State pensions for public employees, particularly teachers, were in the news again this week when Crain’s Chicago Business published excerpts from an interview with TRS Executive Director Richard Ingram.
The Crain’s report had an attention-getting headline: Head of teacher pension fund says state will need to cut COLAs.
Ingram’s comments, especially about COLAs (the annual three percent compounded Cost of Living Adjustment for TRS pensions) generated angst among many IEA members.
“Look at every other state that’s done pension reform – what have they done? They’ve changed the COLA because that’s where the cost is,” Mr. Ingram said, noting that 25 percent of TRS payments are for cost-of-living increases on pension benefits.
Changes in cost-of-living adjustments could be targeted so they have the least impact on the oldest retirees and those with the lowest incomes, he said.
“If that is where we need to go in Illinois, then we can do it in a manner that is targeted and effective and protects those that need it the most and, at least to a large extent, get the job done,” Mr. Ingram said.
Asked by IEA to explain his remarks, Ingram said he was not advocating or proposing a change to the COLAs for TRS annuitants.
IEA President Cinda Klickna, a TRS Trustee, said IEA and the other members of the Illinois labor coalition remain strongly opposed to the proposals that have been made in the legislature to change pension benefits. The coalition continues to insist that the following must be in any plan going forward:
1. A guarantee that the state will pay its portion as required. That hasn’t happened for decades, as legislatures have diverted money to other programs.
2. A true look at revenue by closing loopholes for big corporations that hurt taxpayers of Illinois. Many loopholes exist, and closing a few would generate money to help pay down the pension debt.
3. No inclusion of current retirees, who are living on an earned and needed pension and cannot re-enter the job market.
4. With a guarantee that the state would pay its portion, the members would be willing to help the state by paying more, even though they have contributed their portion over the years. (This increase may differ for the various pension plans.)
The Crain’s report came without warning and IEA leaders immediately contacted Ingram and asked him, on behalf of IEA members, to explain what was said to Crain’s and whether a change of position was being expressed about TRS and state pensions.
His emailed response is below, in its entirety:
Thanks for your email. Let me see if I can address the issues that you raise.
Nowhere in any of these comments did I advocate or propose a change in the COLA for TRS members. The article clearly states that TRS is neutral on legislative proposals related to our member’s benefits. Neither I nor TRS has advocated for any benefit changes or reductions. Crain’s had no illusions that I was advocating for changes to the COLA or any other specific proposal for that matter, and they stated that in the article.
Moreover, you cannot “propose” something that was proposed by legislators in May of 2012, when Senate Bill 1673 was amended. The stakeholders close to this issue; labor, the retirement systems, legislators, and the Governor’s staff have all known for months that the COLA was the main target of the lawmakers discussing potential changes to the pension code.
The proposals to change the COLA made back in May have steadily advanced through the legislative process. As it currently sits in the House, Senate Bill 1673 is now one roll call away from being sent to the governor’s desk for his action – and Gov. Quinn has said he would sign the bill into law.
The interview with Crain’s did cover a wide range of issues related to pension changes. I framed them, as I do in any public discussion, by my consistent focus on the simple and merciless equation that we have to balance, Contributions or Revenue (C) + Investment Income (I) = Benefits (B). We discussed the left side of the equation first.
Going through that equation item by item, we agreed that no one should expect the equation to be balanced by higher returns from TRS’s investment program. We cannot invest our way out of this hole. Our long term performance is top quartile already and our recent action to lower the assumed return in our actuarial model argues that we are more than holding up our part of the deal in that area already.
We then spoke about contributions, or revenue, including proposals (or the lack thereof) to generate additional revenues to help Illinois meet its budget shortfalls, including pension costs. We spoke specifically about the idea of the graduated income tax and loophole closing. The fact remains that right now there are no legislative proposals for more revenue under active consideration and there are multiple claims on any incremental revenue that would be generated if there were. For example, a generally accepted estimate of the additional revenue expected to be generated by a graduated income tax is somewhere around $2.5B annually. That is what TRS would need above current revenue projections over the next 30 years. TRS is not the only budget challenge the state has.
Only after discussing the first two items did we get to the benefit side of the equation. Reading the article you will see that even without the benefit of any description of the full conversation being included in the article, as we pivoted to discuss proposals regarding benefits my quote is “IF (benefit costs) is where we need to go…”, i.e., if revenues are not forthcoming to solve the problem, only then did we discuss benefit costs and proposed changes and their impact. I did point out that if they were focusing on the COLA, then there were smarter and better ways to approach any COLA changes than what is currently in the proposal and what other states have done in this area. While not the only element we need to talk about, everyone knows – and has known for months – that the COLA is the largest cost driver. It represents 22-25% of the cost of the benefit. Other factors, for example, increased member contributions have and should be part of the discussion, but our funding hole is so deep that changes to the COLA must be part of the solution in any scenario. It is the only way that the math can work.
As the executive director of TRS I must be realistic about the provisions of Senate Bill 1673. As I note above it is a roll call vote away from potential passage. We have to prepare for the possibility that it becomes law and ignoring it won’t make it go away. TRS must face reality and the reality is that all of our members must be prepared to deal with this potential change, no matter how they feel about it.
Everything I said to Crain’s is factual and relevant to a discussion about the realities that surround us. I did not advocate for a change in the COLA. I did not propose a change in the COLA. I did respond to questions about a change in the COLA that legislators have been talking about for more than a year and explain why it is part of the proposed legislation.
Teachers Retirement System
of the State of Illinois