By: Mark Glennon*
Should Illinois taxpayers subsidize and guaranty an exceptionally high interest rate on savings accounts for a select few? If so, shouldn’t the select few be the neediest, instead of a group with Social Security, a pension and a job?
Here’s a paraphrase of a special account offered only to members of IMRF, one of Illinois’ public pension systems, which was in its Winter newsletter to members:
Great news! We’ll give you an account paying 7.5% annually, compounding and guaranteed. You can withdraw your money at any time, except for interest, which can only be withdrawn when you retire or change jobs.
But wait, there’s more! This account is in addition to your pension and your Social Security, yet interest you earn is still tax deferred.
The only major limitation is that your deposits cannot exceed 10% of your pay.
Available to IMRF members only.
“Too good to be true,” you would say if your employer offered that, until you remember that this is Illinois and the account is offered only to members in one of its public pensions. And, yes, the account is in addition to ordinary pension contributions and benefits for IMRF members, and Social Security in which most of them participate.
Financially oriented readers will know this already, but here’s why this benefit is so generous compared to what the rest of us can get: No mutual fund, ETF, hedge fund, CD or anything else will guaranty you 7.5% today. With risk-free rates of interest well under three percent, even for the long term, you can’t guaranty anything that high unless somebody is paying very, very heavily to provide a subsidy and that guaranty.
In this case, that somebody is you — taxpayers.
IMRF, the Illinois Municipal Retirement Fund, is among Illinois’ biggest pensions, with $33 billion in assets. Its pensioners are employees of roughly 3,000 different towns and cities across the state. IMRF is unique, however, in that it has a funding mandate that forces municipalities to adequately fund it with tax collections. Consequently, it’s nearly fully funded, assuming you believe it’s assumptions (which no independent pension expert does, such as a 7.5% projected return).
In other words, taxpayers are forced to cough up the difference between what IMRF promises and what it will receive in contributions and earn on investments — for the pension as well as the savings account.
Despite that mechanism, should IMRF really be saying that payment of that interest is guaranteed? IMRF’s funding mandate could be changed in Springfield. Moreover, at least one official, the mayor of Freeport, says IMRF is “a potential target for consolidation with other state pension systems that are desperate for assets.” Hmmm.
But the craziest part is that whether IMRF or the new administration could end the offer of this savings account is questionable. Based on how the Illinois Supreme Court sees things, IMRF members’ constitutional rights would be violated if IMRF stopped offering it!
Specifically, in the Kanerva decision rendered last July, the Illinois Supreme Court said that any benefits offered to members of the public pension systems that are “attendant” to the pension cannot be cut. That decision held that healthcare benefits are attendant to pensions, and therefore entitled protection under the state constitutional pension protection clause. “The drafters [of the pension protection clause],” the court claims, “chose expansive language that goes beyond annuities and the terms of the Pension Code, defining the range of protected benefits broadly to encompass those attendant to membership in the State’s retirement systems.” Kanerva, page 12. Once offered, in other words, an attendant benefit cannot be diminished, and access to this account sure looks like an attendant benefit.
But, wait, there is indeed more. A reader of our original version of this article wrote to say, “Don’t forget about the 13th payment.” Huh? Well, IMRF members also get a sort of bonus check once a year in addition to their monthly pension payments, also paid for by taxpayers by a specific assessment on municipalities, according to IMRF’s site. It reportedly cost $41 million in 2013, with 13th checks averaging $340 and going up as high as $7,600. A coalition of public unions gloated last year about killing a bill that might have ended it.
Both a 13th payment plan and a savings account similar to IMRF’s caused plenty of controversy in the Detroit bankruptcy. A Detroit Free Press article about their 13th payment plan is linked here and a Bloomberg article about their savings account is here. Bloomberg quoted a director at the National Association of State Retirement Administrators as saying, about the account, “I’ve never heard of that happening. I’m not aware of a guaranteed return on a defined-contribution plan.” Great to know Illinois and Detroit are so special.
You gotta love one of the actual lines from the IMRF’s newsletter below about the special savings account. It should be the epitaph on gravestones for any towns and cities that succumb to their pension costs: I thought I knew, but I didn’t understand. Illinoisans may think they know how insane their pubic pension system is, but they don’t.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.