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Tier 2 Teachers Helping Pay Off State's Pension Debt

April 25, 2011

By Chris Wetterich
My Surburban Life

GILLESPIE - While the state won't catch up on the debt it has incurred for existing teachers' pensions for at least three decades, by 2036, it will basically stop having to pay for pensions for teachers hired after Jan. 1.

An actuary's report for the state Teachers' Retirement System projects that as more teachers come into the system under the second tier of benefits approved by the General Assembly in 2009, the new teachers will pay a big chunk of the debt owed by the state.

"The tier 2 members are really paying more than the benefits are worth," said Kathleen Farney, TRS's director of research. "So not only are they paying for their own benefits, but they're actually helping reduce the unfunded liability that was accrued before they were even hired."

While the legislature's intent in creating second-tier benefits for new teachers, state workers, university employees, legislators and judges was to reduce the state's costs, "they kind of overshot" in the case of teachers, Farney said.

Shifting the costs

Illinois' annual payments to the pension systems are divided into two types: normal cost and amortization cost.

Normal cost is the cost of benefits accrued by all active employees during a year. Amortization cost is the cost of wiping out the state's debt to the pension systems to comply with the requirements of a 1995 law aimed at achieving 90 percent funding in Illinois' five state-funded pension systems.

When it comes to teachers, in 2036, the state will cease to have any normal costs. After that, the normal costs become negative numbers that will be subtracted from the amortization costs the state has to pay, according to the TRS actuarial report.

In 2045, the state is projected to have to pay $9.9 billion in amortization costs. It will be able to subtract $876 million in negative normal costs from that amount. In 2046, the year after the state is projected to meet the 90 percent funding goal, its amortization costs will fall to $1.8 billion and its normal costs will be negative-$900 million, resulting in an $881 million pension payment.

"If you look back, that's one of the things that the legislation was designed to do was to decrease the state's costs and save the state money. It's also what the critics of public pensions want done. They want more of the costs shifted to state employees," said TRS spokesman Dave Urbanek.

"Normally what you want to do is you want to set the contributions that you would make to basically even out with the benefit that you're going to receive. And in this case, that's not what's happening."

Steve Brown, a spokesman for House Speaker Michael Madigan, D-Chicago, said it's too early to make judgments about the pension changes.

"I wouldn't rush to judgment regarding some audit report," Brown said.

More changes?

Because the bill reducing pension benefits for future public employees was jammed through the legislature in less than a day, no one in the pension systems had time to calculate the effect it would have. The TRS report, which was prepared by Buck Consultants, follows an earlier report by the same actuary predicting that the second-tier TRS benefits will not provide enough retirement income for school districts to avoid the expense of paying into the Social Security system.

TRS officials don't make policy, so they have no opinion as to the fairness of new teachers bearing the cost of the state's debt to teachers who are in the first tier.

"It is what it is," said TRS executive director Dick Ingram. "I pay the same 9.4 percent of my salary towards my pension that everybody else does. ... The value of our benefit only costs about 5 percent or a little less. ... Half of what I'm contributing every two weeks is something I'm never going to see or never get the benefit of. It's monies that reduce the cost of the state.

The 2010 pension changes may not be the last word on revisions to the five systems. Lawmakers are talking about reducing pension benefits for current public employees, a move considered unconstitutional by public employee unions, and gradually shifting the normal cost of teachers' pensions from the state to local school districts.

"There are questions about why the state pays anything for non-state employees," Brown said. "It'll all be all part of the discussion."

Tier 2 fairness

Even with that discussion occurring, the actuarial report has teachers looking far into the future and thinking about how to reverse the changes that have already been made.

"No, that's not fair," said Cinda Klickna, incoming president of the Illinois Education Association, the state's largest teachers' union. "We have active members pay 9.4 percent. The tier 2 people also will pay 9.4 percent. They really should be only paying 5 percent."

Klickna said graduating students looking to teach are becoming aware of the changes the state has made to teacher pensions, but she holds out hope that as the economy improves, making the pensions more equitable for tier 2 members may be on the table.

"Many are saying they're looking out of state for a job," Klickna said. "When I started teaching, you needed 38 years (to retire). We worked over the years to help increase benefits and make things a little bit better. I think a lot of our new people who will be in tier 2 will understand that being politically active and making changes in that pension is something they want to look to do.

But in a political environment in which public-employee unions are under fire and the state continues to face major fiscal troubles, boosting pension benefits appears to be a non-starter for lawmakers.

"I can't imagine anybody even proposing it," Brown said.

Chris Wetterich can be reached at 788-1523.

On the Web

The part of the 2010 TRS actuarial report referred to in this story is on pages 31 and 32. It can be found at: http://tinyurl.com/trsactuary.

Copyright 2011 Lyons Suburban Life. Some rights reserved

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Frequently Asked Questions

Q: Why are some calling for Illinois to switch from a defined benefit to defined contribution system?

A. As of 2011, Illinois faces an unfunded pension liability that exceeds $80 billion, one of the largest in the nation. Calls have been made to switch Illinois from its current defined benefit system to a defined contribution system due to misunderstandings regarding the sources of this large debt and the effects of a system switch.

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