscation of their assets by a government that is responsible for this state’s deplorable financial condition. 

Check out this update to the Illinois Policy Institute’s Pension Funding & Fairness Act:  http://www.illinoispolicy.org/news/article.asp?ArticleSource=2678

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