Affect of Past Salary Spiking on Pension Finances

Hi. My name is Mark Evenson and this is my first blog. The topic of my blog is “Public Pensions”. The content of this blog was initially intended to be a simple “Letter to the Editor” but Melanie of the Palatine Patch persuaded me to try and publish it as a blog, so here I am.

I would like to preface my comments first with an acknowledgement that the State has failed to make the “required” amounts to make the pension funds actuarially 100% funded. That is a mathematical fact. But it also needs to be acknowledged that it is only the State (i.e. taxpayers) who has an unlimited liability, an open ended obligation, whereas the employees’ contribution is limited, fixed at 9.4% of salary. And, there are many reasons for a pension fund’s “Unfunded Liability” to grow, but unfortunately the entire blame seems to be continuously thrust upon the State for “not paying enough”. This blog posting will look at just one of the reasons for growth in the pension’s unfunded liability.

Often have we have heard those with a vested interest in a public pension claim that the State failed to pay enough into them. Yet more often than not those same individuals who complained about the State were surprisingly silent when their former coworkers, fellow pensioners, or even they themselves, had been party to the taking out of the pension funds far more than their actuaries intended. This was accomplished by employees being awarded exorbitant salary increases the final four years before retirement, until legislation was recently passed to limit those increases to 6% each year. Four years is all it takes because pension rules only look at the salary of the highest four consecutive years to calculate one’s starting pension amount.

To illustrate the practice I will provide the following examples from my local school district, CCSD15. In 2004 82 educators retired with an average ending salary of $123,364, a 66% increase from their $74,116 average three years prior. In 2006, the last year before the cap took affect, 26 educators retired at an average of $130,753, a 71% increase from their $76,317 average four years prior. By 2010, with the caps in full effect, 41 retirees had an average ending salary of $104,276, only a 26% increase over their average of $83,055 four years prior. Needless to say, the average starting pension before the caps was more than $20,000 over the average after the caps, which would yield someone an additional $730,000 over a 25 year pension with its 3% COLA increases.

Should anyone wish to follow up on my analysis, all of the above information was taken from the website http://www.openthebooks.com. While this is a free website, contributing ten or fifteen dollars will allow you to avoid pop-up requests for donations. If you do explore this site I suggest using Mozzila’s Firefox browser as it enables you to copy-and-past the presented data (up to 500 lines per page). Simply paste the data to a text editor like “notepad” (my favorite is the free Crimson editor) and save as a text file. Then you can import the data to Excel where you can do all kinds of analysis with it.

Getting back to the original issue, you can see that for just one school district, and only two years of retirees from that one school district, I have identified $80 million or more that would be removed from the TRS pension fund due solely from my above example. Considering that this practice of educators receiving multiple consecutive 20% annual salary increases just before retirement was most likely happening for over a decade, before being limited just a few years ago by the legislature to four consecutive 6% increases, and many other school districts were also doing this, it is not inconceivable that the pension funds impacted by this practice were in the billions of dollars. Now, I have heard statements about how the State was “stealing from the pensions” by failing to fund them completely. Could the same charge not also be leveled to those taking out of the fund much more than was intended? I just feel the need to point out this apparent double standard. Clearly not one side is blameless in all of this.  

Personally, I honestly don’t know how Illinois is going to pull out of this problem. One idea to start with is to limit the damage caused by the past salary spiking by eliminating the automatic 3% COLA increases, especially if the taxpayers are then to be required to pay the actuarial “required amount”. Another idea, one that would probably require a constitutional amendment, would be to mandate a 50-50 sharing of public pension funding between the employees and the State, similar to what Arizona has. As I have often pointed out before, the taxpayers have consistently funded more than the employees going back at least to 1981 (http://palatine.patch.com/groups/opinion/p/letter-to-the-editor-illinois-public-pension-rhetoric).

I hope that this blog has been informative. I have tried to be as factual as possible. Hopefully with enough public discussion enough pressure would be placed upon our legislators to do something soon. Doing nothing is simply a recipe for disaster.