Around the Pension-o-sphere: FDNY, Illinois Tier 2, and Chicago Teachers' Economic Impact
It keeps coming back to the funded ratio -- ain't that the way
I haven’t done one of these in a while. Let’s dip our toes in the pension news of the day….
FDNY Fire Protection Inspectors Get 25-Year Retirement Option
The Chief: FDNY inspectors secured '25 and out' pension benefit
Fire protection inspectors at the FDNY won a long-sought 25-year retirement pension option that will enable many inspectors to retire earlier than before, according to a provision included in the Fiscal Year 2025 New York State budget.
Inspectors covered by the Tier 6 retirement plan previously had to wait until they were 63 to retire with a full pension. They can now leave their respective service after 25 years, regardless of their age, to secure their pension,\.
“It finally got passed,” said Mike Reardon, a deputy chief fire inspector with more than 40 years on the job. “We’ve been pushing this for years.”
….
Around 400 inspectors who are members of the union could be impacted by the change, said Darryl Chalmers, a retired deputy chief inspector who also sits on Local 2507’s board. He said that the pension reform was a key piece of recognizing the hazardous and important work that the uniformed fire protection inspectors do.
Let’s take a peek at the FDNY pension:
Total membership is about 27K and actives are 11K, so 400 is a drop in the bucket, but notice that the FDNY pension has always had more retirees than active workers.
Note they made full contributions — which is about equal to payroll. Given most of the retirees will be retired longer than they worked for the FDNY, this is unsurprising.
Hey, the funded ratios are better than in Illinois! Speaking of….
Pritzker Says “Sure, We Need to Boost the Pension Benefits” Of Grossly Underfunded Illinois Pensions
Okay, I’m doing the dishonest headline thing. Let me give the news coverage and then explain.
WTTW: Pritzker Says State ‘Obviously’ Needs to Change 2010 Law That Shrunk Pension Benefits
With a month and a half left in the General Assembly’s spring session, Gov. J.B. Pritzker’s administration is readying its proposal to address Illinois’ chronically underfunded pension system.
But the governor this week also acknowledged in the strongest terms yet that any plans to finally get the state on track toward fully funding retirement plans for public school teachers, university employees and state workers could be derailed by a looming legal fight over a 14-year-old law.
Pritzker’s comments came as Illinois’ two influential statewide teachers unions were wrapping up a “week of action,” encouraging their members to call and email lawmakers and urge them to essentially “undo” a 2010 law that created a new less generous pension system for those who began their jobs after Jan. 1, 2011.
The General Assembly and then-Democratic Gov. Pat Quinn quickly approved that law in the wake of the Great Recession, which forced state leaders to grapple with decades of underfunding in Illinois’ pension systems.
This is not just a political fight over slicing pension benefits.
There are many serious legal points to be made, and many people who have called for pension reform in Illinois have mentioned that there were legal problems with Tier 2 since 2010.
However, the legal point on which Tier 2 is being taken to court is not the one which I would have argued:
Cook County Record: Judges challenge IL Tier 2 pension reforms, say law was approved and applied unconstitutionally
Two judges - one from Cook County and the other from St. Clair County, near St. Louis - have partnered in a lawsuit to potentially take down the state's so-called Tier 2 pension law, a key pension reform measure they say was passed unconstitutionally and which they claim has unconstitutionally denied them a larger retirement pension than they believe they are owed.
The lawsuit was lodged nominally against the Illinois Judges Retirement System and the officials who oversee it. However, the lawsuit takes aim directly at the 14 year old state law that many state officials and observers have credited, in part, with helping the state move toward sustaining its troubled public worker pension system.
Specifically, the lawsuit targets Public Act 96-0889. Approved in 2010, the measure was enacted by state lawmakers after the so-called Great Recession of 2008-2009 exposed the shaky financial standing of Illinois' public worker pension systems.
The law specifically sought to reduce retirement benefits for future workers. Under the Illinois Supreme Court's interpretation of the state constitution's pensions protection clause, lawmakers are forbidden from reducing any retirement benefits for current public employees, whether already earned or yet to be earned.
There is a lot more to the story, but here are the key items:
Tier 2 contributions are subsidizing Tier 1 costs (that’s EXTREMELY questionable, and I and other pension reform-minded folks have criticized the Tier 2 change as a half-assed “reform”)
It’s not clear that Tier 2 meets federal requirements to at least meet Social Security benefit levels. Due to recent high inflation, Tier 2 may fall short, as Social Security benefits grow with inflation, and Tier 2 does not grow as rapidly.
The specific people suing in this case are judges who had been other types of Illinois employees under Tier 1, and then switched to become judges… JRS (the judges pension plan) declared them to be Tier 2, because they were new judges, you see. They are disputing whether switching them from one accrual base to another within the state is constitutional.
Finally, there is the question as to the method by which the bill was passed in 2010. This seems to be the one on which the case will be adjudicated.
For that last bullet point, let's see what Mark Glennon has to say: No surprise that Illinois’ Tier 2 pension law being challenged in court given how it was passed – Wirepoints Quickpoint
Still, it should come as no surprise that the entire law is being challenged based on how it was passed.
The law was bulldozed through in 2010 by House Speaker Michael Madigan and Senate President John Cullerton in less than 12 hours with no analysis, debate or actuarial assessment, as we wrote at the time and often since. It was the Illinois General Assembly at its worst. Full details on that process are described in this Forbes column.
In 2010, lawmakers approved the law using what’s called “gut and replace.” Under this process, as the Cook County Record describes, lawmakers take a so-called “shell bill” – an existing bill already pending in committee – and amend that “shell” legislation to delete the existing text entirely and replace it with potentially sweeping new legislation, even if the new legislation has nothing to do with the previous text of the bill. The judges now suing claim, among other things, that the process violated the “three readings” requirement for making a bill law.
Illinois JRS is a fairly small plan, so not in the Public Plans database (yet), so let’s look at the largest Illinois public plan, Illinois TRS - the teachers plan:
-cough-
That’s what it looks like with Tier 2.
So… you want to hear the good news?
Here is the 2022 actuarial valuation with the split-out of Tier 1 and Tier 2 for Illinois TRS: [only giving you a little bit]
You can see that the Tier 1 funded ratio is 43.2% and the overall funded ratio is 43.8%.
If Tier 2 magically became Tier 1, then the overall funded ratio would drop, but the great thing is… it wouldn’t drop a huge amount, because Tier 2 doesn’t represent a huge amount of the current liability. It’s mainly younger, newer employees.
However.
The effect is on the sustainability of the plan.
As it is, the sustainability is questionable with Tier 2.
And the legislature may pull the rug out from under Tier 2 even without the court case.
Chicago Teachers Pension Fund Is Missing Part of the Economic Equation
It’s generally deeply underfunded pensions that put out press releases like this:
ai-CIO: Chicago Teachers’ Pension Fund Adds $2.1 Billion to Illinois Economy in 2023
The Chicago Teachers’ Pension Fund’s $1.5 billion in payments to participants living in Illinois in 2023 had a $2.1 billion impact on the state’s economy and supported more than 11,500 jobs, according to its 2024 Economic Impact Statement.
The report found that each dollar it paid out in pension benefits generated $1.40 in economic activity for the state.
….
The report, released annually by the $12.1 billion pension fund, calculates the CTPF’s impact on the state of Illinois and its largest city, Chicago, and includes data on economic impact by legislative district and city ward in Chicago. To assess the economic impact, the report uses standard economic multipliers supplied by the U.S. Department of Commerce’s Bureau of Economic Analysis to measure the direct and indirect effect of payments made to the pension fund’s annuitants.
According to the report, 82% of the fund’s annuitants who collect a pension remain in the state, with nearly half of them residing in Chicago. Those Chicago-based annuitants received $742 million in pension benefits in 2023, which resulted in approximately $1 billion in total economic impact and supported nearly 5,800 jobs in the city, the report stated.
The report is here: 2024 - The Buck Stays Here
So, I am going to push back here. They claim they can achieve the benefits at about half the cost associated with a 401(k) plan.
This is the cost — the total height of the bars. (Using their optimistic assumption set)
And they’ve never paid the total cost.
Also, I’ve never been at an employer who contributed even 40% of my salary to a 401(k). I believe that would exceed IRS limits for 401(k)s. I could be wrong about that.
But wait, there’s more!
Mmmmm, maybe 50% wasn’t the percentage you wanted to mention.
I would be willing to just take their assumption that each pension benefit dollar generated however much they used in their multipliers.
But then, each Illinois resident should be able to generate a similar multiplier from their own money that they get to keep and spend, instead of being taxed to make up that deep whole of underfunded pensions… don’t you think?
Because that’s the part of the economic equation being ignored here.
The benefit generates economic activity, but this plan will be in an asset death spiral if the contributions don’t keep up at a fairly high level. This is why the pension plan has to sell itself to the community now.
The “required” contribution level, which the city has never met, is close to 50% of payroll. The recent actuarial calculations exceed 50%:
That’s high.
So, the Chicagoans will not forget the cost portion of this equation, and ignoring it in your report doesn’t help your case.