Wednesday, August 15, 2012

Stupid Is As Stupid Does ... Illinois Public Sector Union President Publicly Demonstrates Complete Ignorance About Pension Funding

Some people should learn to keep their mouths shut. Otherwise their ignorance is on full display for all to see. Especially public officials who depend on their membership's trust to keep their job.

But sometimes these "leaders" slip and tell us things they don't mean for us to know. Like how ignorant they are about things they should be knowledgeable of for the benefit of their membership.

Unions pushing to revisit pensions contains such a completely ignorant based comment by a public sector union President in Illinois:

"SPRINGFIELD — A coalition of Illinois public employee unions said they’re willing to negotiate higher contributions to their pensions — if they’re part of a package that includes exempting those already retired from pension changes, guaranteed pension contributions from the state and ending some corporate tax breaks.

Members of the We Are One Illinois coalition laid out their conditions for pension reform at a news conference Monday.

They also blasted pension proposals under discussion now as unfair and unconstitutional.

“Any of these pieces of legislation will significantly reduce pensions for all current employees and retirees,” said Michael Carrigan, president of the Illinois AFL-CIO.

The General Assembly is to take up pension reform during a special session Friday. The House could vote on House Bill 1447, which would reduce benefits for members of the State Employees Retirement System and the General Assembly Retirement System. Another bill has been introduced to make similar changes in the Teachers Retirement System and the State Universities Retirement System.

Both bills would force members of the systems to choose between 3 percent annual increases in their pensions or continued access to retiree health insurance. The changes would affect both active employees and retirees.

Open to negotiation

Illinois Education Association President Cinda Klickna said higher member contributions are open to negotiation if they would be part of a package that includes other conditions set out by the coalition.

“The increase would vary among the pension plans, due to the different benefit structures,” she said. “The percentage would have to be something we work on at the table.”

She said a 1 percentage point increase in contributions by downstate teachers, university workers and state employees would generate about $168 million a year toward pension costs. If those contributions earned 5 percent in investment income each year, they would accumulate to $15 billion by 2047.

However, Klickna and other union officials said, higher contributions would have to be accompanied by guarantees that state government will meet its pension obligations and by a provision exempting current retirees from changes in their pension benefits.

Klickna said pensions should rank second only to bond payments in the state’s funding priorities. “This would mean a guarantee for the future retirement security that thousands of workers rely upon,” she said.

The coalition also called for the state to end numerous corporate tax breaks, which the union group said cost Illinois hundreds of millions of dollars annually. . . .

Quinn: ‘Nothing new’

Gov. Pat Quinn’s office immediately rejected the coalition’s ideas.

“This is nothing new and all has been discussed before,” said Quinn spokeswoman Brooke Anderson. “This proposal would not solve the state’s pension challenges, nor is it feasible.”

Quinn, meanwhile, tried to increase the pressure on lawmakers to shift some pension costs away from the state. He released an analysis in Chicago showing that state funding for higher education will continue to drop if pension funding continues to squeeze out the money available for other state programs."

Discussion and Analysis 

Now let's consider the Forrest Gump stupid is as stupid does part of the story. 

Illinois Education Association President Klickna is offering to increase employee contributions by 1%, saying this would amount to $168 million annually which would accumulate to $15 billion by 2047 if it earned 5% annually. 

Of course, the $15 billion would be in nominal and not inflation adjusted dollars. More important, it would represent a step backward from the current unaffordable position of the funds today. Pension funding would be losing ground instead of gaining. Things would be getting worse each year and not better. And that's the Union President's proposal. The membership should fire her immediately or sooner if possible.

Now I of course don't expect that everybody reading this posting is familiar with actuarial assumptions, or how they're used to assess current liabilities for future payment obligations. That gets a little technical and an understanding requires either expertise or some expert advice. That's called actuarial science.

But I would certainly have expected, and the people of Illinois absolutely deserve, as well as do the public sector union members themselves, that the union president Klickna would consult an actuary before saying something so utterly stupid. 

That she said what she said shows how far off track things really are in Illinois public sector pension discussions. Here's the bottom line. If funds invested don't earn 8% over time, the unfunded problem gets progressively worse. Not better. So a 5% rate of return on employee contributions is a loser, pure and simple, especially when compared to an 8% rate of return assumption used by the pension plan for purposes of funding its requirements each year.

So here's what I know, or at least think I know, based on what I've read about all this. Illinois has a current unfunded public sector pension liability of some $85 billion. The assumptions underlying the pension fund's liability are that money in the fund and future contributions will earn an average 8% annual rate of return. Not 5%.

Accordingly, if the monies earn 5% instead of 8%, the unfunded problem will only get worse each year.  At a shortfall of 3% annually (8% - 5% = 3%), and using the rule of 72, every 24 years the unfunded liability would double.

Thus, if the fund earns 5%, as trumpeted by Union President Klickna, the actual unfunded liability is probably much closer to $200 billion than the acknowledged $85 billion.

Which begs the question of how much will be needed to fully fund the pension promises and how that money will be invested, as well as what happens if in fact the fund in the future only earns the 5% forecasted by the union president Klickna.

Concerned yet, Illinois taxpayers, teachers, other public sector employees, government officials, union leaders and legislators? Well, you should be.

Summing Up

This would all be pretty funny if it weren't so sick. And Ms. Klickna is the Union President? The leader of the pack?

I hope she's being paid appropriately for her efforts.

Her mouth can only hurt the cause and chances for a rational discussion of the problem anytime soon.

Thanks. Bob.

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