[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


 
                  EXAMINING THE RETIREMENT SECURITY OF
                  STATE AND LOCAL GOVERNMENT EMPLOYEES

=======================================================================

                             FIELD HEARING

                               before the

              SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS

                                 of the

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

               August 30, 2006, in Springfield, Illinois

                               __________

                           Serial No. 109-54

                               __________

  Printed for the use of the Committee on Education and the Workforce



 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house
                                   or
            Committee address: http://edworkforce.house.gov


                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
29-627                      WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                COMMITTEE ON EDUCATION AND THE WORKFORCE

            HOWARD P. ``BUCK'' McKEON, California, Chairman

Thomas E. Petri, Wisconsin, Vice     George Miller, California,
    Chairman                           Ranking Minority Member
Michael N. Castle, Delaware          Dale E. Kildee, Michigan
Sam Johnson, Texas                   Major R. Owens, New York
Mark E. Souder, Indiana              Donald M. Payne, New Jersey
Charlie Norwood, Georgia             Robert E. Andrews, New Jersey
Vernon J. Ehlers, Michigan           Robert C. Scott, Virginia
Judy Biggert, Illinois               Lynn C. Woolsey, California
Todd Russell Platts, Pennsylvania    Ruben Hinojosa, Texas
Patrick J. Tiberi, Ohio              Carolyn McCarthy, New York
Ric Keller, Florida                  John F. Tierney, Massachusetts
Tom Osborne, Nebraska                Ron Kind, Wisconsin
Joe Wilson, South Carolina           Dennis J. Kucinich, Ohio
Jon C. Porter, Nevada                David Wu, Oregon
John Kline, Minnesota                Rush D. Holt, New Jersey
Marilyn N. Musgrave, Colorado        Susan A. Davis, California
Bob Inglis, South Carolina           Betty McCollum, Minnesota
Cathy McMorris, Washington           Danny K. Davis, Illinois
Kenny Marchant, Texas                Raul M. Grijalva, Arizona
Tom Price, Georgia                   Chris Van Hollen, Maryland
Luis G. Fortuno, Puerto Rico         Tim Ryan, Ohio
Bobby Jindal, Louisiana              Timothy H. Bishop, New York
Charles W. Boustany, Jr., Louisiana  [Vacancy]
Virginia Foxx, North Carolina
Thelma D. Drake, Virginia
John R. ``Randy'' Kuhl, Jr., New 
    York
[Vacancy]

                       Vic Klatt, Staff Director
        Mark Zuckerman, Minority Staff Director, General Counsel
                                 ------                                

              SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS

                      SAM JOHNSON, Texas, Chairman

John Kline, Minnesota, Vice          Robert E. Andrews, New Jersey
    Chairman                           Ranking Minority Member
Howard P. ``Buck'' McKeon,           Dale E. Kildee, Michigan
    California                       Donald M. Payne, New Jersey
Todd Russell Platts, Pennsylvania    Carolyn McCarthy, New York
Patrick J. Tiberi, Ohio              John F. Tierney, Massachusetts
Joe Wilson, South Carolina           David Wu, Oregon
Marilyn N. Musgrave, Colorado        Rush D. Holt, New Jersey
Kenny Marchant, Texas                Betty McCollum, Minnesota
Bobby Jindal, Louisiana              Raul M. Grijalva, Arizona
Charles W. Boustany, Jr., Loiusiana  George Miller, California, ex 
Virginia Foxx, North Carolina            officio
[Vacancy]


                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on August 30, 2006..................................     1

Statement of Members:
    Biggert, Hon. Judy, a Representative in Congress from the 
      State of Illinois..........................................     4
    Kline, Hon. John, Vice Chairman, Subcommittee on Employer-
      Employee Relations, Committee on Education and the 
      Workforce..................................................     1
        Prepared statement of....................................     3

Statement of Witnesses:
    Brainard, Keith, research director, National Association of 
      State Retirement Administrators (NASRA)....................    10
        Prepared statement of....................................    13
        NASRA letter.............................................    67
        Letter of support to Messrs. Grassley and Baucus.........    69
        GRS letter...............................................    71
        Key facts benefits information sheet.....................    75
        NASRA response to Reason Foundation study................    77
    Filan, John, director, Governor's Office of Management and 
      Budget, State of Illinois..................................    20
        Prepared statement of....................................    24
        Article from Governing.com, Management Insights column, 
          ``Paying for Tomorrow''................................    49
        ``Report on the 90% Funding Target of Public Act 88-
          0593,'' and accompanying letters.......................    51
        PowerPoint slides presented during statement.............    89
    Giertz, J. Fred, professor, Institute of Government and 
      Public Affairs, University of Illinois.....................     7
        Prepared statement of....................................     9
    Jinks, Irene, president, Illinois Retired Teachers 
      Association................................................    18
        Prepared statement of....................................    19
    Webb-Gauvin, Joanna, director of retiree programs, Council 
      31, American Federation of State, County and Municipal 
      Employees (AFSCME).........................................    28
        Prepared statement of....................................    30
    Weiss, Lance, consulting actuary, Deloitte Consulting, LLP...    33
        Prepared statement of....................................    34


                  EXAMINING THE RETIREMENT SECURITY OF
                  STATE AND LOCAL GOVERNMENT EMPLOYEES

                              ----------                              


                       Wednesday, August 30, 2006

                     U.S. House of Representatives

              Subcommittee on Employer-Employee Relations

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The subcommittee met, pursuant to call, at 11:05 a.m., in 
room 400, Illinois State Capitol, Springfield, Illinois, Hon. 
John Kline [Vice-Chairman of the Subcommittee] presiding.
    Present: Representatives Kline and Biggert.
    Staff Present: James A. Paretti, Jr., Workforce Policy 
Counsel; Steven Perrotta, Professional Staff Member; Steve 
Forde, Communications Director and Michele Varnhagen, Minority 
Senior Benefits Counsel.
    Mr. Kline. Good morning. A quorum being present, the 
Subcommittee on Employer-Employee Relations of the Committee on 
Education and the Workforce will come to order.
    We are meeting today to hear testimony on Examining the 
Retirement Security of State and Local Government Employees. I 
ask unanimous consent for the hearing record to remain open for 
14 days to allow members' statements and other extraneous 
material referenced during the hearing to be submitted to the 
official hearing record. And I have a note that some 
organizations have already submitted statements and they will 
be included in the record.
    Without objection, so ordered.
    Let me say greetings from the great state of Minnesota. I 
flew in this morning and it is a pleasure to be here and be in 
the land of Lincoln and be in this absolutely beautiful 
Capitol, and a pleasure of course being with my colleague Mrs. 
Biggert, who served here and who gave me a little tour. It is 
absolutely terrific, and you should be very proud of it.
    Today's hearing will begin an examination of the retirement 
security of state and local government employees, but before we 
start, I think some background is in order.
    Earlier this month, President Bush signed into law the 
Pension Protection Act, the most comprehensive reform of the 
laws governing our nation's private sector pension plans. Just 
a side note, I had the great pleasure of going to Washington 
and being there for that signing ceremony and I can tell you 
there was great joy in the room when that was signed. This bill 
was overwhelmingly approved on a bipartisan basis by both 
houses of Congress and represents a culmination of years of 
examination and study by this Committee, among others.
    Why was the Pension Protection Act necessary? Simply put, 
it was needed to ensure that workers receive the pension 
benefits that they have been promised and that they have relied 
upon. It was needed to ensure that businesses have clarity and 
certainty as to their pension obligations so that they can 
budget and plan accordingly. And it was needed to ensure that 
ultimately taxpayers, through Federal pension guarantees, are 
not left holding the bag for billions of dollars of pension 
bailout. The Pension Protection Act takes important steps, some 
in the near term, others in the longer term, to ensure that the 
retirement security of private sector workers receiving 
pensions is guaranteed. The bill does so by adopting tough new 
funding standards that employers will have to meet to make sure 
that plans are sufficiently funded with real dollars. It 
requires plans to use actuarial assumptions that accurately 
reflect the performance of plans and the marketplace. It 
targets and adopts tougher standards for those plans whose 
funding levels indicate that they are at the highest risk. And 
it does so by following a simple rule. When you are in a hole, 
stop digging.
    The Pension Protection Act prohibits plans from increasing 
or expanding benefits when the plan is already under-funded and 
at risk. That's simple common sense and something I expect 
anyone in this room who has ever had to follow a budget for a 
company or a school or a household understands all too well.
    So what has that got to do with our hearing this morning? 
As most who have had the good fortune--and I use the term 
``fortune'' advisedly--to dig into the policy of pension 
regulation knows, pension plans in the private sector are 
governed by the Employee Retirement Income Security Act, the 
Federal law known as ERISA.
    Now certain plans, notably plans sponsored by states or 
localities or municipal governments are exempted from ERISA's 
coverage. Those plans instead are governed by local and state 
pension laws. One of the questions before us today is does that 
exemption make sense and are state and local government 
regulations enough to protect public employees' pensions.
    Within the last few months, we have seen more and more 
reports that states and municipalities are facing the same 
crises that private employers face with their pension plans--
increased benefits, more liabilities and an expanding gap in 
the funding to pay for them. Across the country, from Texas to 
California to New Jersey and right here in Illinois, we are 
seeing on an almost weekly basis reports that the retirement 
security of some state and local workers may not be as secure 
as we would hope. The facts speak for themselves. According to 
the U.S. Census Bureau, major public pension programs paid out 
$78.5 billion in the 12 months that ended September 2000. By 
the same period in 2004, pension payouts had grown by 50 
percent to $118 billion.
    State and local governments currently employ 14 million 
people with an additional six million retirees. It is estimated 
that these workers and retirees are owed $2.37 trillion by more 
than 2000 different state and municipal government entities--
$2.37 trillion is a lot to us even in Washington.
    Published government estimates suggest that the largest 
state and local pension funds faced a funding gap of $278 
billion in 2003. An analysis by Barclay's Global Investors 
places the gap at closer to $700 billion. Even those that 
dispute Barclay's number recognize that the potential under-
funding we are talking about is in the hundreds of billions of 
dollars. Most recently, in March of this year, Wilshire 
Consulting, based in Santa Monica, California, which has been 
tracking the funding levels and performance of public pension 
funds for over a decade, reported that state and local pension 
systems are only 85 percent funded in the aggregate, down from 
103 percent in 2000.
    Indeed, we are here today because the State of Illinois has 
the dubious distinction of having its public pension plans 
ranked among the most under-funded in the nation. Let me be 
clear, we are not here today to announce that the Federal 
Government wants to be or should be in the business of 
regulating state and local pension plans. Nor are we here to 
scare public sector employees or suggest that their benefits 
are at risk today. But whether it's today or years in the 
future, the looming crisis in public pension under-funding is 
real. And without action on some level, will not go away.
    We all have an interest in ensuring that every worker 
ultimately receives the pension benefits which they were 
guaranteed. Congress took bold and decisive action to protect 
the welfare of private sector workers and retirees. Surely 
public sector employees deserve no less.
    The purpose of today's hearing is to begin to understand 
the scope of the issue facing us, to ask questions, to listen 
and to learn. It is not to come to the table with preformed 
ideas or prejudged solutions.
    The panel before us represents some of the leading scholars 
and advocates involved in this issue, and I look forward to 
their testimony.
    Before I introduce the witnesses, without objection, I will 
recognize my colleague and good friend Mrs. Biggert for her 
opening statement.
    [The prepared statement of Mr. Kline follows:]

 Prepared Statement of Hon. John Kline, Vice Chairman, Subcommittee on 
 Employer-Employee Relations, Committee on Education and the Workforce

    Good morning. Today's hearing will begin an examination of the 
retirement security of state and local government employees. But before 
we start, I think some background is in order.
    Earlier this month, President Bush signed into law the Pension 
Protection Act, the most comprehensive reform of the laws governing our 
nation's private-sector pension plans. This bill was overwhelmingly 
approved on a bipartisan basis by both houses of Congress, and 
represents the culmination of years of examination and study by this 
committee among others.
    Why was the Pension Protection Act necessary? Simply put, it was 
needed to ensure that workers receive the pension benefits that they 
have been promised--and that they have relied upon. It was needed to 
ensure that businesses have clarity and certainty as to their pension 
obligations, so that they can budget and plan accordingly. And it was 
needed to ensure that ultimately, taxpayers, through federal pension 
guarantees, are not left holding the bag for billions of dollars of 
pension ``bailout.''
    The Pension Protection Act takes important steps--some in the near-
term, others in the longer-term--to ensure that the retirement security 
of private-sector workers receiving pensions is guaranteed. The bill 
does so by adopting tough new funding standards that employers will 
have to meet, to make sure that plans are sufficiently funded, with 
real dollars. It requires plans to use actuarial assumptions that 
accurately reflect the performance of plans, and the marketplace. It 
targets and adopts tougher standards for those plans whose funding 
levels indicate that they are the highest risk. And it does so by 
following a simple rule: when you're in a hole, stop digging. The 
Pension Protection Act prohibits plans from increasing or expanding 
benefits when the plan is already under funded and at risk. That's 
simple common sense, and something I expect anyone in this room who's 
ever had to follow a budget--for a company, or a school, or for a 
household--understands all too well.
    So what has that got to do with our hearing this morning?
    As most who have had the good fortune--and I use the term fortune 
advisedly--to dig into the policy of pension regulation know, pension 
plans in the private sector are governed by the Employee Retirement 
Income Security Act--the federal law known as ERISA. Now, certain 
plans--notably, plans sponsored by states, or localities, or municipal 
governments--are exempted from ERISA's coverage. Those plans instead 
are governed by local and state pension laws. One of the questions 
before us today is, does that exemption make sense, and are state and 
local government regulations enough to protect public-employees' 
pensions?
    Within the last few months, we've seen more and more reports that 
states and municipalities are facing the same crises that private 
employers faced with their pension plans: increased benefits, more 
liabilities, and an expanding gap in the funding to pay for them. 
Across the country, from Texas, to California, to New Jersey, and right 
here in Illinois, we are seeing on an almost weekly basis reports that 
the retirement security of some state and local workers may not be as 
secure as we would hope. The facts speak for themselves:
     According to the U.S. Census Bureau, major public pension 
programs paid out $78.5 billion in the 12 months that ended in 
September 2000. By the same period in 2004, pension payouts had grown 
by 50 percent to $118 billion.
     State and local governments currently employ 14 million 
people, with an additional 6 million retirees. It is estimated that 
these workers and retirees are owed $2.37 trillion by more than 2000 
different state and municipal government entities.
     Published government estimates suggest that the largest 
state and local pension funds faced a funding gap of $278 billion in 
2003. An analysis by Barclays Global Investors places the gap at closer 
to $700 billion. Even those that dispute Barclays' number recognize 
that the potential under funding we are talking about is in the 
hundreds of billions of dollars.
     Most recently, in March of this year, Wilshire Consulting, 
based in Santa Monica, California, which has been tracking the funding 
levels and performance of public pension funds for over a decade, 
reported that state and local pension systems are only 85% funded in 
the aggregate, down from 103% in 2000.
    Indeed, we are here today because the State of Illinois has the 
dubious distinction of having its public pension plans ranked among the 
most under funded in the nation.
    Let me be clear: we are not here today to announce that the federal 
governments wants to be, or should be, in the business of regulating 
state and local pension plans. Nor are we here to scare public-sector 
employees or suggest that their benefits are at risk today. But whether 
it's today or years in the future, the looming crisis in public pension 
under funding is real--and without action, on some level, will not go 
away.
    We all have an interest in ensuring that every worker ultimately 
receives the pension benefits which they were guaranteed. Congress took 
bold and decisive action to protect the welfare of private-sector 
workers and retirees. Surely public-sector employees deserve no less. 
The purpose of today's hearing is to begin to understand the scope of 
the issue facing us--to ask questions, to listen, and to learn. It is 
not to come to the table with pre-formed ideas or pre-judged solution. 
The panel before us represents some of the leading scholars and 
advocates involved in this issue, and I look forward to their 
testimony.
                                 ______
                                 
    Ms. Biggert. Thank you, Mr. Kline, and thank you for 
chairing this important and timely hearing, and welcome to 
Illinois.
    For several years, you and I have joined colleagues from 
both parties in a series of Education and Workforce Committee 
hearings to lay the foundation for the Pension Protection Act 
that President Bush recently signed into law. During that 
series of hearings, we spoke with dozens of witnesses and 
examined a wide array of information that pointed to a private 
pension system in turmoil. We heard stories of employers and 
unions making pension promises they knew they could not keep. 
We learned that today's outdated Federal pension laws do not 
reflect the reality of today's economy. And we were told that 
without real reform to fix outdated Federal pension laws, more 
companies would default on their worker pension plans, 
increasing the likelihood of a massive taxpayer bailout of the 
Pension Benefits Guarantee Corporation, which is the Federal 
body charged with ensuring private pension plans. And so we 
acted.
    Today, we convene this hearing to focus and to discuss the 
health of our public pension system. I'm afraid the symptoms we 
are examining do not look much different than those of our 
nation's traditional private plans. According to a Wall Street 
Journal article published last week, the California firm, 
Wilshire Consulting, reported that our nation's state and local 
pension systems are only 85 percent funded, down from 103 
percent in the year 2000. Moreover, four of every five public 
pension plans are currently under-funded and as you noted, the 
total amount of under-funding nationwide is in the hundreds of 
billions of dollars.
    I am troubled to say that my home State of Illinois manages 
a plan for its workers and retirees that is under-funded by $38 
billion, making it the worst funded state pension plan in the 
nation.
    This concerns me for two key reasons. First, I represent 
workers and retirees who depend on the state pension plan. Do 
these public servants not deserve the same pension plan 
assurances as those who work for private employers? Reneging on 
pension promises to retirees is one of the most shameful and 
reprehensible practices, whether it is by a public employer or 
a private employer.
    Second, legitimate concerns were raised about a potential 
taxpayer bailout of the Federal agency that insures the private 
pension system. And I believe the recently enacted Pension 
Protection Act will go a long way toward calming those fears.
    But similar concerns can and should be raised, arguably 
with a greater sense of urgency, because taxpayers dollars not 
only could be used to bailout a collapsed public pension plan, 
but they also serve as the primary funding source for state and 
local pensions.
    It is no surprise that the Wall Street Journal has been 
joined by other newspapers across the country in focusing on 
this escalating crisis and searching for both its causes and 
its potential solutions. That search brings us today to 
Springfield, inside the Capitol building, where decisions have 
been and will continue to be made about the future of our state 
pension system.
    Before we begin, let me be clear, as a former member of our 
General Assembly, I am sensitive to the fact that the Federal 
Government does not and should not reach its hands into state 
government matters. I would not take part in a committee 
activity that would advocate otherwise. However, I believe that 
public officials at all levels have responsibilities when it 
comes to taxes paid and nest eggs expected by those they 
represent. The public pension crisis is one that is national in 
scope, so much so that two prominent U.S. Senators, one a 
Republican and one a Democrat, have requested an official 
Federal study of this very issue. And it is one that deserves a 
much closer look, not just by our nation's newspapers and state 
and local governments, but by both parties in both houses of 
Congress as well.
    This is precisely why we are here today, to listen and to 
learn. I thank the witnesses who have joined us and agreed to 
testify today, and I look forward to discussing this important 
matter with them.
    Thank you again, Mr. Kline, for chairing this hearing and I 
yield back.
    Mr. Kline. Thank you, Mrs. Biggert. I should say that I am 
here because the Chairman of this Subcommittee is recovering 
from surgery and, of course, we wish him well.
    We have today a really distinguished panel, and I am 
excited to hear from them. I would like to sort of briefly 
introduce all of them to everyone in the room and then we will 
start down the line.
    We have Dr. Fred Giertz, a Professor in the University of 
Illinois at Urbana-Champaign Department of Economics. He has 
been on the faculty of the Institute of Government and Public 
Affairs at the University of Illinois since 1980.
    Mr. Keith Brainard serves as Research Director for the 
National Association of State Retirement Administrators, for 
which he collects, prepares, distributes studies and reports 
pertinent to public retirement system administration and 
policy.
    Ms. Irene Jinks is the President of the Illinois Retired 
Teachers' Association. Ms. Jinks taught mathematics for 34 
years in Skokie, Illinois and served on the Board of Education 
of Parkridge-Niles.
    Mr. John Filan is Director of the Governor's Office of 
Management and Budget. Mr. Filan previously served in state 
government as a department cabinet officer and is a member of 
the Governor's staff for Central Management, Employment 
Security and State Pension Agencies.
    Ms. Joanna Webb-Gauvin serves as the Director of Retiree 
Programs for Council 31 of the American Federation of State, 
County and Municipal Employees. Prior to her current position, 
she spent 2 years with the Illinois Attorney General's Office 
assisting the policy advisor on senior issues.
    Mr. Lance Weiss is a Senior Analyst for Deloitte 
Consulting, LLP in Chicago. He has over 30 years of experience 
in employee benefits and retirement planning with special 
emphasis on the design, funding, security, administration and 
implementation of retirement programs.
    Before the panel begins, I would ask that each of our 
witnesses today please try to limit your oral statements to 5 
minutes. Your entire written testimony will be included in the 
official hearing record. So you can feel free to summarize.
    In Washington, we have a light system which would alert you 
to the dwindling time. We do not have such a system here and I 
am reluctant to interrupt, but if it looks like it's going to 
go too long, I may have to do that. Please try to limit your 
statements to 5 minutes.
    And we will start, if everybody is ready, with Dr. Giertz. 
Sir, you are recognized.

STATEMENT OF J. FRED GIERTZ, PROFESSOR, INSTITUTE OF GOVERNMENT 
           AND PUBLIC AFFAIRS, UNIVERSITY OF ILLINOIS

    Dr. Giertz. Thank you very much. I am really pleased to be 
here and hope I can make a contribution to the issue.
    First of all, I am from the University of Illinois and my 
specialty is in state and local government finance, I am an 
economist dealing with budget issues, but equally importantly I 
served 10 years on the State University's Retirement System 
Board of Directors and several years as Chair of the Investment 
Committee, so I have first hand knowledge of pension systems.
    Most of what I will be talking about here today is 
Illinois-specific and also state specific, not too much about 
local governments, and a lot about Illinois. But I think a lot 
of things about Illinois have general applicability.
    If there is any good news--I am not sure whether it is good 
news or bad news--but our problem, and Illinois and the state 
and local pension systems in the country's have a problem, but 
that problem pales in comparison to the looming Social 
Security-Medicare-Medicaid problems. So put in perspective, 
this is a serious issue, but we have a number of other 
retirement issues on the horizon that are probably of a 
magnitude larger than this, so that is something that I think 
we need to address first of all.
    So I am going to suggest today that the pension problem, 
the pension funding problem, the security problem, is really a 
twofold problem. It is a problem for state and local workers, 
retirees, participants, but it is equally severe a problem for 
taxpayers. This is a dual problem. It is a problem for the 
participants in the system, it is also a serious problem for 
taxpayers who in the long run will have to deal with this issue 
in equal measure.
    To talk a little bit about history, the under-funding in 
Illinois is not an accident. It came about largely because we 
chose not to fund at the full actuarial cost of the systems as 
these accrued over the years. This is not an oversight, it was 
not neglect, it was explicit policy. It was easier to spend 
money for other things, to not raise taxes, to give raises to a 
whole host of things rather than set aside money for the 
pension system. And this is not the last 5 years, 10 years, it 
goes back decades.
    In 1995, the State of Illinois recognized that this was a 
problem that had become a serious one and was basically out of 
control, and we set to right ourselves with a multi-decade 
program to try to get back in balance again. The first 10 
years, unfortunately, did not involve a lot of pain, it was 
more sort of ramping up, getting ready for the serious problem 
to come in the future. And so the first 10 years, we stayed 
within the plan guidelines. But 2005 came, the hurdle moved up 
in size, the contribution the State was supposed to make 
increased, and we blinked. We changed our plan and did not 
fulfill the obligation that we chose in 1995 and basically made 
a new plan starting in 2005 with, again, not very much pain in 
the early stages and most of the pain pushed back into the 
later years. So neither the 1995 nor the 2005 changes really 
righted our--we are going to have to have huge increases in 
funding obligations in the State of Illinois in just a very few 
years in the future, obligations that cannot be met within the 
framework of our current budget.
    We did make some adjustments, we did make some changes in 
the pension obligations and the payments to future retirees, 
but we actually, after even 1 year, we went back and changed 
some of the ways that we were going to save money. For example, 
we were going to save money by limiting end-of-career salary 
increases. That only lasted 1 year, that has been modified now. 
So we still face this very, very large problem, a problem that 
is not really able to be addressed in the framework of our 
present budget.
    Now the State of Illinois has in its Constitution something 
called a non-impairment clause. A non-impairment clause 
basically guarantees the benefits that have been earned to 
government employees. So that is why I said it is both a 
taxpayer problem and an employee problem, because most of the 
pain eventually is going to be felt not necessarily by the 
people who are retiring, like me, but will be felt by the 
taxpayers that have to pay the bill for this.
    Now I do not have any--one last thing. There is in fact a 
suggestion abroad that somehow the pensions have gone out of 
control because of generous extension of benefits, all kinds of 
changes being made to the benefit of workers. Now there have 
been a few of those, but most of the changes in the benefits 
have been a quid pro quo, where there has been some kind of 
decrease in, for example, 1 year people had to forego a salary 
increase and the State contributed more to pensions. Another 
time there was an increase in the cost of healthcare to 
employees and the State increased pension payments. So the 
pattern was take back something that you save money today from, 
but then increase pension benefits sometime in the future. You 
do not have to pay today, you may have to pay years in the 
future. So most of the problem is from under-funding, it is not 
from a lavish extension of benefits to the workers.
    Now I am not in a position to talk about solutions. Let me 
just summarize now.
    Douglas Holtz-Eakin was the head of the Congressional 
Budget Office in Washington, he just stepped down 6 months ago 
or so. He was asked about what can you do about the Social 
Security, Medicaid, Medicare problem and he said ``This is a 
really serious problem, but I know that we will address it 
eventually because we have to address it.'' There is a famous 
statement by Herbert Stein, who used to be a Council of 
Economic Advisors member, he said ``Some things cannot go on 
forever and eventually will end.'' Well, obviously this cannot 
go on forever, it eventually has to be solved. The question is 
how do we solve it. Do we solve it in an effective way or do we 
solve it in a less-than-effective way? And Holtz-Eakin had two 
suggestions; one is that any kind of solution has to entail 
pain, there is no painless way of dealing with this. We cannot 
insulate taxpayers from pain, we cannot insulate necessarily 
future workers from pain. So pain has to be part of the 
equation. The second suggestion he gave was that you have to 
have all options on the table. You cannot say we are going to 
solve this problem, but we cannot possibly raise taxes, we 
cannot possibly do this, we cannot possibly do that. We need to 
have all options open and then we have to address the issue.
    So that is basically my suggestion, no specifics, but this 
issue has to be addressed, it will be addressed and our 
challenge is to do it in an effective way.
    Thank you.
    Mr. Kline. Thank you, sir. I think right on time. The 
timekeeper is here. So thank you very much, that was a good 
job.
    Now, Mr. Brainard.
    [The prepared statement of Dr. Giertz follows:]

     Prepared Statement of J. Fred Giertz, Professor, Institute of 
         Government and Public Affairs, University of Illinois

    The State of Illinois' pension systems are among the most seriously 
underfunded in the nation. This underfunding is the result of decades 
of neglect where decisions were made to use available funds for 
purposes other than pensions. The so-called pension problem should be 
viewed as a more general state budget problem that manifests itself in 
high pension costs because the state's pension systems have been used 
in the past to mask more basic budget issues. This problem continues to 
this day where the state faces huge increases in pension funding costs 
in the upcoming years to address past underfunding problems. The 
problem is one of taxpayer ``security'' as well as retirement 
``security'' for state employees.
    On many occasions in the last several decades, maneuvers involving 
the state's pensions systems have been used to avoid painful political 
choices of either raising taxes or cutting state programs. The heart of 
the current pension problem is the long-term underfunding of the 
state's pension systems where funds that should have gone for pensions 
have been used for other state programs. Each year, actuaries for the 
pension systems calculate the normal costs of the systems-the increased 
liabilities for promised future benefits created in that year. If the 
contributions of the state and the employees equal this normal cost, 
the pension systems will remain fully funded, assuming the actuarial 
assumptions are met.
    From their inception, the state has almost always chosen to fund 
pensions at less than their normal cost, thus creating unfunded 
liabilities that have to be made up in the future. This was done 
explicitly during the austere budget days of the 1980s when the state 
chose to direct the available state resources to other state programs 
and underfund the pensions. This was not an oversight, but a conscious 
policy decision. A case can be made to underfund pensions during lean 
times with the shortfall made up during the good years. In Illinois' 
case, every year was a lean year and the shortfalls were never made up.
    Unfortunately for the state, the underfunding was not invested in 
the portfolios of the pension systems and therefore missed out on the 
phenomenal growth in the financial markets from the early 1980s through 
the end of the century. Simulations for the State Universities 
Retirement System indicate that had the state made its required 
contributions along with the contribution mandated for employees (which 
were made), the system would be fully funded at the end of fiscal 2004 
with assets at nearly 110 percent of accrued liabilities even after the 
decline of the stock market after 2000 and the state would only have to 
contribute its share of the normal pension costs in the future-a 
fraction of the costs they now face.
    In 1995, the state of Illinois realized the seriousness of the 
underfunding problem and set out on a course to correct it. It is safe 
to say the state did not act precipitously in this regard. In fact, the 
state adopted a 50-year plan to bring the various pension systems up to 
a modest goal of 90 percent of full funding. Not only did the plan 
stretch the catch-up over half a century, it delayed any real catching 
up for a decade. The period from 1995 to 2005 was labeled a ramp phase 
in which the state still contributed less that the normal pension costs 
with the serious business of making up the short fall deferred 10 years 
(to 2005). Note that if the state had dealt with its past budget 
problems by issuing bonds in the credit market rather than by 
underfunding pensions, the state would now have a bond repayment 
problem, not a pension problem. In such a case, would the appropriate 
policy be to default on the bonds?
    Since the pension funding reform in 1995, it is alleged that the 
pensions systems have provided generous benefit increases and early 
retirement options. In one sense, there is an element of truth in these 
statements, but these changes have, for the most part, been instigated 
by the state in order to save money in other programs. For example, 
there was an increase in the retirement benefit formula for those 
retiring under defined benefit plans approved in 1997. However, the 
increased benefits came at a cost. As a kind of quid pro quo, the state 
eliminated a costly program that paid state employees for a portion of 
their unused sick leave at retirement while also tightening the 
eligibility requirements for state-subsidized medical insurance for 
retirees. The state captured the savings in the form of lower general 
fund spending while the costs were borne by increases in the unfunded 
liability of the pension system.
    In another case, certain state workers gave up a scheduled pay 
increase in return for the state picking up a larger portion of their 
retirement contributions. Here again, the state saved the forgone wage 
costs while the burden was placed on the retirement systems.
    Finally, early retirement programs, that have become common in 
recent years, are portrayed as costly benefits for young retirees. 
While a strong case can be made for limiting early retirements and 
possibly raising the retirement age, most early retirement programs 
were designed to help the state and school districts by moving older 
workers out of their jobs and into retirement. Again the state and the 
schools capture the benefits of lower wage costs while the pension 
systems bear the burden of increased underfunding. It is interesting to 
note that when officials bemoan the increased underfunding of the 
pension systems from early retirements, they seldom mention the 
offsetting savings resulting from the early retirements.
    The state is severely limited in its ability to reduce the 
currently-accrued pension liabilities by Article XII, Section 5 of the 
State Constitution. The so-called non-impairment clause states:
    ``Membership in any pension or retirement system of the State, any 
unit of local government or school district, or any agency or 
instrumentality thereof, shall be an enforceable contractual 
relationship, the benefits of which shall not be diminished or 
impaired.''
    The article constrains the ability of the state to directly reduce 
current pension liabilities and protects current employees and retirees 
from pension reductions. However, it does not protect state taxpayers 
or future employees from the consequences of this problem.
    As noted above, the state has a budget imbalance problem, not just 
a pension problem, even though pension costs have come to play an 
important role in both the problem and its solution. The problem is a 
serious one and the solutions are not easy. The solutions require a 
comprehensive review of state expenditures and revenues. Focusing 
narrowly on pensions will lead to inferior solutions to the state's 
underlying budget problem. Soon, the state of Illinois must face the 
prospect either making large and painful cuts in major state programs 
(not just cuts in pension benefits decades in the future) or finding 
additional permanent revenue sources to fund its activities.
    The 1995 legislation has not solved Illinois pension problem. In 
2005 in response to a serious budget shortfall and a reluctance to 
raise state taxes or make expenditure cuts, the Illinois General 
Assembly and the governor targeted the state's pension system to free 
up revenue by reducing funding for the fiscal years 2006 and 2007 by an 
estimated $2.3 billion. The plan reduced pension benefits for new 
employees that will reduce funding requirements many years in the 
future, but booked the expected savings immediately. This increased the 
underfunding of the state pensions systems at a time when the state 
pension systems are already the most poorly funded in the nation. In 
essence, the state is borrowing money from the pension systems which 
will have to be repaid in future years at an expected implicit interest 
rate of over 8 percent-the expected return on the pension fund 
investments in future years. This resulted in large scheduled increases 
in state pension cost over the next several years.
    (Note: This testimony is based on material produced by the 
presenter over the last several years.)
                                 ______
                                 

   STATEMENT OF KEITH BRAINARD, RESEARCH DIRECTOR, NATIONAL 
         ASSOCIATION OF STATE RETIREMENT ADMINISTRATORS

    Mr. Brainard. Chairman Kline, Representative Biggert, thank 
you for the opportunity to appear before you today.
    Broadly speaking, I believe the retirement security of the 
nation's state and local government employees and retirees, 
particularly compared with other groups, is strong. This 
strength is a result of the system that features pre-funded 
defined benefit plans; reasonable costs that are shared by 
public employees, employers and investment earnings; flexible 
plan designs that accommodate the objectives of relevant 
stakeholders; voluntary defined contribution plans that 
supplement defined benefit plans; exemption from most Federal 
regulation, allowing cities and states to design, administer 
and finance retirement benefits in concert with the unique 
needs of each pension plan sponsor and within the framework of 
each state's constitution, statutes, case law and political 
culture; and finally, state protections of pension benefits, 
many of which predate and exceed Federal regulations of pension 
benefits among private employers.
    Sixteen million Americans, more than 10 percent of the 
nation's workforce, are employed by a state or local 
government. These are public school teachers, administrators 
and support personnel, firefighters, public health officials, 
correctional officers, judges, police officers, child 
protective service agents and myriad other professionals 
responsible for performing a broad array of essential public 
services. Ninety percent of these workers have a defined 
benefit plan or traditional pension as their primary retirement 
benefit, a figure that stands in increasing contrast to the 
diminishing portion of the nation's private sector workforce 
with access to a traditional pension. This pension coverage 
makes a significant and cost-effective contribution to the 
retirement security of not only these public employees, but 
also to the Nation as a whole.
    Pension plans for the vast majority of state and local 
government employees are in reasonably good condition. Based on 
the latest available data, pubic pensions have approximately 
$2.8 trillion in assets to fund more than 86 percent of the 
next 30 years of pension liabilities they have incurred. Based 
on my own projections, this figure will begin rising again in 
fiscal year 2006 and for the foreseeable future. Absent an 
extreme downturn in investment markets, 86 percent is likely to 
be the low point for the aggregate public pension funding 
level.
    There is nothing inherently flawed about defined benefit 
plans for public employees that makes them risky or expensive 
to taxpayers, and cities and states that have properly funded 
their pension plans and managed their liabilities generally are 
in good condition.
    I want to take just a moment to explain the meaning of 
under-funding in the context of a public pension plan. Most 
pension benefits for public employees are pre-funded, meaning 
that all or most of the assets needed to fund pension 
liabilities are accumulated during an employee's working life, 
then paid out in the form of retirement benefits. Pre-funding 
is one way of financing a pension benefit, and it enables a 
large portion of the benefit to be paid with investment 
earnings rather than contributions from employees and 
employers. All else held equal, a fully funded pension plan is 
better than one that is poorly funded, but a plan's funded 
status is simply a snapshot of what is happening at a 
particular point in time in an ongoing pre-funding process. It 
is a single frame, if you will, of a movie that spans decades. 
There is nothing magic about a pension plan being fully funded. 
And even with no changes to funding policies or plan design, 
most under-funded pension plans will be able to pay promised 
benefits for decades. Pension liabilities typically extend 
years into the future, and it is during this time that a 
pension fund can accumulate the assets it needs to pay its 
future liabilities.
    The critical factor in assessing the current and future 
health of a pension plan is not so much the plan's actuarial 
funding level, as whether or not funding the plan's liabilities 
creates fiscal stress to the plan sponsor.
    Under-funding is a matter of degree, not of kind. Many 
pension plans remain under-funded for decades with no 
deleterious consequences. The status of a plan whose funding 
level declines from 101 percent in year one to 99 percent in 
year two has changed from over-funded to under-funded. Although 
the nomenclature describing the plan's funding condition has 
changed diametrically, the financial reality of its funding 
condition has changed little. Fully funded and under-funded 
plans both continue to require contributions and investment 
earnings.
    As mentioned previously, public pensions as a group have 
accumulated assets equal to approximately 86 percent of their 
liabilities, a figure I project will begin to rise in the 
coming months as more of the investment earnings generated 
since March 2003 are incorporated into public funds' actuarial 
calculations. In my view, the fact that public pension funds 
have accumulated as much of their liabilities as they have 
deserves praise, not condemnation. Whether one refers to the 
public pension funding glass as 86 percent full or 14 percent 
empty, the glass undeniably is mostly full.
    This is not to suggest that there are not funding problems 
among some public pension plans--there are and they need to be 
addressed, but there is no national crisis and suggesting that 
a plan is in crisis simply because it is under-funded is to 
misunderstand the meaning of that term.
    On a national basis, the cost to taxpayers of public 
pensions, both as a percentage of public employee payroll and 
of all state and local government spending, is lower today than 
during most of the last decade. On a national basis, employer 
or taxpayer pension costs for state and local government 
pensions are lower today than they were during the mid-1990's. 
In most cases, where employer costs have risen sharply, a major 
factor contributing to that rise is that the employer allowed 
its contribution rates to decline to very low levels.
    For the 22 years from 1983 to 2004, three-fourths of all 
public pension revenue came from sources other than taxpayers. 
Unlike most corporate pension plans, most employees in the 
public sector are required to contribute to their pension plan. 
Five percent of pay is the median and most popular employee 
contribution rate.
    In addition to promoting retirement security for public 
employees and the Nation as a whole, traditional pensions for 
state and local government employees offer other advantages 
that benefit all Americans relative to defined contribution or 
401k plans. For example, traditional pensions strengthen the 
ability of public employers to attract and retain the personnel 
needed to perform essential public services. Taxpayers benefit 
from these plans because they promote worker retention and 
longevity, encouraging experienced and qualified workers to 
return the investment in training and experience that has been 
made in them by their public employers. Those who rely on 
public services--which includes all of us--enjoy myriad 
benefits that emanate, directly or indirectly, from the 
provision of these services.
    Americans also enjoy the economic benefits generated by 
traditional pension plans for public employees. The $2.8 
trillion held by public pension funds is a key source of 
liquidity and stability for the nation's financial markets. 
Pension assets are real, invested in stocks, bonds, real 
estate, venture capital and other asset classes. Public 
pensions hold in trust approximate 10 percent of the nation's 
corporate equity and as institutional investors, these funds 
are an important source of long-term patient capital for the 
nation's publicly traded companies. Recent studies have found 
that public pension funds are significant sources of economic 
support and stimulus that reaches every city and town in the 
nation. Public pension funds are also a key source of financing 
for venture capital, which represents the seeds of the nation's 
future economic growth and productivity gains.
    State and local governments take seriously their legal and 
civic responsibilities for paying promised benefits to their 
employees and retirees. Comprehensive state and local laws and 
significant public accountability and scrutiny provide rigorous 
and transparent regulation of public plans and have resulted in 
strong funding rules and levels. These safeguards often predate 
and exceed Federal laws for private sector pensions.
    Additionally, public plans are backed by the full faith and 
credit of their sponsoring state and local governments. And 
public plan participants' accrued level of benefits and future 
accruals typically are protected by state constitutions, 
statutes or case law, which prohibit the elimination or 
diminution of retirement benefits. These constitutional and 
statutory protections provide far greater security than are 
provided to private sector pension plans under ERISA and the 
PBGC.
    Although any group as large as the public pension community 
could benefit from some common sense reforms, a fair review 
will lead a reasonable person to conclude that (a) the model 
for providing retirement benefits for employees of state and 
local governments is working for all stakeholders; (b) pension 
benefits of working and retired public employees are safe and 
assured; and (c) the model used by state and local governments 
to provide employee retirement benefits contain elements worthy 
of imitation by other employer groups and segments of the 
economy.
    Thank you.
    Mr. Kline. Thank you, Mr. Brainard.
    Ms. Jinks, you are recognized.
    [The prepared statement of Mr. Brainard follows:]

   Prepared Statement of Keith Brainard, Research Director, National 
         Association of State Retirement Administrators (NASRA)

    Mr. Chairman, members of the Subcommittee, I want to thank you for 
the opportunity to speak to you today. The membership of the National 
Association of State Retirement Administrators (NASRA) and the National 
Council on Teacher Retirement (NCTR) administer State, territorial, 
local, university and statewide public pension systems that 
collectively hold over $2.1 trillion in trust for over 18 million 
public employees, retirees and their beneficiaries.
    Broadly speaking, I believe the retirement security of the nation's 
state and local government employees and retirees, particularly when 
compared with other groups, is strong. This strength is the result of a 
system that features:
    a) pre-funded defined benefit plans;
    b) reasonable costs that are shared by public employees, employers, 
and investment earnings;
    c) flexible plan designs that accommodate the objectives of 
relevant stakeholders, including public employers, taxpayers, those who 
rely on public services, and public employees;
    d) voluntary defined contribution plans that supplement defined 
benefit plans;
    e) exemption from most federal regulation, allowing cities and 
states to design, administer, and finance retirement benefits in 
concert with the unique needs of each pension plan sponsor and within 
each state's constitutions, statutes, case law, and political culture.
    f) state protections of pension benefits, many of which pre-date 
and exceed federal regulations of pension benefits among private 
employers.
    Sixteen million Americans--more than 10 percent of the nation's 
workforce--are employed by a state or local government. These are 
public school teachers, administrators, and support personnel; 
firefighters; public health officials; correctional officers; judges; 
police officers; transportation workers; child protective service 
agents; and myriad other professionals responsible for performing a 
broad array of essential public services.
    Ninety percent of these workers have a defined benefit plan, or 
traditional pension, as their primary retirement benefit, a figure that 
stands in increasing contrast to the diminishing portion of the 
nation's private sector workforce with access to a traditional pension. 
This pension coverage makes a significant and cost-effective 
contribution to the retirement security of not only these public 
employees, but also to the nation as a whole.
    Pension plans for the vast majority of state and local government 
employees are in reasonably good condition. Based on the latest 
available data, public pensions have approximately $2.18 trillion in 
assets to fund more than 86 percent of the next 30 years on pension 
liabilities they have incurred to-date. Based on my projections, this 
figure will begin rising again in FY 2006 and for the foreseeable 
future. Absent an extreme downturn in investment markets, 86 percent is 
likely to be the low point for the aggregate public pension funding 
level.
    Figure 1. plots the current funding level of 117 public pension 
plans around the country. Combined, the plans depicted in this chart 
provide pension benefits for approximately 85 percent of all state and 
local government employees in the U.S. The size of the bubbles in the 
chart is roughly proportionate to the size of each plan. Larger bubbles 
indicate larger plans, and smaller plans are indicated by smaller 
bubbles. As the chart shows, most plans are funded above 80 percent, 
especially most of the larger plans.
  figure 1. current funding level of 117 state and local pension plans


    There is nothing inherently flawed about defined benefit plans for 
public employees that makes them risky or expensive to taxpayers, and 
cities and states that have properly funded their pension plans and 
managed their liabilities are generally in good actuarial condition.
    I want to take a moment to explain the meaning of underfunding in 
the context of a public pension plan. Most pension benefits for public 
employees are pre-funded, meaning that all or most of the assets needed 
to fund pension liabilities are accumulated during an employee's 
working life, then paid out in the form of retirement benefits. Pre-
funding is one way of financing a pension benefit, enabling a large 
portion of the benefit to be paid with investment earnings rather than 
contributions from employees and employers. All else held equal, a 
fully funded pension plan is better than one that is poorly funded, but 
a plan's funded status is simply a snapshot of what is happening at a 
particular point in time in an ongoing pre-funding process. It is a 
single frame, if you will, of a movie that spans decades. There is 
nothing magic about a pension plan being fully funded, and even with no 
changes to funding policies or plan design, most underfunded public 
pension plans will be able to pay promised benefits for decades. 
Pension liabilities typically extend years into the future, and it is 
during this time that a pension fund can accumulate the assets it needs 
to fund its future liabilities. The critical factor in assessing the 
current and future health of a pension plan is not so much the plan's 
actuarial funding level, as whether or not funding the plan's 
liabilities creates fiscal stress for the pension plan sponsor.
    Underfunding is a matter of degree, not of kind. Many pension plans 
remain underfunded for decades with no deleterious consequences. The 
status of a plan whose funding level declines from 101 percent in year 
one to 99 percent in year two, has changed from overfunded to 
underfunded. Although the nomenclature describing the plan's funding 
condition has changed diametrically, the financial reality of its 
funding condition has changed little. Fully funded and underfunded 
plans both continue to require contributions and investment earnings.
    As mentioned previously, public pensions as a group have 
accumulated assets equal to approximately 86 percent of their 
liabilities, a figure I project will begin rising in the coming months 
as more of the investment earnings generated since March 2003 are 
incorporated into public funds' actuarial calculations. In my view, the 
fact that public pension funds have accumulated as much of their 
liabilities as they have deserves praise, not condemnation. Whether one 
refers to the public pension funding glass as 86 percent full or 14 
percent empty, the glass undeniably is mostly full.
    This is not to suggest that there are not funding problems among 
some public pension plans. There are, and they need to be addressed. 
But there is no national crisis, and suggesting that a plan is in 
crisis simply because it is underfunded is to misunderstand the meaning 
of that term.
    On a national basis, the cost to taxpayers of public pensions, both 
as a percentage of public employee payroll and of all state and local 
government spending, is lower today than during most of the last 
decade. As shown in Figure 2., on a national basis, employer (taxpayer) 
pension costs for state and local government pensions, are lower today 
than they were during the mid-1990's. In most cases where employer 
costs have risen sharply, a major factor contributing to the rise is 
that the employer allowed its contribution rates to decline to very low 
levels.
    figure 2. employer (taxpayer) contributions to state and local 
government pension plans as a percentage of payroll and of total state 
              and local government spending, 1995 to 2004


    Figure 3 shows the three sources of public pension revenue for the 
22-year period from 1983 to 2004 (these are the only years of this data 
available from the U.S. Census Bureau.) As the figure shows, three-
fourths of all public pension revenue came from sources other than 
taxpayers. Unlike most corporate pension plans, most employees are 
required to contribute to their pension plan; five percent of pay is 
the median and most popular employee contribution rate.
 figure 3. sources of state and local government pension revenue, 1983-
                                  2004


    In addition to promoting retirement security for public employees 
and the nation as a whole, traditional pensions for state and local 
government employees offer other advantages that benefit all Americans 
relative to defined contribution, or 401k, plans. For example, 
traditional pensions strengthen the ability of public employers to 
attract and retain the personnel needed to perform essential public 
services. Taxpayers benefit from these plans because they promote 
worker retention and longevity, encouraging experienced and qualified 
workers to return the investment in training and experience that has 
been made in them by their public employers. Those who rely on public 
services--which includes all of us--enjoy myriad benefits that emanate, 
directly or indirectly, from the provision of these services.
    Americans also enjoy the economic benefits generated by traditional 
pension plans for public employees. The $2.8 trillion held by public 
pension funds is a key source of liquidity and stability for the 
nation's financial markets. Pension assets are real, invested in 
stocks, bonds, real estate, venture capital, and other asset classes. 
Public pensions hold in trust more than 10 percent of the nation's 
corporate equities, and, as institutional investors, public pension 
funds are an important source of long-term, patient capital for the 
nation's publicly-traded companies. Recent studies have found that 
public pension funds are significant sources of economic support and 
stimulus that reaches every city and town in the nation. Public pension 
funds are also a key source of financing for venture capital, which 
represents the seeds of the nation's future economic growth and 
productivity gains.
    State and local governments take seriously their legal and civic 
responsibilities for paying promised benefits to their employees and 
retirees. Comprehensive state and local laws and significant public 
accountability and scrutiny, provide rigorous and transparent 
regulation of public plans and have resulted in strong funding rules 
and levels. These safeguards often pre-date and exceed federal laws for 
private sector pensions.
    Additionally, public plans are backed by the full faith and credit 
of their sponsoring state and local governments, and public plan 
participants' accrued level of benefits and future accruals typically 
are protected by state constitutions, statutes, or case law, which 
prohibit the elimination or diminution of retirement benefits. These 
constitutional and statutory protections provide far greater security 
than are provided to private sector pension plans under the Employee 
Retirement Income Security Act (ERISA) and the Pension Benefit Guaranty 
Corporation.
    Although any group as large as the public pension community could 
benefit from some common sense reforms, on the whole, a fair review 
will lead a reasonable person to conclude that: a) the model for 
providing retirement benefits for employees of state and local 
governments is working for all stakeholders: public employers, 
taxpayers, recipients of public services, and public employees; b) 
pension benefits of working and retired public employees are safe and 
assured; and c) the model used by state and local governments to 
provide employee retirement benefits contains elements worthy of 
imitation by other employer groups and segments of the economy.
    I am happy to respond to any questions you may have about public 
pension issues. Thank you.
                                 ______
                                 

STATEMENT OF IRENE JINKS, PRESIDENT, ILLINOIS RETIRED TEACHERS' 
                          ASSOCIATION

    Ms. Jinks. Thank you for this opportunity to speak with 
you. I appreciate it very much. I am the President of the 
Illinois Retired Teachers Association, a 31,000 member 
grassroots organization representing retired educators who 
taught outside the city of Chicago, because we, of course have 
the state of Chicago as far as teachers are concerned, with 
their own pension system.
    The Teacher Retirement System, which protects all of those 
who are downstate teachers, was created in 1939 to provide 
members with retirement, disability and survivor benefits. As 
of June 30 of 2005, there were over 155,000 active teacher-
members, or educators and 82,575 members receiving benefits. On 
that date, the average monthly retirement annuity was $3043, 
but there are more than 1700 annuitants in Illinois who receive 
less than $1200 a month, many after a lifetime in education.
    Funding for our pensions come from member contributions, 
school district contributions, investment income and the State 
of Illinois. Over the past 20 years, 21 percent of total TRS 
income has been from member contribution and 55 percent from 
investment income. Active educators are now required to 
contribute 9.4 percent of their creditable earnings each year, 
considerably more than you mentioned, Mr. Brainard.
    Illinois is facing a pension fund crisis. In 1995, 
following years of the state's failure to adequately fund 
retirement systems, the General Assembly enacted a pension 
reform law designed to bring the state's pension to a 90 
percent funded level by 2045. Until 2005, the state adhered to 
the funding schedule. Then, action by the General Assembly 
reduced funding of the state's pension system by over $2 
billion over a 2-year period. The TRS portion of the under-
funding is about $1 billion. Of course, IRTA opposed passage of 
this bill.
    The Illinois Constitution guarantees pension benefits, but 
the Constitution is not inviolable. Illinois educators deserve 
more than just a promise that the system will be funded. Active 
teachers and school systems have upheld their responsibilities 
to pay into the system regularly. The State must do the same.
    For most retired Illinois educators, the TRS pension is 
their only source of income. They do not receive Social 
Security and even if they have contributed to Social Security 
through other employment or would be eligible otherwise for a 
spousal pension, those payments are reduced or even eliminated 
under the Windfall Elimination Provision and the Government 
Pension Offset.
    IRTA is concerned about present retirees, but also is 
concerned about the effect on current and future educators. 
Salaries in education are not high. And we do not have the 
benefits of profit sharing and bonuses of the private sector. 
To ensure that we attract the best teachers to our schools, we 
must protect the retirement system. We need to ensure that the 
plan to fund the system to 90 percent by 2045 is met. We know 
that with additional programs or increases, the State cannot 
meet its pension obligations. We fear that we will be faced 
with an attempt to change the current payment schedule or the 
current benefit formula, a change that could create a two-
tiered benefit program, which we oppose.
    Under-funding has required the Teacher Retirement System to 
sell assets to meet current obligations. These assets, as well 
as the interest they would have earned, are lost forever. 
Without assurance of an adequate pension, people will be less 
likely to remain in education long term.
    I spent 37 years as a teacher and administrator, plus 8 
years given as a school board member, so I have spent 
considerably more than half my lifetime in education. I do not 
regret 1 day of it, but I certainly hope that we do not find 
ourselves in a position where people teach for a couple of 
years and then move on to other things. We will have an 
inexperienced and much less dedicated cadre of teachers in our 
schools.
    The State of Illinois must not forego its obligations. We 
retired educators have served our state and the youth of our 
state. We have fulfilled our obligation by paying into TRS. 
Illinois must do the same.
    Thank you for this opportunity.
    Mr. Kline. Thank you, Ms. Jinks, for your testimony.
    Mr. Filan, sir, the floor is yours.
    [The prepared statement of Ms. Jinks follows:]

Prepared Statement of Irene Jinks, President, Illinois Retired Teachers 
                              Association

    Good Morning, members of the Subcommittee on Employer-Employee 
Relations. My name is Irene Jinks and I am the President of the 
Illinois Retired Teachers Association (IRTA). I thank you for the 
opportunity to speak with you today on the important subject of the 
state's retirement security. The IRTA is a 31,000-member ``grassroots'' 
organization, which represents retired educators who taught outside of 
Chicago.
    The General Assembly created the Teachers' Retirement System for 
the State of Illinois (TRS) in 1939. TRS provides its members with 
retirement, disability, and survivor benefits. As of June 30, 2005, 
there were 155,850 active members and 82,575 annuitants and 
beneficiaries receiving benefits. As of June 30, 2005 the average 
monthly retirement annuity was $3,043. In addition, there are over 
1,700 members who gave most of their lives to education making less 
than $1,200 per month.
    Funding for TRS benefits comes from member contribution, 
contributions by school districts, investment income and the State of 
Illinois. Over the past 30 years, 21% of the total income to TRS has 
been from members, 23% has been from employers, and 55% has been from 
investment income. Currently, active TRS members are required to 
contribute 9.4% of their creditable earnings each year towards their 
retirement.
    Illinois is facing a pension fund crisis. In 1995, due to years of 
Illinois failing to fund its retirement systems adequately, the General 
Assembly passed a pension funding reform law, Public Act 88-593. The 
law is designed to bring the State's pension funds to a 90% funded 
ratio by 2045 by requiring that the state's contribution ``equal a 
percentage of payroll necessary to amortize 90% of unfunded 
liabilities''. Until 2005, the State met its statutory obligation by 
adhering to the funding schedule. In 2005, the General Assembly passed 
SB27 (PA 94-0004). This legislation reduced the funding to the state 
pension systems by over $2 billion in a two-year period. The Teachers 
Retirement System portion of the under funding is approximately $1 
billion over the same period of time. The IRTA opposed the passage of 
SB27 recognizing the additional strain it would put on the system and 
the threat of jeopardizing future benefits. It should be noted during 
this time of pension funding abuse; teachers and school districts never 
missed a payment.
    Article 13, Section Five of the Illinois Constitution states 
``Membership in any pension system of the State, any unit of local 
government or school district, or any agency or instrumentality thereof 
shall, be an enforceable contractual relationship, the benefits of 
which shall not be diminished or impaired.'' Some of our members take 
comfort by this guarantee, but constitutions can be amended. The 
legislature simply votes to place constitutional questions on the 
ballot. They would only be voting to allow the general public to decide 
the outcome.
    Our members and other Illinois retired educators' deserve more than 
a promise that the pension system will be funded. As previously stated, 
retired teachers and school districts have upheld their responsibility 
to pay into the pension system, having never missed a payment.
    For most Illinois retired teachers their TRS pension is their only 
source of income. Unless these retirees held other employment, they do 
not receive any Social Security. Even if they did have outside 
employment in which they contributed to Social Security, their payments 
from Social Security have been minimized and in some cases eliminated 
due to the Windfall Elimination Provision and the Government Pension 
Offset. Current and future retirees have expected and planned on their 
teachers' pension being there when they retire. If Illinois continues 
to miss payments, this may not be the case in the future.
    The IRTA is not only concerned about the well-being of current 
retirees, but we are worried about the impact that this administration 
will have on our current and future teachers. Educators in Illinois are 
already burdened by fairly low salaries. In order to ensure that we 
attract the best and brightest teachers for our future generations, we 
must protect the retirement system.
    The best way to do that is to ensure that the TRS is fully funded 
to 90% by the previously set date of 2045. We oppose any type of two-
tier system or reduction of benefits. In order to bring pension 
contributions back up to the level required by the 1995 Pension Act, 
substantial ``ramp-up'' payments are required in the future years. The 
first of these comes due July 1, 2007, when the state must increase 
scheduled pension payments by an estimated $700 million.
    Natural revenue growth in Illinois is about $1 billion. The minimum 
annual education increase is about $300 million. Medicaid absorbs $200 
million in revenue growth annually. With any additional programs or 
increases, the numbers will guarantee that the state will be unable to 
meet its pension obligation for fiscal year 2007. With this knowledge 
at hand, we know that we will eventually be faced with an attempt to 
change the current 2045 date or the payment formula. The IRTA opposes 
any change to the current formula and believes that pensions should be 
funded according to the 1995 law.
    The under-funding of payments also caused the TRS to have to sell 
off assets in order to make payments on time. The under-funding now 
means the pension systems will not be able to invest that money and 
will lose their projected 8.5% interest earnings each year. This is 
just one more barrier that TRS must face as they head in a downward 
spiral while still trying to serve the retired teachers of Illinois.
    The State of Illinois must stop forgoing payments into the TRS. 
Illinois retired teachers have served the State of Illinois by 
educating our youth, they have fulfilled their obligation by paying 
into TRS, and it is time for Illinois to do the same.
                                 ______
                                 

    STATEMENT OF JOHN FILAN, DIRECTOR, GOVERNOR'S OFFICE OF 
           MANAGEMENT AND BUDGET, STATE OF ILLINOIS*

    Mr. Filan. Thank you very much. Vice Chairman Kline, thanks 
for coming on behalf of the Chairman today; Representative 
Biggert, nice to see you in Illinois. I appreciate very much 
the opportunity to appear before you today.
---------------------------------------------------------------------------
    *PowerPoint slides presented during Mr. Filan's statement appear on 
page 89 of this document.
---------------------------------------------------------------------------
    The State of Illinois sponsors five plans covering state 
employees, university employees, teachers outside of Chicago as 
was just mentioned, judges and members of the General Assembly.
    As many reports have indicated, Illinois state pensions 
have been under-funded for more than 30 years, 30 consecutive 
years I might add. As a point of clarity, recent statements 
have referred to raiding Illinois state pension funds. Even the 
word ``stealing'' has been used. Nothing could be further from 
the truth. A look at the facts clearly show that these are 
outright false statements. In fact, the statements have been 
made so often by some that I can confidently say these 
statements are in fact totally false.
    In 2003, when Governor Blagojevich took office, the 
combined assets, cash and investments, of the five state 
retirement systems were approximately $41 billion. At the end 
of the Governor's first two budget years, June 30, 2005, those 
same cash and investments totaled $59 billion, $18 billion more 
than when the Governor first took office. This represents by 
far the single largest increase in pension assets in any 2 
years in Illinois history. Further, according to the Retirement 
Systems, those same cash and investments as of the recently 
completed third budget year of the Governor, June 30, 2006, now 
total $61.9 billion, a full $21 billion more, in fact 50 
percent more in assets in the Retirement Systems than when the 
Governor took office.
    So as you can plainly see, there have been no raids, no 
withdrawals, no transfers, no stealing of pension assets or 
funds. Instead, there have been record deposits and increases 
in assets and substantial earnings on those assets since 
Governor Blagojevich took office. No Governor in Illinois 
history has deposited more money, $13.3 billion, in one term, 
into the retirement funds than Governor Blagojevich. In fact, 
no Governor has budgeted and contributed more money into the 
Retirement Systems in any one term than Governor Blagojevich.
    During the 1970's, 1980's and first half of the 1990's, 
state contributions were grossly inadequate. It increased the 
unfunded liability every single year, every adopted budget 
under-funded the pensions, without exception, during good times 
and during bad times.
    In 1994, the state adopted a payment schedule. That first 
became effective in fiscal year 1996. However, the payment 
schedule continued to under-fund each of the pension funds each 
and every year. And would do so until 2034, 40 years later. At 
that point in time, June 30, 1995, the plans had a total funded 
ratio of 52.4 percent, that is assets to liabilities, and an 
unfunded liability of $19.5 billion in 1995. At that time, 
according to Wilshire, referred to earlier, they were about the 
43rd worse funded system in the nation. You will see, as a 
result of this plan's funding, Illinois quickly moved to the 
worst funded pension system in the Nation, and it has been 
there for many years.
    The 1995 payment schedule was structurally and 
fundamentally flawed when it was enacted. We agree that 
adopting a payment policy for the state pension contributions 
was definitely needed, and still is. Unfortunately, the 1995 
payment schedule would not decrease the pension debt for 40 
years. The $19.5 billion will not go down, but go up, over the 
next 40 years. Payments were not sufficient to pay normal costs 
and interest on unfunded liability until around 2034. Thus, the 
state was guaranteed to experience a growing unfunded 
liability.
    This had the impact of deferring and increasing major debt 
into the future. As a result, the unfunded liability was 
originally projected in 1995 to grow from the June 30, 1995 
level of $19.5 billion to more than $70 billion in 2034. The 
plan was structured that way, before it finally reduces to $45 
billion in 2045, the last 10 years of the plan, based on 
projections done by the actuaries in 1995.
    As a result, the 1995 payment schedule that was adopted 
pushed the entire unfunded liability of 1995, every nickel of 
it, out 40 years, to 2034. The total unfunded liability of the 
state pension systems more than doubled from $19.5 billion in 
1995, the year before the 50-year payment schedule was adopted, 
to $43.1 billion as of June 30, 2003, the beginning of the 
current Governor's term. The $43 billion unfunded liability in 
June of 2003 equated to a funded ratio of 48.6 percent, less 
than when the 1995 plan started. The primary drivers of the 
increase in unfunded liability and consequent reduction in 
funded ratio include state contributions determined in 
accordance with the 1995 payment plan which were designed not 
to be sufficient to fund the normal costs and unfunded 
liability. This amounted to $10.9 billion worth of increase 
between 1995 and 2003. Significant investment losses incurred 
during the last three fiscal years amounted to $6.5 billion, 
those come and go.
    Most alarming though, after recognizing the liability of 
1995 and how big it was, the State of Illinois adopted benefit 
improvements, without a single nickel of additional funding, in 
the amount of $5.8 billion between 1995 and 2002. That practice 
of adopting pension benefits without a funding source was 
stopped last spring under this General Assembly and this 
Governor.
    So what have we done about the pension problems since 2003? 
We have made the pension funds more secure and better funded. 
We have done it both by increasing the assets, as mentioned 
earlier, to record levels, and reducing the costs and the rate 
of growth in liability for the first time in Illinois history. 
So we have made both immediate improvements in funding assets 
and short and long term reductions in costs and liabilities. In 
fact, since 2003, Governor Blagojevich has increased assets by 
$21 billion, more than 50 percent, primarily due to pension 
bond proceeds, additional contributions on that and earnings on 
those additional contributions; increasing the funded ratio, 
ratio of assets to liabilities from 48 percent to 60 percent, 
primarily due to pension bonds and earnings on those additional 
contributions; reducing the long term liabilities of the system 
by $83 billion, according to the Retirement Systems, based on 
the reforms that were adopted in the spring of 2005; and maybe 
most importantly, as I said before, prohibiting by law 
increasing benefits without dedicated funding.
    Another way to look at the impact of the Governor's action 
is to compare the unfunded liability and funded ratio of the 
pension systems with and without the proceeds of the pension 
obligation bonds. With the proceeds of the pension obligation 
bonds, the unfunded liability and funded ratio, are $38.6 
billion and 60.3 percent respectively as of June 30, 2005. 
Without the proceeds of the pension bonds, the ratio would have 
been--I am sorry, the liability and the funded ratio would have 
been $47.6 billion and 50.4 percent respectively if we had not 
adopted the pension bond policy. Again, the results are 
demonstrably better than if the Governor's actions had not been 
implemented.
    Earlier this year, the bipartisan Commission on 
Governmental Forecasting and Accountability issued a report 
which compares the actual progress toward the 90 percent 
funding goal in 2045 on a year-by-year basis. The Commission 
engaged its own independent actuary, the same actuary developed 
a year-by-year set of projections back in 1995 when the pension 
plan was adopted. This year's report compared those 1995 
projections to 2005. The bottom line is simple and stark: the 
1995 pension payment schedule estimated the funded ratio would 
be 52.5 percent in 2005, while the actual funded ratio achieved 
as a result of what I just mentioned was 60.3 percent, clearly 
ahead of schedule.
    So as a result of the policies put in place since Governor 
Blagojevich took office, the State of Illinois is well ahead of 
the funding level expected and designed in the 1995 payment 
schedule. If we had followed the 1995 payment plan, we would 
have been even lower than the 52.5 percent because of the 
adoption since the 1995 plan of $6 billion of unfunded 
benefits.
    A direct quote from the report just mentioned: Despite 
counteractive factors such as formula increases--the $6 
billion--investment gains or losses due to market volatility, 
the infusion of pension bonds and funding reductions as 
contained in Public Act 94.4, the total cost of the current 
funding plans has not grown appreciably from what was 
originally projected in 1994. The significant material increase 
in the funded ratio was due primarily to the record $7.3 
billion of additional contributions not called for in the plan 
in fiscal year 2004 that came from the pension bond and the 
$3.3 billion of earnings on that $7.3 billion through June 30, 
2006, earnings that could not have been done unless they had 
that additional money.
    Those that accuse the Governor of raiding the pension 
systems conveniently forget the additional funding that went to 
the systems in 2004. In fact, the 1995 projections of the 
Commission actuary estimated that the State would have 
received--the pension systems, pardon me--would have received 
$12.3 billion of contributions from 1996 to 2005. In fact, the 
actual contributions received were $19.8 billion for that same 
period, exceeding the plan's requirements by $7.5 billion. Once 
again, one hell of a--once again, pardon me--well ahead of 
schedule.
    In closing, I know that there are a lot of numbers being 
stated today. Let me repeat those findings of the Commission--
$7.5 billion of contributions more than called for in the 1995 
payment plan and a funded ratio of 60.3 percent, not 52 percent 
that was called for there.
    I challenge anyone to refute those numbers and that result. 
Specifically answer this simple question: If the funds were 
raided, how can they have $7.5 billion more than required by 
the funding plan and a funded ratio that is 7.8 percent more 
than the actuary estimated?
    Illinois has had the worst funded pension system by far for 
many years--solely caused by 30 years of under-funding, 
including many years of planned under-funding of the 1995 plan. 
Illinois also had a practice of adding billions of dollars of 
costly benefits without providing any new funding, which only 
made the longstanding under-funding worse. We have put a stop 
to that in Illinois, no new benefits can now be adopted without 
a funding source.
    Our submission to the Committee also outlines many of the 
other steps we have taken and the other recommendations we have 
made. Illinois has made demonstrable progress on pension 
funding for the first time in decades. We still have a long way 
to go and are committed to continue down that path.
    By any measure, the Illinois state pension systems are 
better funded and more secure than they were when the Governor 
first went into office. Any statement to the contrary, 
particularly statements or inferences about raiding or 
stealing, are demonstrably and completely false.
    Thank you so much for allowing me to speak here today.
    Mr. Kline. Thank you, Mr. Filan.
    Ms. Webb-Gauvin, thank you.
    [The prepared statement of Mr. Filan follows:]

   Prepared Statement of John Filan, Director, Governor's Office of 
                Management and Budget, State of Illinois

    Chairman Johnson, Ranking Member Andrews, Vice Chairman Kline, 
Representative Biggert, Representative Davis, and Members of the 
Subcommittee, I am John Filan, Director of the State of Illinois 
Governor's Office of Management and Budget. I appreciate the 
opportunity to appear before you today.
Background
    The State of Illinois sponsors five retirement plans covering state 
employees, university employees, teachers outside of Chicago, judges, 
and members of the state General Assembly. As of the date of the most 
recent actuarial valuation (June 30, 2005), the plans on an aggregate 
basis were 60.3% funded, up from 48% in 2003.
    During the 1970's, 1980's and the first half of the 1990's, state 
contributions were grossly inadequate during both good and bad economic 
times. As a result, in 1994, the state adopted a payment schedule 
(Public Act 88-593) that first became effective in fiscal 1996. 
However, the payment schedule continued to grossly underfund each of 
the pension funds. At that point in time (June 30, 1995), the plans on 
a total basis were 52.4% funded, with an unfunded liability of $19.5 
billion.
Unfunded Growth Since 1995
    The total unfunded liability of the state pension system more than 
doubled from $19.5 billion as of June 30, 1995 (the year before 
implementation of the 50-year payment plan) to $43.1 billion as of June 
30, 2003, the beginning of the current gubernatorial term in office.
    The $43.1 billion unfunded liability as of June 30, 2003 equates to 
a funded ratio of 48.6%. The primary drivers of the increase in 
unfunded liability and consequent reduction in funded ratio include:
     State contributions determined in accordance with the 1995 
Payment Plan were designed not to be sufficient to fund the normal cost 
and interest on the unfunded liability--this amounted to $10.9 billion. 
In other words, the 1995 plan was flawed from the beginning.
     Significant investment losses incurred during the three 
fiscal years ended June 30, 2003--$6.5 billion.
     Benefit improvements passed by the legislature from 1995 
through 2003 with out any source of funding--5.8 billion.
    A combination of consistently underfunding the pensions and 
continuing to provide more and more benefits without a way to pay for 
them resulted in more than doubling the unfunded liability.
    The following chart shows the components of the increase in the 
unfunded liability from 1996 to 2003 (numbers in billions):

Unfunded Liability at 6/30/1995................................... $19.5
Change due to:
        State Contributions....................................... $10.9
        Actuarial Investment Losses (Gains).......................   6.5
        Unfunded Benefit Improvements.............................   5.8
        All Other Factors.........................................    .4
          Total Increase.......................................... $23.6
                                                                  ______
Unfunded Liability at 6/30/2003................................... $43.1
                        =================================================================
                        ________________________________________________
Failings of 1995 Payment Schedule
    The 1995 payment schedule was structurally flawed when it was 
enacted. We agree that adopting a payment policy for the state pension 
contributions was definitely needed. Unfortunately, the 1995 payment 
schedule Governor Edgar's administration proposed would not decrease 
the pension debt for 40 years. First of all, it incorporated a 15 year 
ramp-up period, which increased contributions over a period of 15 years 
from a starting level that was totally arbitrary and grossly less than 
the amount needed to keep the unfunded liability from increasing. Thus 
the state was guaranteed to experience a growing unfunded liability 
from 1996 through at least 2010. This had the impact of deferring and 
increasing the entire liability into the future. To make matters even 
worse, contributions for years after 2010, although determined as a 
level percent of pay, are also not sufficient to pay normal cost and 
interest on the unfunded liability until around 2034. As a result, the 
unfunded liability was originally projected to grow from the June 30, 
1995 level of $19.5 billion to more than $70 billion by 2034 before it 
finally reduces to $45 billion in 2045 (based on projections from the 
June 30, 2005 actuarial valuation). Ultimately, the 1995 payment 
schedule did nothing more than push the entire unfunded liability out 
40 years to 2034.
2003/2004 Pension Obligation Bonds
    In response to the enormous challenges facing the state in funding 
the state pension systems, Governor Blagojevich developed, and is 
currently in the process of implementing, a long-term, multi-step plan 
to reform the state's pension system. The ultimate goal of this reform 
plan is to develop a retirement program that is affordable for the 
state, and at the same time, meets the retirement security needs of the 
state's pension system participants.
    The first step taken by the Governor to address these tough issues 
was to provide the state pension systems with a cash infusion and 
reduce the state's pension debt. During June of 2003, the state issued 
$10 billion of Pension Obligation Bonds, all of which, except for $500 
million which was used to cover issuance costs and initial debt service 
payments, was paid into the pension systems. Of this $10 billion total, 
$7.3 billion was disbursed to the pension systems as an additional 
state contribution over and above any annual contribution requirements. 
Note this was the first time in the history of Illinois that payments 
were made above the annual contribution requirements.
    This additional cash infusion on July 3, 2003 immediately reduced 
the pension system's unfunded liability, and increased the system's 
funded ratio from 49% as of June 30, 2003 to over 57% literally 
overnight. (With investment earnings, the funded ratio subsequently 
improved to over 60% by June 30, 2005.) With this single action, the 
security of the members and retirees' pensions improved significantly. 
This reduction in liability exceeds the goals set out in the 1995 
payment plan.
Governor's Pension Commission
    The second step was the Governor's appointment of a Pension 
Commission to review the pension system's funding issues, and make 
recommendations focused on improving the system's financial condition 
and affordability. The Commission met numerous times and issued their 
report and recommendations on February 11, 2005.
    The Governor then examined and considered the recommendations 
contained in the Commission's report. Based on the recommendations of 
the Commission, the Governor next proposed changes to the plan 
provisions and funding mechanisms for the state retirement systems.
Public Act 94-4
    The third step taken by the Governor to reform the pension system 
was to submit the set of proposed changes to the Legislature. After 
review and negotiation, several reforms to the state pension system, 
known as Public Act 94-4, were adopted.
    The net results of the pension reforms included in PA 94-4 is a 
projected reduction in the 2045 actuarial accrued liability of 
approximately $83 billion according to the independent determination of 
the pension systems' actuaries, as well as a reduction in state 
contribution requirements of approximately $3 billion over the next 40 
years according to the independent determination of CGFA (in their 
January 2006 report).
    The Governor's commitment to streamline and revitalize state 
government has resulted in the elimination of 13,000 non-essential 
positions, reducing the state payroll to under 57,000 employees (after 
decades where the payroll hovered near 70,000 employees, resulting in a 
bloated and inefficient state government). In addition to the annual 
payroll savings this effort has generated, the most current actuarial 
valuation of the State Employees Retirement System (SERS) as of June 
30, 2005 projected a savings of approximately $5 billion in state 
contribution requirements to SERS between fiscal year 2006 and 2045 as 
a result of this effort. This $5 billion contribution savings 
represents an additional $2 billion savings over the $3 billion 
discussed above.
Governor's Pension Reforms
    The reforms included in Public Act 94-4 represent the first time 
future liabilities and costs of the Illinois pension system have ever 
been reduced.
    Recent statements have referred to ``raiding'' Illinois state 
pension funds. Those statements are nothing more than political 
rhetoric from elected officials who, for years, voted for budgets and 
benefits that drove the unfunded liability to $43 billion. If there's 
something the Blagojevich administration has been deficient on when it 
comes to pension funding, it's failing to aggressively halt the 
attempts of those who created the problem to then re-write history and 
try to pass the blame onto others.
    In 2003 when Governor Blagojevich took office the combined assets 
of the five state retirement funds were $40.7 billion. By the end of 
the Gov's first two budget years (June 30, 2005) those assets had grown 
to $58.8 billion--$18.1 billion more than when the Governor took 
office. This is, by far, the single largest increase in pension assets 
in any 2 year period in history.
    Further, according to the retirement systems, as of June 30, 2006 
those same cash and investments are in excess of $61.9 billion--a full 
$21 billion more (50% more) than when Governor Blagojevich took office 
in 2003.
    The $21 billion increase in assets came from $12.2 billion of 
deposits into the retirement funds by the Blagojevich administration 
through June 30, 2006 as well as investment earnings on those deposits.
    There have been record deposits and increases in assets, and 
substantial earnings on those assets since Governor Blagojevich took 
office--despite the rhetoric and attacks leveled by politicians seeking 
to hide their own shameful record when it comes to pension funding and 
benefits.
    Governor Blagojevich's administration has contributed the most 
funds to the state pension system of the last four administrations. The 
following table illustrates state contributions to the pension system 
under the last four administrations:


----------------------------------------------------------------------------------------------------------------
                                                             Contributions    Average annual       Percent of
                    Fiscal year period                        (millions)       contribution        resources
----------------------------------------------------------------------------------------------------------------
2004-2007 Blagojevich....................................         $13,300.0          $3,325.0             12.9%
2000-2003 Ryan...........................................          $5,818.4          $1,454.6             6.08%
1996-1999 Edgar..........................................          $3,433.7           $ 858.4             4.30%
1992-1995 Edgar..........................................          $2,067.6           $ 516.9             3.28%
----------------------------------------------------------------------------------------------------------------

    Another way to look at the impact of the Governor's actions is to 
compare the unfunded liability and funded ratio of the pension systems 
with and without the additional contribution of the pension obligation 
bonds. With the additional contribution of the pension obligation 
bonds, the unfunded liability and funded ratio are $38.6 billion and 
60.3% respectively as of June 30, 2005. Without the proceeds of the 
pension obligation bonds, the unfunded liability and funded ratio would 
have been $47.6 billion and 50.4% respectively as of the same date. 
Again the results are demonstrably better than if the Governor's 
actions had not been implemented.
Advisory Commission on Pension Benefits
    The fourth step in the Governor's long-term plan to reform the 
state's pension system consisted of establishing an Advisory Commission 
on Pension Benefits. The mandate of this Advisory Commission on Pension 
Benefits (the ``Commission'') was to consider and make recommendations 
concerning revenue sources, changing the age and service requirements, 
automatic annual increase benefits, and employee contribution rates of 
the State-funded retirement systems and other pension-related issues.
    The Commission met five times between September 23 and October 27, 
2005. After extensive and productive discussions of the State 
Retirement Systems, the Commission crafted several recommendations. The 
next step in the Governor's plans to reform the state's pension system 
will be for the legislation to consider the Commission's 
recommendations. Some of these recommendations were included and 
adopted in the Fiscal Year 2007 budget.
Commission on Government Forecasting and Accountability (``CGFA'')
    Earlier this year, the Commission on Government Forecasting and 
Accountability (``CGFA'') (a bi-partisan commission whose statutory 
role encompasses monitoring of the state's pension systems including 
their progress toward the funding levels set forth in the 1995 pension 
legislation) issued a ten year report (on the 1995 payment plan). The 
report compares the actual progress toward the 90% funded goal (in 
2045) on a year by year basis. CGFA engaged its own independent actuary 
to track the impact of all cash contributions by the state, changes in 
pension benefits such as the early retirement incentive program (ERI), 
the impact of the pension obligation bond issued in 2003 and actual 
investment results. The same actuary developed a year-by-year set of 
projections back in 1995 when the pension funding plan was adopted. 
This year's report compared those 1995 projections of where the pension 
plans were projected to be (relative to the funded ratio level) in 2005 
versus what the funding levels actually were at that same date.
    In fact, following is a quote directly from CGFA's report in 
January of 2006 ``Despite counteractive factors such as formula 
increases, investment gains and losses due to market volatility, the 
infusion of Pension Obligation Bond proceeds and funding reductions as 
contained in PA94-4, the total cost of the current funding plan has not 
grown appreciably from what was originally projected in 1994.''
    The bottom line is simple and stark: the 1995 pension payment 
schedule estimated the funded ratio would be 52.5% in 2005 while the 
actual funded ratio achieved was 60.3%. So, as a result of the policies 
put in place since Governor Blagojevich took office in 2003, the state 
of Illinois is well ahead of the funding level expected and designed in 
the 1995 payment schedule.
    This significant and material increase in the funded ratio was due 
primarily to the record additional contribution in Fiscal 2004 
associated with the $10 billion pension obligation bond and earnings on 
that additional contribution.
    Those that accuse this governor of ``raiding'' the pension systems 
conveniently forget the additional funding that went to the systems. In 
fact, the 1995 projections of the CGFA actuary estimated that the state 
would make $12.3 billion of contributions from 1996 through 2005. In 
fact, the actual contributions for the same period totaled $19.8 
billion, thereby exceeding the statutory requirements by $7.5 billion. 
Once again, we are well ahead of the original 1995 payment schedule.
Conclusion
    I know there's a lot of numbers being stated today but let me 
repeat those findings of the independent actuary of CGFA--$7.5 billion 
of contributions more than called for in the 1995 plan, and a funded 
ratio of 60.3% versus only 52.5% (called for in the 1995 payment plan).
    I challenge anyone to refute those numbers and that result. 
Specifically, answer this simple question: if the funds were raided, 
how can they have $7.5 billion more than statutorily required and the 
funded ratio is 7.8% more than the independent actuary estimated?
    Illinois has had the worst funded pension system by far for many 
years--solely caused by 30 years of underfunding, including many years 
of planned underfunding. Illinois also had a practice of adding 
billions of dollars of costly benefits without providing any new 
funding, which only made the longstanding underfunding worse. We have 
put a stop to this in Illinois-the Governor proposed and signed into 
law in 2005 a key pension reform: no new benefits without a full 
funding source.
    Our submission to the Committee outlines many of the steps we have 
taken and the recommendations we have made. Illinois has made 
demonstrable progress on pension funding for the first time in decades. 
I believe that we have taken the first steps towards the pension reform 
necessary to strengthen the retirement system's balance sheet, protect 
taxpayers and preserve retirement security for our employees. We still 
have a long way to go and are committed to continue down that path.
    By any measure Illinois state pension systems for retirees and 
current employees are better funded and more secure that they were when 
Governor Blagojevich came into office. Any statement to the contrary--
particularly statements or inferences about ``raiding'' or 
``stealing''--is not only patently false, they scream for the records 
of those making those statements to be examined and the truth revealed.
    Thank you for allowing me to speak to you today.
                                 ______
                                 

STATEMENT OF JOANNA WEBB-GAUVIN, DIRECTOR OR RETIREE PROGRAMS, 
COUNCIL 31, AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL 
                           EMPLOYEES

    Ms. Webb-Gauvin. Good afternoon, Mr. Chairman and members 
of the Committee. My name is Joanna Webb-Gauvin. I am the 
Retiree Director for Council 31 of the American Federation of 
State, County and Municipal Employees in the State of Illinois. 
I am pleased to be here today representing Council 31 and 
AFSCME on the subject of examining the retirement security of 
state and local government employees.
    I want to begin by making it very clear that our members do 
not have gold-plated pensions. The average pension in the State 
of Illinois is $1500 per month, which is not overly generous. 
Our members, to earn their pensions, work very hard in public 
service. They deserve a sound retirement plan that will let 
them live with dignity and have some level of financial 
security. That is why our members are deeply concerned that the 
State of Illinois, for some time now, has not been contributing 
enough money each year to cover the retirement system's long-
term costs. They are concerned that the irresponsibility of our 
political leaders may compromise the system's ability to 
protect their retirement security. Unfortunately, our under-
funding problem may have even broader implications that we are 
concerned about. We are afraid it will provide an opening for 
others to unfairly attack the entire concept of defined benefit 
pension plans.
    Council 31 represents about 75,000 working members and 
about 23,000 retired members in the State of Illinois and our 
international union represents 1.4 million working members and 
almost 230,000 retiree members. One of our principal goals has 
always been to ensure that workers receive sufficient income in 
retirement. As a result, AFSCME has been a strong supporter of 
traditional defined benefit pension plans and the Social 
Security system. Both guarantee a steady income to retired 
workers and their spouses, along with disability and survivor 
benefits. Despite the strength of a defined benefit pension 
plan, a handful of anti-worker groups and some politicians, 
claim that public employee retirement systems are unfair and an 
unaffordable expense. They say these systems must be overhauled 
and that a financial crisis is looming. We do not agree that 
major changes are required or that a major crisis is looming. 
In fact, we feel that most of these attacks are part of a 
concerted effort to dismantle pension systems around the 
country and undermine the retirement security of millions of 
Americans.
    We believe that, for the most part, defined benefit plans 
in public retirement systems across the country are well 
managed and well funded. Pension systems with problems, such as 
in San Diego, are the exception. Problems occur when public 
employers take pension holidays or fail to pay the normal cost 
of the pension system every year. Public pension plans should 
not be under-funded. The same for private sector plans, 
including those that have been hit by scandal, such as those at 
Enron and WorldCom.
    Moving from secure defined benefit plans to often risky 
defined contribution plans is not the answer. While much has 
been made of the growth of 401k style DC savings plans in the 
United States, most Fortune 500 companies and 90 percent of 
public sector employers continue to offer traditional defined 
benefit plans. In fact, the ideal retirement income formula has 
long been described as a three-legged stool, with one leg each 
representing Social Security, a guaranteed employer-paid 
pension--employer-provided--and individual savings. Because a 
DC plan is a savings plan and not a guaranteed pension, it 
should be viewed as a supplement to a DB pension plan, not as a 
substitute. Without a defined benefit plan, the retirement 
stool gets pretty wobbly. As a result, many workers are being 
forced to find a third leg--continued employment. Defined 
benefit plans are especially critical for public employees who, 
of which a quarter of them including about half of them in 
Illinois, are not covered by Social Security. And for those 
employees, an employer-sponsored defined benefit plan is their 
only dependable source of income in retirement.
    Although there a few public sector retirement systems with 
large unfunded actuarial liabilities, these shortfalls were 
brought about by situations like the one involving the systems 
covering state and university employees in Illinois. This is 
not a recent development in Illinois. For the past 25-30 years, 
State government has failed to make the necessary contributions 
to plans covering its employees. In some instances, the State 
has actually borrowed from what should have been plan 
contributions to fund education and Medicaid programs. As a 
result, the systems covering Illinois' state and university 
employees are funded at an aggregate level of 60 percent. In 
contrast though, because local employers have made the 
necessary contributions to the Illinois Municipal Retirement 
Fund, it is funded at a very healthy 94 percent level. In both 
instances, however, public employees and retirees have a 
guaranteed benefit that exceed whatever is provided for in 
ERISA, in that those current and future accruals are guaranteed 
by the State Constitution and there is no risk that the plans 
will be offloaded to the PBGC as a business tactic. This lack 
of an escape valve adds protections for participants, but also 
makes it even more important for governments to pre-fund their 
programs to keep the bulk of the costs paid by investment 
income.
    Workers and retirees in the United States are facing 
growing economic uncertainty. Our nation is facing an 
unprecedented Federal deficit and has been introduced to a new 
era of greedy corporate executives infamous for gross 
mismanagement of their companies' funds and stocks. Coupled 
with the White House's scheme to replace guaranteed Social 
Security benefits with private investment accounts, there is 
now more than ever a need for certainty and stability in 
retirement plans. Public sector systems remain healthy and will 
continue to deliver promised pension benefits.
    Government, in its dual role as employer and policymaker, 
has the responsibility not only to serve as a model employer, 
but to provide secure retirement benefits for a large part of 
the nation's workforce. Career employees deserve an adequate 
pension benefit that will not disappear in just a few short 
years into retirement. Without the retirement security provided 
by a defined benefit pension plan, it would be the burden of 
the state and local governments to deal with the consequences 
of an elderly population unable to provide for themselves in 
retirement.
    In closing, Mr. Chairman, I want to thank you for the 
opportunity to testify on this important issue, and I would be 
happy to answer any questions that you may have.
    Mr. Kline. Thank you very much.
    Mr. Weiss, the floor is yours.
    [The prepared statement of Ms. Webb-Gauvin follows:]

Prepared Statement of Joanna Webb-Gauvin, Director of Retiree Programs, 
    Council 31, American Federation of State, County and Municipal 
                           Employees (AFSCME)

    Good morning, Mr. Chairman and members of the committee, my name is 
Joanna Webb-Gauvin. I am the Director of Retiree Programs for Council 
31 of the American Federation of State, County and Municipal Employees 
in the state of Illinois. I am pleased to be here today representing 
Council 31 and AFSCME on the subject of Examining the Retirement 
Security of State and Local Government Employees.
    I want to begin by making it clear that our members do not have 
gold-plated pensions. In fact, in Illinois the average state pension is 
only $1500 per month--not overly generous. To earn their pensions, our 
members work very hard in the public service. They deserve a sound 
retirement plan that will let them live with dignity and some degree of 
financial security. That's why our members are deeply concerned that 
the state of Illinois, for some time now, has not been contributing 
enough money each year to cover the retirement system's long-term 
costs. They are concerned that the irresponsibility of our state's 
political leaders may compromise the system's ability to protect their 
retirement security. Unfortunately, our under-funding problem may have 
even broader implications. We're afraid it will provide an opening for 
others to unfairly attack the entire concept of defined benefit plans.
    Council 31 represents about 75,000 employees here in the state of 
Illinois and our International union AFSCME represents 1.4 million 
active members and almost 230,000 retiree members. One of our principal 
goals has always been to ensure that workers receive sufficient income 
in retirement. As a result, AFSCME has always been a strong supporter 
of traditional defined benefit (DB) pension plans and the Social 
Security system. Both guarantee a steady income to retired workers and 
their spouses, along with disability and survivor protections. Despite 
the strengths of DB pension plans, a handful of anti-worker groups--and 
even some politicians--claim that public employee retirement systems 
are unfair and an unaffordable expense. They say these systems must be 
overhauled to avoid a financial crisis. We don't agree that major 
changes are required or that a major crisis is looming. In fact, we 
feel most of these attacks are part of a concerted effort to dismantle 
pensions systems around the country and undermine the retirement 
security of millions of Americans.
    We believe that, for the most part, defined benefit plans in public 
retirement systems across the country are well managed and well funded. 
Pensions systems with problems, such as in San Diego, are the 
exception. Problems occur when public employers take pension holidays 
or fail to pay the normal cost of the pension system every year. Public 
pension plans should not be under-funded. The same goes for private 
sector plans, including those that have been hit by scandal, such as 
those at Enron and Worldcom.
    Moving from secure defined benefit plans to often risky defined 
contribution (DC) plans is not the answer. While much has been made of 
the growth of 401(k)-type DC savings plans in the United States, most 
Fortune 500 companies and 90 percent of public sector employers 
continue to offer traditional DB pension plans. In fact, the ideal 
retirement income formula has long been described as a ``three-legged 
stool,'' with one leg each representing Social Security; a guaranteed, 
employer-provided pension; and individual savings. Because a DC plan is 
a savings plan and not a guaranteed pension, it should be viewed as a 
supplement to a DB pension plan--not as a substitute. Without a DB 
plan, the retirement stool gets pretty wobbly. As a result, many 
workers approaching retirement may be forced to add another leg--
continued employment. DB plans are especially critical for public 
employees because a quarter of them, including about half of those in 
Illinois, aren't covered by Social Security. For those employees, an 
employer-sponsored DB plan is their only dependable source of income 
upon retirement.
    No matter what happens on Wall Street or how long an individual 
lives, DB pension plans provide employees and their dependents with a 
secure retirement income. This is not the case for a DC plan 
participant, whose private account balance will depend on the level of 
contributions and, perhaps more importantly, the investment income 
earned on those contributions. All of the risk is placed on the 
individual employee under a DC plan.
    Look at how investment returns can play havoc with a person's 
retirement savings. Assume an employee with 30 years of service had 
accumulated $150,000 in her DC savings plan by the end of 1999. If she 
happened to retire in 2000, she may have been able to maintain a modest 
standard of living by combining her savings with Social Security. If 
she waited to retire until 2002, however, her retirement security would 
be in jeopardy. That's because market reverses caused average DC 
account balances to decline by 30 to 40 percent over those two years. 
Imagine having to get by on two-thirds of the savings you anticipated.
    The fact is that retirement prospects for American workers whose 
employers do not offer a traditional DB plan are poor. According to the 
Employee Benefit Research Institute (EBRI), the average account balance 
among DC plan participants was just $57,000 at the end of 2004 and half 
of those participants had account balances under $20,000. With an 
average additional life expectancy of about 20 years for an American 
retiring at age 65, millions of workers will see their savings vanish 
just a few years after retirement. Even more alarming is that those 
averages only include employees actually participating in their 
employer's plan: about one-fourth of workers who are eligible to 
participate in DC plans do not do so.
    It is our strong belief, that dollar for dollar defined benefit 
plans are a more efficient use of taxpayer money once contributions are 
made. Unlike the private sector, where employers typically pay all 
pension plan costs, most public DB plans require worker contributions 
as well. Public employees generally contribute between 4 and 8 percent 
of their pay.
    Defined benefit plans also have professional management, which 
allows for a wider set of investment opportunities, leading to higher 
returns than the average DC plan and much lower fee structures. All of 
this makes DB plans highly desirable for both public employees and 
taxpayers. There's another reason that DB plans also make sense from a 
taxpayer's perspective: they help states and localities maintain a 
qualified and stable workforce. The billions of dollars in public 
pension systems go to work for both by earning strong returns that are 
used to fund on average about 75 percent of the benefits that are paid 
out. Consequently, taxpayers only pay somewhere between 10 and 20 
percent of the cost of the retirement benefit.
    It is also important to note that some states have been too 
precipitous in changing to DC plans only to regret it later. In 2002, 
the state of Nebraska recognized the numerous problems with DC plans 
and scrapped its long standing DC plan in favor of a plan that more 
closely resembles a DB plan. The change followed a study determining 
that DC plan members had worse returns on their investments than DB 
plan members and were retiring with only 25 percent of their pre-
retirement income, while DB plan participants were retiring with 60 to 
70 percent of pre-retirement income. Studies have shown that rates of 
return for professionally managed DB plans significantly outperform 
employee-directed DC investments. The actuarial consulting firm of 
Watson Wyatt found that the rates of return for DB plans exceeded those 
of DC plans by about 4 percent each year over a recent three-year 
period.
    Defined benefit plan managers are trained in developing ongoing, 
long-term investment strategies that include an optimum mix of growth 
potential and risk. Participants benefit from the favorable investment 
performance of pooled pension fund assets. DC plan participants, on the 
other hand, are often limited to a handful of investment choices. 
Furthermore, investments in a DB plan are not affected by the 
retirement timing of a particular employee so the investment horizon 
never has to be shortened. As a result, return prospects are enhanced 
in a DB plan.
    Also, of great importance to taxpayers, public pensions are an 
important source of economic stimulus to every state, city, and town 
across America. These systems distribute more than $130 billion 
annually. Their $2.5 trillion in assets are an important source of 
liquidity and stability for our financial markets. Higher returns 
generated from pooled and professionally invested funds contribute an 
estimated $240 billion (or 2 percent) more to GDP than if they had been 
invested in private accounts.
    Defined contribution plan proponents claim those plans provide 
much-needed portability for a workforce that changes jobs more often 
than in the past. Numerous studies, however, dispel the notion that 
workers today change jobs more often than in the past. The Bureau of 
Labor Statistics reports that tenure for wage and salary workers was 4 
years in January 2004, compared with 3.5 years in January 1983. For 
public employees, tenure is even longer, with the average public 
employee having nearly 7 years on the job. Therefore, with most public 
sector DB plans providing for vesting after 5 years, most public 
employees will be eligible for a pension benefit commensurate with 
their service.
    Groups that want to eliminate traditional pensions often claim the 
systems responsible for providing retirement benefits are facing a 
collective financial crisis. That claim is simply not true. According 
to the Wisconsin Legislative Council's ``Comparative Study of Major 
Public Employee Retirement Systems,'' released in December 2005, the 
average funding ratio of the 88 large plans surveyed was 85 percent, 
and nearly half of the plans were over 90 percent funded. A plan's 
funding ratio is simply a comparison of assets to future obligations. 
Typically, a retirement system's liabilities are amortized over time--
similar to paying off a mortgage. As Fred Nesbitt, former Executive 
Director of the National Conference on Public Employee Retirement 
Systems, put it, ``A family that owes $200,000 on a mortgage wouldn't 
say 'we're doomed,' because it knows it has 30 years to pay the bill.''
    Although there are a few public sector retirement systems with 
large unfunded actuarial liabilities, these shortfalls were brought 
about by situations like the one involving the systems covering state 
and university employees in Illinois. This is not a recent development 
in Illinois. For the past 25 years, state government has failed to make 
the necessary contributions to plans covering its employees. In some 
instances, the state has actually borrowed from what should have been 
plan contributions to fund education and Medicaid programs. As a 
result, the systems covering Illinois' state and university employees 
are funded at an aggregate level of 60 percent. In contrast, because 
local employers have made the necessary contributions to the Illinois 
Municipal Retirement Fund, it is funded at a very healthy 94 percent 
level. In both instances, however, public employees and retirees have 
benefit guarantees that exceed what is provided for in ERISA, in that 
both current and future accruals are guaranteed by the state 
constitution and there is no risk that the plans will be offloaded to 
the PBGC as a business tactic. This lack of an ``escape valve'' adds 
protections for participants, but also makes it even more important for 
governments to pre-fund their programs to keep the bulk of the costs 
paid for by investment income.
    For most DB plans, the vast majority of income comes from returns 
on investments. The fact that investment losses during bear markets 
reduce the value of retirement systems' assets should not come as a 
surprise. What is surprising is that groups attempting to dismantle 
pension systems fail to account for the fact that DB pension plan 
funding is structured to be carried out indefinitely. Defined benefit 
plans are designed for the long haul and do not have an investment 
horizon like DC savings plans that cover individual employees. 
Furthermore, governments are ongoing concerns that will not go bankrupt 
and leave workers unprotected.
    Defined benefit plans are also good for employers. Public sector 
employers must attract, and retain, a uniquely diverse workforce, such 
as architects, correctional officers, librarians, social workers and 
zookeepers, to name just a few occupations. Each of these jobs calls 
for special skills, knowledge and abilities. More than half of all 
public employees hold positions classified by the Bureau of Labor 
Statistics in either the ``Education'' or ``Protective Service'' 
fields. These are jobs for which there is little or no private sector 
equivalent, and their nature makes experience highly valuable. Defined 
benefit plans have not only done a good job of attracting such a 
diverse group, but those plans have also promoted retention efforts by 
rewarding the hard work and dedication of career employees.
    Workers and retirees in the United States are facing growing 
economic uncertainty. Our nation is facing an unprecedented federal 
deficit and has been introduced to a new era of greedy corporate 
executives infamous for gross mishandling of their company funds and 
stock. Coupled with the White House's scheme to replace guaranteed 
Social Security benefits with private investment accounts, there is 
now, more than ever, a need for certainty and stability in retirement 
planning. Public sector retirement systems remain healthy and will 
continue to deliver promised pension benefits.
    Government, in its dual role as employer and policy-maker, has the 
responsibility to not only serve as a model employer, but to provide 
secure retirement benefits for a large part of the nation's work force. 
Career employees deserve an adequate pension benefit that will not 
disappear just a few short years into retirement. Without the 
retirement security provided by DB pension plans, it would be the 
burden of state and local governments to deal with the consequences of 
an elderly population lacking the resources to provide for themselves.
    In closing, Mr. Chairman, I want to thank you for the opportunity 
to testify on this important issue. I would be pleased to answer any 
questions you may have.
                                 ______
                                 

    STATEMENT OF LANCE WEISS, CONSULTING ACTUARY, DELOITTE 
                        CONSULTING, LLP

    Mr. Weiss. Thank you. Chairman Johnson, Ranking Member 
Andrews, Vice Chairman Kline, Representative Biggert and 
members of the Subcommittee, my name is Lance Weiss and I am a 
pension actuary with Deloitte Consulting, LLC. I very much 
appreciate the opportunity to appear before you today.
    Mounting public sector retirement costs pose a serious 
threat to many--not all, but definitely many--state and local 
governments. Public officials must confront runaway public 
pension and retiree health benefit costs or risk voter backlash 
as these costs hit taxpayers directly in the pocketbook and 
force states to spend tax dollars on legacy obligations that 
otherwise could have been used for education, services and 
infrastructure.
    Solving the public pension crisis requires prompt action. 
Government policymakers must address this challenge by 
developing sound funding policies for public pension systems 
and then having the discipline to follow through on them.
    Now, although each state or locality has a unique set of 
factors which contributed to their own pension crisis, there 
are a number of causes that are pretty consistent across many 
plans.
    First, there are generally no requirements forcing public 
entities to fund their pension liabilities. As a result, public 
pension plans are funded to varying degrees, including some 
that are funded very well. Unfortunately, it also includes some 
that are completely unfunded and operate on a pay-as-you-go 
basis.
    By contrast, private sector pension plans are now required 
by the recently enacted Pension Protection Act of 2006 to reach 
100 percent funding of accrued liabilities in 7 years. Most 
public sector plans, by comparison, are funded over much, much 
longer periods of time--30, 40 or even 50 years.
    Second, flush with earnings from the bull markets that 
lasted through much of the 1990's, and actually masked 
significant under-funding of many plans that occurred prior to 
that time, states and localities routinely added all types of 
benefit enhancements to public sector retirement plans, often 
justifying the increases as necessary to retain qualified 
workers.
    Unfortunately, as the investment markets cooled in 2000, 
the bill came due for generous benefit packages accrued during 
the boom years. However, instead of shoring up pension funds 
with more revenues, some states and localities used revenues 
that should have gone into pension funds to finance other 
priorities such as Medicaid or education. Thus, making the 
pension funding situation even worse.
    Regrettably, there is no silver bullet for solving the 
public pension crisis. Most jurisdictions will require a 
combination of cost-cutting and revenue-enhancing changes to 
bring their pension systems back into balance. In the short 
term, jurisdictions facing large unfunded pension obligations 
must stop the financial bleeding. Several strategies for 
relatively quick improvement include:
    First, curtail abuses by eliminating pay raises and sick 
leave policies that allow pension benefits to be arbitrarily 
inflated.
    Narrow eligibility for costly public safety benefits to 
true public safety employees.
    Second, where possible, raise employee pension 
contributions to better match rising total costs.
    Third, explore all other revenue sources to improve pension 
funding.
    And last, reduce administrative costs by combining multiple 
pension plans or implementing more efficient administrative 
systems and procedures.
    Longer-term viability of public retirement programs likely 
will demand fundamental changes in pensions. Because these 
reforms sometimes are difficult to apply to existing employees, 
their impact often will not be felt until a new generation of 
public workers is hired and some of today's younger workers 
near retirement.
    Pension reform for the medium to long-term include, first, 
develop an appropriate pension funding policy and stick to it. 
Current laws governing public sector plans allow policymakers 
to shift huge retirement costs to future generations. States 
should consider crafting laws that require minimum funding 
levels for public retirement systems. There is no magic number 
for what the funding levels should be. Funding targets may 
range from 80 to 100 percent. Policymakers need to decide on a 
level of pension funding that balances short-term needs with 
long-term goals.
    Second, consider establishing a two-tier pension program 
that shifts newly hired workers into lower cost retirement 
plans. This approach, which is now very common in the private 
sector, reduces retirement and health benefits for employees 
hired after a specific date, while maintaining agreed upon 
benefit packages for existing workers and current retirees.
    Third, tie cost of living increases to actual inflation 
rates. This could actually produce significant savings while 
still protecting retirees from rising living expenses.
    Fourth, scale back generous early retirement programs. As a 
huge number of aging baby boomers near retirement age, these 
provisions are proving to be extremely expensive and very 
poorly designed. Restructuring these early retirement programs 
would save money and encourage valuable workers to stay on the 
job.
    In conclusion, there are no easy answers to the public 
pension crisis. In the short term, jurisdictions facing large 
unfunded pension obligations must stop the financial bleeding. 
In the longer term, jurisdictions must develop sound funding 
policies for the public pension systems and then have the 
discipline to follow them. They must make the minimum required 
pension contributions when times are tough. Just as important, 
they must resist politically expedient pension give-aways when 
times are good.
    Thank you and I look forward to your questions.
    [The prepared statement of Mr. Weiss follows:]

         Prepared Statement of Lance Weiss, Consulting Actuary,
                        Deloitte Consulting, LLP

    Chairman Johnson, Ranking Member Andrews, Vice Chairman Kline, 
Representative Biggert, and Members of the Subcommittee, I am Lance 
Weiss, a consulting Actuary with Deloitte Consulting LLP.
    I have over 33 years of experience in employee benefits and 
retirement planning, with special emphasis on the design, funding, 
security, administration and implementation of qualified and 
nonqualified retirement and post-retirement medical programs. I have 
worked with large public and private corporations, coordinating 
retirement benefits with other elements of total compensation programs, 
as well as developing effective benefits and cost containment programs.
    I am a Fellow of the Conference of Consulting Actuaries, a Member 
of the American Academy of Actuaries and an Enrolled Actuary under 
ERISA.
    I've had the unique opportunity to work with leading public and 
private sector organizations helping them navigate their way through 
employee benefit challenges and opportunities. Most recently, I have 
spent a great deal of my time working with public sector organizations 
assisting them manage their underfunded pension programs. These 
experiences led directly to my involvement as co-author of a Deloitte 
Research Paper entitled ``Paying for Tomorrow: Practical Strategies for 
Tackling the Public Pension Crisis.''
    I think I can be most helpful to the Subcommittee today by focusing 
on what I have gleaned from my own experiences with public sector 
pension plans and therefore, I will be testifying on my own behalf and 
not on behalf of Deloitte or any of its affiliates or clients.
    Mr. Chairman, I appreciate the opportunity to appear before you and 
share my perspective with the Subcommittee.
Introduction to the Public Pension Crisis
    ``Public Pension Plans Face Billions in Shortages'' was the title 
of a front page article that appeared in the August 8, 2006 New York 
Times. The first in a series that will examine actions of state and 
local governments that have left taxpayers with large unpaid bills for 
public employee pensions, the article states that ``By one estimate, 
state and local governments owe roughly $375 billion more than they 
have committed to their pension funds.''
    While some public pension plans are in sound financial shape, too 
many others are in crisis mode. In fact, funding public pension plans 
today represents one of the most significant budget issues for many 
states and local governments.
    The news is similar across the nation, as many states and 
localities confront the widening gap between the amount of money 
collected by pension plans through employee contributions and 
investments, and the amount of money these plans are committed to 
paying out in the form of benefits to government retirees. Several 
examples follow:
     In April 2005, San Diego Mayor Dick Murphy stepped before 
a crowd of news reporters and announced his resignation. Murphy, 
elected to office just five months earlier, had become the focal point 
of public backlash over a city pension deficit of nearly $2 billion. 
Not only were San Diego's pension troubles a key factor in Murphy's 
resignation, they also hindered the city's effort to complete capital 
projects. San Diego's credit rating fell in 2004, hobbling the city's 
ability to sell bonds to finance initiatives such as water and sewer 
improvements, the Los Angeles Times reported.
     In Texas, the state Pension Review Board placed 18 public 
retirement plans on its watch list, a warning that the plans have 
insufficient funds to meet future obligations.
     In New Jersey, newly elected Gov. Jon Corzine made public 
pension reform a campaign issue in his state, where taxpayers may need 
to come up with nearly $400 million this year to cover skyrocketing 
pension costs for municipal workers, police and firefighters. New 
Jersey's state and local public retirement systems are underfunded by 
as much as $35 billion--a shortfall that must be filled either by 
investment gains or taxpayer contributions over the next three decades.
     Cities and counties in New York State saw their pension 
contributions grow by as much as 248 percent in 2004, according to 
BusinessWeek. For example, the pension bill for Binghamton, N.Y., 
jumped from $1.6 million to $4.2 million, prompting Mayor Richard Bucci 
to brand the increase a ``fiscal atom bomb.'' The city hiked property 
taxes 7 percent in 2004--half of which went to cover pension costs--and 
another 7 percent in 2005 for the same reason.
    A 2006 survey of 125 state retirement systems by Wilshire Research 
shows the breadth and magnitude of the problem. Of the 58 plans that 
provided actuarial data for 2005, 84 percent of them were underfunded. 
For those providing data for 2004, the number was even higher at 87%. 
This is up from 79 percent in 2002 and 51 percent in 2001.
    A report from the Reason Foundation warned that the current price 
tag for unfunded pension obligations dwarfs the federal government's 
bailout of the savings and loan industry in the late 1980s, which cost 
taxpayers $124 billion. Today, taxpayers may be exposed to more than 
five times that amount in unfunded pension obligations across the 
public and private sectors.
    In a recent special report, BusinessWeek magazine highlighted the 
impact of exploding pension costs on several communities. One of these 
is Jenison, Mich., where contributions to pensions and retiree health 
care are the fastest-growing expense for the public school system. The 
bill came to $1 million in 2005 and will jump to $1.5 million in 2006. 
With state school funds frozen for the past three years, the district 
coped with growing pension expenses by eliminating teaching positions 
and instituting fees for afterschool sports and field trips.
    As these impacts become more pronounced, public officials will face 
growing public concern over the spiraling expense of government 
retirement programs. The problem will only get worse when the huge wave 
of baby boomers begins to retire.
    The bottom line is the world in which retirement programs operate 
has changed dramatically in recent years, and the programs must be 
proactively managed in order to maintain a cost-benefit balance.
    Although not part of this hearing or my testimony, it should be 
noted that the financial crisis facing many public sector entities is 
compounded and dwarfed when considered in combination with (1) 
increasing post-retirement health plan costs and (2) the fact that the 
workforces of many entities will decline as the competition for a 
shrinking workforce intensifies. This will result in fewer younger 
workers contributing to the plans to help fund the higher costs of 
older and retired workers. Accordingly, any solutions to the pension 
problems need to be considered in a broader perspective.
Causes of the Public Pension Crisis
    The current public pension crisis stems from a multitude of causes, 
but basically boils down to a mix of ineffective pension policy 
decisions and a lack of planning, the results of which were exposed by 
the stock market slide that began in 2000.
    Although each state or locality has a unique set of factors 
contributing to the pension crisis, there are a number of causes that 
are consistent across many plans. The primary causes of the pension 
crisis that are consistent across numerous plans include the following:
Lack of Prefunding Requirements
    There are generally no requirements forcing public retirement plans 
to fund their pension liabilities. As a result these plans are funded 
to varying degrees, including some that are completely unfunded and 
operate on a ``pay-as-you-go'' basis. Paying less than the actuarially 
determined contribution each year increases the unfunded liability, 
which may impact debt ratings for state and local governments and cause 
future required contributions to be even higher.
    By contrast, private-sector organizations must comply with the 
Employee Retirement Income Security Act of 1974 (ERISA), as recently 
amended by the Pension Protection Act of 2006, which sets minimum 
funding standards for company sponsored retirement plans. In very 
simple terms, private plans are now required by the recently enacted 
Pension Protection Act of 2006 to reach 100% funding of accrued 
liabilities in seven years. Most public sector plans are funded over 
much longer periods of time--30, 40 or even 50 years.
    Due to the lack of prefunding requirements, there is little 
incentive for fiscal restraint. In fact, sometimes the opposite is 
true--policy leaders reap political rewards for creating new benefits 
for public employees or underfunding retirement systems and using the 
money for other short-term goals. The bill for increasing unfunded 
pension liabilities is unfortunately left for future generations.
    In recent years, the economic slowdown reduced general government 
revenues, leading jurisdictions to divert retirement fund contributions 
toward other priorities. States such as New Jersey and North Carolina 
reduced retirement fund payments to help balance their books. Now they 
are struggling to reduce unfunded pension liabilities--and the rating 
agencies are taking notice.
Benefit Expansions
    Bolstered by the bull market that lasted through much of the 1990s, 
many States and localities improved benefits in public-sector 
retirement plans, often justifying the increases as necessary to retain 
qualified workers. In some cases, the benefit expansions were given in 
lieu of politically more difficult pay raises. For example, Texas state 
lawmakers approved $14 billion in benefit enhancements for public 
school employees over the past 10 years. Benefit enhancements added in 
Illinois between 1995 and 2003 boosted liabilities by approximately $6 
billion.
    Public pension plans also expanded supplemental plan benefits over 
the past 10 years. For instance, an ever-growing number of public 
employees were classified as public-safety workers, thus qualifying 
them for higher retirement benefits due to the hazardous nature of 
their jobs. In Illinois, special benefits once reserved for police 
officers now go to approximately one-third of all state workers. 
Likewise, one in three California government workers now receives 
public-safety pensions, up from one in twenty during the 1960s. In 
addition, generous rules on selling back unused sick- and vacation-time 
caused artificial raises in final year earnings. Since retirement 
benefits usually are based on how much workers earn during their last 
several years of employment, these income spikes resulted in bigger 
lifetime pension amounts for retirees and permanently higher costs for 
taxpayers.
    Not only were benefit amounts rising in the 1990s but public 
retirement systems were paying out higher pension amounts for longer 
periods of time. Lucrative ``unreduced'' early retirement benefit 
provisions had the effect of actually encouraging many employees to 
retire in their early 50s. Such early retirement adds significantly to 
the costs of these plans because earlier benefit commencement coupled 
with constant improvements in health care (resulting in retirees living 
longer) mean that retirees now draw benefits longer than ever before.
Structural Weaknesses Masked by 1990s Stock Market Boom
    The increasing cost of government pensions (and the failure of many 
public pension sponsors to adequately fund their plans) was totally 
masked by the booming stock market of the 1990s. Thanks to historic 
market gains during the ``dot-com'' era, pension fund investment 
revenue easily kept pace with expanding retirement perks under the 
guise of ``only spending the surplus''. Investment returns were so 
good, in fact, that many governments made no contribution at all to 
their retirement funds. Before 2005, local governments in New Jersey 
had gone six years without paying anything toward public employee 
retirement plans, the Star-Ledger reported. Some retirement systems 
even gave away extra earnings to plan participants in the form of bonus 
``13th'' pension checks--meaning an extra month's worth of payments--
instead of saving the money to offset periods when the market 
inevitably cooled off. Although many states underfunded their public 
retirement systems for years, thanks to the strong stock market, their 
pension plans remained reasonably well funded. When the dot-com bubble 
burst, retirement systems accustomed to earning a handsome return on 
their investments abruptly found themselves in a financial bind. As 
investment markets cooled, lucrative benefit packages approved during 
the boom years began pushing pension contribution requirements to 
unaffordable levels.
Solutions to the Pension Crisis
    Since each plan has its own unique set of circumstances, there is 
no single solution for solving the public pension crisis that will fit 
all situations. However, there are a number of strategies that public 
sector entities can adopt to improve the funded position and 
affordability of their pension plans. In general, most jurisdictions 
with plans in crisis will require a mix of (1) cost cutting and (2) 
revenue enhancing changes. Some of the strategies that can be utilized 
are described below.
1. Cost Cutting Strategies
    First with regard to cost cutting, the costs of pension plans are 
equal to the benefits paid, plus administrative expenses associated 
with operating the plan, reduced by any investment return generated by 
invested assets. Therefore, there are really only three ways to reduce 
plan costs:
     Reduce benefits
     Increase investment return
     Reduce administrative costs
            Reduce Pension Benefits
    One caution with regard to reducing benefits is that public pension 
benefits may be very difficult to modify. Public pension benefits are 
often the product of collective bargaining agreements, and they're 
strongly supported by employee and union groups.
    Furthermore, public employee pension benefits, once approved, are 
subject to constitutional protection in some states. Experts generally 
agree that governments can change or reduce benefits for employees who 
haven't yet been hired, and they cannot change them for retired 
employees. The gray area is whether benefits can be reduced for the 
employees in between--workers who are hired, but not yet retired.
    Because of the difficulty and uncertainty of reducing benefits for 
current employees, providing reduced benefits for newly hired employees 
may be the most practical option for paring costs. Unfortunately this 
``two-tier'' approach will not produce significant cost savings for 
years.
    Some of the options for reducing benefits are to:
     Reduce cost of living increases--automatic cost-of-living 
increases are common in public-sector retirement programs. By contrast, 
these provisions have become rare in the private sector because they 
are extremely costly. Contractual issues will most likely make it hard 
to eliminate cost-of-living provisions for public sector retirees. 
Further, since public retirement systems replace Social Security 
benefits in many states, it may be politically difficult and perhaps 
unfair to abolish cost-of-living increases for public-sector plans when 
private-sector workers receive them through Social Security benefits. 
But some public retirement plans offer extremely generous automatic 
increases--as high as 5 percent, regardless of inflation. Tying cost-
of-living increases to actual inflation rates could produce significant 
savings, while still protecting retirees from rising living expenses.
     Scale back lucrative early retirement benefit provisions--
generous early retirement provisions often allow public-sector workers 
to retire with full benefits as early as age 50 or 55--instead of 65 
which is typical in the private sector. In some cases, state and local 
officials also viewed early retirement programs as cost-cutting 
measures to reduce the size of government workforces with delayed cash 
implications. As a huge number of aging baby boomers near retirement 
age, these provisions are proving to be extremely expensive and poorly 
designed. In some states, nearly half of the public workforce will be 
eligible for early retirement within 10 years. Some jurisdictions 
already have been forced to offer older workers additional incentives 
not to take early retirement benefits. Restructuring these provisions 
would save money and encourage valuable workers to stay on the job.
     Reduce basic pension benefit--the most common two-tier 
pension program strategy is to shift newly hired public employees from 
traditional defined benefit plans to less risky (from an employer cost 
perspective) defined contribution plans. Defined contribution plans 
don't necessarily reduce employee retirement benefits, but they limit 
employer and taxpayer exposure to investment risk because ultimate 
retirement benefits under a defined contribution plan are determined by 
the performance of an employee's retirement investments. By contrast, 
defined benefit plans pay a set pension amount regardless of a fund's 
investment performance, with taxpayers picking up the tab for any 
deficiency. However, one word of caution--transitioning to defined 
contribution plans for new hires while still providing pensions to 
existing employees may actually result in higher total costs for poorly 
funded pension plans.
     Close Loopholes--although it may not be easy to reduce 
basic benefit formulas, it may be possible to modify ancillary plan 
provisions, some of which can significantly reduce plan costs. Options 
include:
  --Tighten the practice of granting large pay raises in the years 
        immediately before retirement, which can allow employees to 
        spike final earnings amounts.
  --Tighten overly generous sick-leave policies, which also can allow 
        employees to spike final earnings amounts.
  --Narrow eligibility for high-cost public-safety pension benefits by 
        limiting the categories of eligible workers.
            Increase Investment Return
    Overly cautious investment strategies needlessly reduce income 
potential. They also often don't give the flexibility that is needed to 
manage the portfolio and manage risk. Some plans' policies often place 
a ceiling on equities and don't allow for hedging or alternative 
investments. By limiting the types of investments and investment mix 
they can actually create greater risks under certain market conditions. 
Therefore, investment policies must balance profit potential with risk. 
Achieving the right balance of risk and reward maximizes investment 
income and limits the chance of devastating losses. Plans should 
undertake a review and analysis of their investments policies to 
determine if they are appropriate for the particular plans. One way for 
states and localities to analyze the risk/reward relationship is to 
conduct an asset and liability projection study. Finally, investment 
advisors need to be given enough latitude to manage the investments 
prudently but should fully understand all potential investments.
    Another strategy that should be examined is pension obligation 
bonds. This approach requires governments to issue bonds at low 
interest rates, and then reinvest the bond proceeds into higher-
yielding financial investments. The difference between the cost of debt 
service on the bonds and revenue created by investing the bond proceeds 
generates income that could be used to prop up pension funds.
    This strategy depends on careful market timing and therefore is 
highly risky. Another problem with pension obligation bonds is that it 
involves converting a soft debt (pension liability) into a hard debt 
(the required bond payments), which gets the attention of the bond 
rating agencies. Moreover, voters may balk at the prospect of approving 
new long-term debt.
    Illinois, however, used the technique very successfully in 2004, 
selling $10 billion in pension obligation bonds when interest rates in 
the bond market had nearly hit bottom. The move allowed the state to 
basically refinance $10 billion of pension debt at approximately a 5 
percent interest rate instead of an 8.5 percent interest rate. The bulk 
of the bond proceeds went directly into the state retirement fund, 
increasing the funding status by more than 10 percent virtually 
overnight.
            Reduce Administrative Costs
    Savings from administrative changes probably will be small in 
relation to the size of the pension funding problem. Nevertheless, 
cutting plan overhead should at least be a component of any 
comprehensive solution.
    The biggest opportunity lies with consolidating multiple pension 
plans. There are more than 2,600 public employee retirement systems 
nationwide, according to the U.S. Census Bureau. In Texas, for example, 
dozens of state and local public retirement plans cover government 
workers, teachers, police and firefighters. Similarly, the state of 
Illinois has five separate retirement boards--each with its own 
workforce and infrastructure. Combining these plans where sensible 
would eliminate redundant administrative staffs and functions, 
producing lower operating costs and leaving more dollars available for 
pension payments. Consolidating pension plans could be politically 
difficult, but it's a commonsense reform that deserves consideration.
    Outsourcing certain administrative tasks or automating processes 
represents another opportunity to trim overhead expenses. Jurisdictions 
can also benefit from a thorough review of vendors and service 
providers involved in their public pension systems. Analyzing pricing 
and services provided by third parties--and renegotiating contracts 
when appropriate--can deliver savings. California, New York and New 
Mexico are among a growing number of states deploying information 
technology designed to boost efficiency in their public employee 
retirement systems.
2. Revenue Enhancing Strategies
    In terms of enhancing revenue, States and localities should first 
consider raising the amount that employees contribute to public 
retirement plans. Employee pension contributions generally have held 
steady as plan costs have increased. One alternative would be to tie 
employee contribution amounts to actual plan costs. So, for example, if 
total pension plan costs increase by 10 percent, employee contributions 
would increase by the same percentage or at least by some amount.
    Such adjustments are common for employee health plans. But 
instituting similar practices for pension contributions would depend on 
potentially difficult negotiations with public employee unions and 
consideration of constitutional provisions.
    State and local governments should also look and see if they have 
any untapped revenue sources that could be used to fund pension 
obligations. Finding these dollars will require innovative thinking. 
Illinois, for example, is exploring selling or leasing it's state 
tollway system. Proceeds from the sale would be funneled into the state 
pension system. Other revenue sources might include sales of unused 
public properties.
    Jurisdictions must develop sound funding policies for their public 
pension systems and then have the discipline to follow them. Since 
there is generally no governmental prefunding requirement for public 
pension plans, funding decisions must be guided by sound fiscal policy.
    For more than 30 years, ERISA has spelled out requirements and 
responsibilities for private-sector pension and health plans. Yet the 
absence of similar laws for public-sector plans allows policymakers to 
shift huge retirement costs to future generations. States should 
consider crafting laws that require minimum funding levels for public 
retirement systems.
    Finally, pension funding policies have little impact if no one 
follows them. Officials must make the minimum required pension 
contributions when times are tough. Just as important, they must resist 
politically expedient pension giveaways when times are good.
    Mr. Chairman and Members of the Committee, there are no easy 
solutions to the public pension crisis. Hopefully, the information 
presented in this testimony will assist the federal government (1) 
better understand the unique challenges facing public sector pension 
plans and (2) develop solutions designed to improve the affordability 
and funded positions of public sector pension plans.
                                 ______
                                 
    Mr. Kline. Thank you, Mr. Weiss. And thank all of the panel 
members.
    Our plan here is for each of us to ask some questions, I am 
going to ask a few questions and then I will yield to Mrs. 
Biggert and then probably another round. I am mindful that 
people have schedules to keep, both panel members and Mrs. 
Biggert and I, and I am sure most people in the audience, so we 
will try not to have this go too long, but there are some 
things that I feel need to be cleared up. I am not sure if we 
can do it here today, but I am going to try just a couple.
    Just a couple of comments. It is interesting the different 
perceptions. We had several panel members talking about the 
crisis in public employee pensions and other witnesses discount 
that completely. So we may need to explore that a little bit. I 
may need to use Ms. Jinks' mathematics skills to help me with 
Mr. Filan's testimony.
    [Laughter.]
    Mr. Kline. That was an impressive array of numbers.
    Let me just start with a couple here. I wrote so many 
notes, I have got to get myself organized a little bit. It 
seems to me that we have differing ways of looking at the 
health of these pensions, and I am wondering--I think I will 
start with you, Mr. Weiss--how much of this debate and 
confusion is a function of the differing modes of accounting 
and actuarial assumptions and would a more uniform or 
standardized set of accounting assumptions give us a better 
picture? Is that something that you can address?
    Mr. Weiss. Sure. I really do not believe it is a function 
of accounting or actuarial assumptions. I think, you know, if 
you look at the funded percentages as it compares to accrued 
liabilities, I think that gives you a pretty good, at least a 
snapshot, view of the health of these plans, at least in 
today's terms.
    Probably more important though is to look at what is the 
projected funded percentage ratios of these plans as we go 
forward, based on their existing funding policies. And for too 
many plans, the ratios are, in my own opinion, inadequate and 
trending downward instead of upward, notwithstanding, you know, 
future investment returns or expectations for investment 
returns.
    So I think it is really a function of looking at the funded 
percentage, determining if that is appropriate, looking at the 
affordability of the funding schedule required to improve the 
funded percentages. So for example, for a plan that is 70 
percent funded, I think we probably all agree we would like 
that plan to get to 100 percent funded within a reasonable 
period of time. What is the funding required to get there, is 
it affordable based on the existing level of benefits?
    Mr. Kline. But in determining the percentage funded, you 
have got to use some basis. Are you assuming a growth of 6 
percent, 8 percent, 9 percent? It seems to me that would have a 
big impact on determining how well funded you are and I do not 
know--we tried to grapple with that in the Pension Protection 
Act, but I do not see that there is any uniformity here. Is 
that of any interest to you at all?
    Mr. Weiss. Yeah, it is. I think honestly most public plans 
make a reasonable attempt to come up with a discount rate to 
determine their liability, and that is really where it is 
applicable, determining the liability.
    Mr. Kline. Exactly.
    Mr. Weiss. With the assets, the market value is the market 
value. But it is the liability that there is some flexibility 
in terms of determining the appropriate discount rate.
    You are right, it might require a uniform measure of that 
liability similarly to what you have done now for the private 
sector via the Pension Protection Act, might make these plans 
more comparable but honestly, I think the plans do a very 
reasonable job in determining, you know, fairly consistent 
discount rates.
    Mr. Kline. OK, thank you. Anybody else have a comment? Mr. 
Brainard.
    Mr. Brainard. If I might.
    Mr. Kline. Yes, please.
    Mr. Brainard. Mr. Weiss commented that he felt that public 
pension plan funding levels are trending downward. I believe 
that they have reached--for the community certainly as a whole 
and for most plans, they have reached their low point. Most 
public pension plans phase in investment gains and losses over 
several years to reduce volatility in funding levels and 
required contribution rates. For most plans, they have 
recognized all or most of the investment losses that we 
experienced through March 2003, but very few of the investment 
gains we have experienced since then. As more of those 
investment gains are recognized on the books in the next few 
years, those funding levels are going to begin to rise. That 
coincides nicely as well with the last several years of public 
pension plan liability growth which has been significantly 
lower than assumed levels, where in the 1990's when there were 
some benefit enhancements approved, liability growth was 8 
percent, 9 percent. The last 3 years average liability growth 
for the public pension community has been about 5 percent, 
significantly lower than the assumed rate of 8 percent.
    Mr. Kline. OK, thank you.
    Let me--I am going to ask another one or two and then I 
will be happy to yield to you.
    Ms. Jinks, you said that the Teachers Retirement System had 
to sell off assets to make the payments on time. Could you tell 
us some more about that, what literally happened?
    Ms. Jinks. It is my understanding that the Teacher 
Retirement System was forced, during this last year, in order 
to meet the current obligations of payroll, the actual monies 
to be paid out to annuitants, had to sell some of its invested 
stocks in one of the funds in which it was invested to use 
those funds to pay the present annuitants.
    Mr. Kline. And so the effect of that then obviously is you 
have fewer assets that can earn a return.
    Ms. Jinks. It is like spending one's bank account without a 
reasonable way of replenishing those funds. They are in fact 
gone.
    Mr. Kline. Yes, sir? You had some more comments here? Go 
ahead.
    Dr. Giertz. The fact of a pension system selling assets is 
really not a clear sign of either good times or bad times. A 
mature system, a system that has been in operation for many 
years and accumulated a lot of assets will in fact routinely 
sell assets to meet its obligation. So it could be a sign of 
weakness, it might not be. In this case, it probably is a sign, 
but in general selling assets is not a warning sign of some 
kind of major problem.
    Mr. Kline. Mr. Weiss.
    Mr. Weiss. Actually we did take a look at the Teachers plan 
and it is more a function of how the assets are invested and 
the generated cash versus investment--it is really a function 
of the investment policy that required them to sell assets. The 
combination of employee contributions, employer contributions 
and generated investment cash was insufficient to pay the total 
amount of benefits. In fact, the total assets of the Teachers 
plan increased, so it is really not the fact that the fund is 
having to--is being reduced to pay benefits, it is more a 
function, as Dr. Giertz implied, of the maturity of the plan, 
the significant dollars that are being paid out in benefits and 
the investment policies.
    Mr. Kline. I see.
    Mr. Weiss. Most importantly, the total funds increased.
    Mr. Kline. I see.
    Let me yield now to Mrs. Biggert.
    Ms. Biggert. Thank you, Mr. Chairman.
    Congress, in the Pension Protection Act, acted to toughen 
up the funding requirement for the private pension plans, 
requiring a step up to 100 percent by phasing it in, and they 
required sponsors of severely under-funded plans to step up the 
funding requirements and probably most importantly by limiting 
the benefit increases and accruals when the plans are under-
funded.
    In general, are state plans, in particular Illinois' 
pension plans, subject to any similar restrictions?
    Dr. Giertz. I think the answer is no, but we have a kind of 
odd situation constitutionally. The State of Illinois is 
mandated to pay the pension benefits, but there has been a 
court cases that has held that we are not constitutionally 
mandated to fund the pension system. So the under-funding then 
becomes a liability to the State of Illinois and the taxpayers 
of Illinois. So unlike the Federal situation, a poorly funded 
firm might go out of business and then some of those 
obligations would fall back on the Pension Guarantee 
Organization and become an obligation of the taxpayers of the 
country. But in the case of the state, the funder of last 
resort is in fact the state and the taxpayers. So there is in 
fact an argument to be made that the state systems, and 
probably less so local systems, are kind of hybrid, somewhere 
between--seems like Social Security was basically a pay-as-you-
go and a purely private system should be a fully funded kind of 
system. So I think it is not unreasonable to think that a 
system like Illinois could operate at a 90 percent fully funded 
situation continually because we have an ongoing life 
expectancy, we do not expect to go out of business, we have the 
fallback of the taxpayers. So 100 percent would be good, but 
may not be absolutely necessary.
    Ms. Biggert. Would you say that there is a certain level 
that the fund should reach?
    Dr. Giertz. I think the concern is--we clearly have a 
source of concern, but there are many ways to fund a pension 
system. The pay-as-you-go system is the worst way because you 
end up not paying at the time and having to pay huge amounts in 
the future. My rough calculation says if you had a fully pay-
as-you-go system, we would end up paying about 20 percent of 
our salary to fund pensions. If you had a fully funded, pre-
funded, system, it would take about 10 percent of our salary 
contributions. So not fully funding is a very expensive way to 
do it. It could be done, we have the resources, the taxpayers 
of Illinois are there, but it not a very good way to go about 
it.
    Ms. Biggert. It was mentioned that Social Security is a big 
problem and Medicare. We tried to take on Social Security 
because we thought Medicare was harder and now here we are with 
the pensions. We have a lot to do, and maybe Social Security, 
because it is a pay-as-you-go, has always been that way.
    We heard a lot of testimony about Public Law 88-593 and the 
1995 pension law that set up the plan to get Illinois pensions 
up to 90 percent funding and then SB 27. In your opinion, Mr. 
Giertz, is SB 27 a step forward toward better pension funding, 
or a step back away from the improvement plan that the state 
has been following over the last 10 years.
    Dr. Giertz. Well, I think it was a temporizing kind of 
measure that--it was not in a sense catastrophic, but it 
increased the payback into the future. I used the analogy once 
that the 1995 law was like saying I am going to go on a diet, I 
am going to start by reducing my calories 10 years in the 
future. Well, the 1995 law said we are going to solve our 
problem, but they did not really attack the pain until a decade 
later. And when that pain came along, we decided to roll back 
the clock. So my problem with--Mr. Filan, I think was correct 
in terms of all the money, we have had a lot of money going 
into pensions and if you compare the current administration to 
10, 20, 30 years ago, they might fare fairly well, the question 
is what about the future. Just in 2 years, this is the 2007 
budget year, 2 years from now, the State is going to have to, 
according to our rules that are on the books right now, going 
to have to increase pension funding by 1.3 billion, the year 
after that another $2 billion. Well, $2 billion is about 7 
percent, is a huge percentage of our state budget. So the 
question is, where is the State, a year and a half from now, 
going to come up with another $1.2 billion, where is the State 
going to come up with another $2 billion. Now again, that is 
not the fault of the administration, these numbers were there, 
but the question is at some point we have to stop blaming 
people 20 and 30 years ago and step up to the plate and deal 
with the problem. That is where we are right now.
    Ms. Biggert. I have read reports that say that the change 
in SB 27 would allow the State to contribute $2.3 billion less 
in pension contributions.
    Dr. Giertz. Again, I am sure Mr. Weiss and Mr. Filan 
probably have a different opinion, but it did reduce benefits 
in the future, especially for new employees. But what they did 
was to capture those future benefit reductions that are going 
to occur years into the future and reduced by this year and the 
preceding fiscal year. So again, it is a matter of reducing 
benefit growth somewhat but then attributing all those 
reductions to the current period, and we still have the future 
demands starting in a couple of years.
    The other thing which is a little bit troubling too, one of 
the reforms of the 2005 law was to reduce end-of-career salary 
increases that credit toward the pension. It was supposed to 
save money. We passed it 1 year, the very next year, we 
rescinded that and as far as I know there was no extra source 
of revenue coming in to compensate for that.
    Ms. Biggert. Mr. Filan.
    Mr. Filan. That last statement is incorrect. The Senate 
Bill 27 that indicated a number of cost reductions going 
forward, that was referred to, according to the system 
actuaries, will reduce the long-term liabilities, both a short 
and long-term challenge, by $83 billion. The changes made this 
year in what is terms unintended consequences, were minor 
revisions where the State was not trying to penalize a local 
school district for increases that were caused not by them but 
by things such as state statute or other provisions that were 
not their responsibility. But the vast majority of the end-of-
career pay increase controls that were put into place in the 
law remain in place.
    If I may comment just very briefly, I think the question 
asked of Lance Weiss regarding accounting and economics is an 
excellent question frankly, I think. I have kidded Lance a 
couple of times, my background is accounting, his is actuarial 
science, if we both sent our children to the best schools and 
one had an accounting degree and one had an economics or 
actuarial degree and you were looking at any government's 
financial statements, you would find the accountant's 
representation of the pension liability and that of the actuary 
vastly different. In the case of Illinois, it is about half in 
terms of what they assume and how they report it and how they 
structure it. So I think it is a very excellent point to 
pursue.
    I would point out on the earlier question, no one goal or 
no one act should be looked at by itself, I think it is what 
happens in the entirety. And the question to Lance about the 
market value of assets is a perfect example. I think for all 
pension systems, including Illinois, in those four or five boom 
years in the 1990's, those returns looked so wonderful that it 
masked the under-funding, it masked the unfunded benefits 
because the way it worked is you were booking those huge gains 
as if they would last forever and they do not. And 
consequently, I think a lot of people were not consciously 
misled but got an unwarranted amount of comfort from doing 
that.
    So in this case, I think if you look at the entirety and 
not just any one bill or one action, but what has happened in 
this case in the last 3 years, as Dr. Giertz said, there is 
improvement. We have a long-range goal. The only way we fix a 
$43 billion problem ultimately is with $43 billion. And you do 
not do it overnight, but it takes a tremendous amount of 
discipline over many years to dig out of a hole that Illinois 
has been in for three decades.
    Ms. Biggert. I guess that is why we do the planning for 40 
years. Mr. Weiss.
    Mr. Weiss. Thank you. One other comment with regard to the 
1995 funding plan. I was not involved with, you know, the State 
at that point, but they had to know when they implemented that 
plan that basically it was a payment plan. As Director Filan 
pointed out, it really was not a funding plan so much as it 
provided some discipline to the State, it required a certain 
amount of payment. To me, a funding plan is a plan that 
sufficiently funds the plan. This did not do it, it pushed most 
of the liability--again Director Filan pointed this out--it 
pushed most of the liability out into the future to future 
generations. And I believe the legislators had to know at some 
point that payment was going to become unaffordable. 
Unfortunately it became unaffordable during Governor 
Blagojevich's tenure here. And I think SB 27 was one of the 
actions that the Governor took to attempt to alleviate some of 
that pain and attempt to bring the plan back into balance. Now 
as Director Filan pointed out, you know, in and of itself, it 
is not going to do it, it has got to be part of a series of 
actions designed to bring the plan back into balance.
    Ms. Biggert. Thank you. I have not decided whether I want 
to say I was here then or not.
    Mr. Weiss. I was afraid to ask.
    [Laughter.]
    Dr. Giertz. Well, affordability is not a clear term. People 
talk about, there are words of choice and words of necessity. 
Affordability is really a question of can you do it. And 
clearly we can afford to deal with the pension system in 
Illinois. We chose not to because we ruled out the most 
important option to be ruled out, spending cuts in other areas. 
Governor Blagojevich came in saying I will not cut education 
spending, I will not cut health, I will not cut public safety 
and so on, and I will not raise taxes.
    Well, when you make those kind of promises, almost 
everything becomes unaffordable unless you do it by borrowing, 
so affordability is not--it was not unaffordable in the sense 
if we wanted to, it was unaffordable because we chose not to 
because we ruled out most of the options that would make it 
affordable.
    Ms. Biggert. Thank you. I yield back.
    Mr. Kline. Thank you, Mrs. Biggert. I will ask a few, and 
we will come back to you in a minute.
    Sort of a fairness doctrine here directs that I turn to Ms. 
Webb-Gauvin, you have been sitting there as this has been going 
on back and forth. I certainly have no disagreement, and I am 
sure that Mrs. Biggert does not, nor does this Committee, the 
Subcommittee, large Committee, that a defined benefit pension 
plan is a very valuable asset. We worked very, very hard to 
make sure that those defined benefit plans were fully funded 
and working, would be there for the retirees in the private 
sector. So it is not a question of is a defined benefit plan 
important or is it good, it is a question of is it going to be 
there when you need it.
    And that is sort of what we are grappling with here. We 
took it on in the private sector and now we are sort of asking 
the question of ourselves, is there a role for the Federal 
Government--and neither one of us is at all sure there is, but 
is there a role for the Federal Government in making sure that 
the public employee defined benefit plans are going to be there 
for their employees. And so I guess my question to you is do 
you or your organization, you have no concerns about the under-
funded plans that we have been talking about here?
    Ms. Webb-Gauvin. By all means, we are concerned about 
under-funding of pension programs, whether they be in the 
private or public sector. We believe though that most of the 
public pension funds are well managed and well funded. Illinois 
is the exception to that. We are not as well funded as we would 
like to see, our members are very concerned about that. We 
think it is not a regulatory problem, it is an under-funding 
problem. We had the money, we chose to spend it somewhere else 
and we believe that that policy here in Illinois needs to 
change.
    I do not know if there is--I do not believe that there is a 
uniform way for the Federal Government to come in and address 
this concern. All states are different and their pension 
systems are unique and they have their own unique problems. I 
am not sure you could come in with a uniform policy that one 
size fits all.
    Here in the State of Illinois, we have a constitutional 
guarantee that our members will receive their pension benefits, 
and we believe that they will be there. The under-funding is a 
very serious problem and it needs to be addressed. We do not 
believe that a two-tiered system or reducing pension benefits 
is a way to address that problem.
    Again, as I said in my testimony, our pension benefits here 
in the State of Illinois are not overly generous. This is 
purely a funding problem, and we feel that there are other ways 
that we can address that by raising revenue to address the 
funding problem.
    Mr. Kline. Thank you. I would say that as we looked at the 
pension plans in the private sector, it was largely an under-
funding problem as well. We had the issue of masking that was 
discussed earlier with the dot-com in the 1990's that looked 
like there were a great many assets in these plans, and when 
the dot-com bubble burst--and I am over-simplifying this a 
little bit--but it turned out that the assets were not there 
and private companies had not been putting payments into those 
plans. So we had some very under-funded plans.
    So the problems are not dissimilar in that if you do not 
put enough money in the plan, there may not be enough money 
there to make the payments. The difference is, of course, that 
with governments, state governments, and particularly like 
Illinois, where you have a constitutional requirement that 
those benefits be paid, it is going to go directly to the 
taxpayers and it is a policy decision.
    And again, I am not really suggesting that the Federal 
Government has a role here, that is something we are exploring. 
We felt the Federal Government did have a role because of the 
exposure of the American taxpayers in the role of the Pension 
Benefit Guarantee Corporation in making sure that private 
sector employers were meeting their funding requirements.
    Mr. Weiss, let me turn back to you. You are the last guy in 
the line here I think, but you have some expertise I want to 
use to--I want to exploit for just a minute. To what extent 
does a state, and it does not have to be Illinois, to what 
extent does a state's deferral of pension plan payments--what 
role does that play in the broader economic picture in the 
state or in the country? Bond rating and so forth, what is the 
impact?
    Mr. Weiss. That is a very good question, and the bond 
rating agencies now are taking a much, much closer look at debt 
of a state, both hard and soft debt. And in talking to and 
listening to some of the rating agencies, when they look at a 
state and rate that state, pension debt plays a major, major 
issue these days.
    More importantly, I think though the rating agencies 
nowadays are looking at the actions a state is taking to 
address those issues. So they are not necessarily, you know, 
nicking a state for past inadequacies in funding, but more 
importantly, they are looking at what are you doing to address 
these liabilities. You have these liabilities, these unfunded 
liabilities, what are you doing to address these liabilities. 
And I think it is important for these states to recognize that 
they have to take some action.
    As a pension actuary, I can assure you that--and you all 
know this from the actions you took by implementing the Pension 
Protection Act--if you do nothing, pensions that are out of 
balance do not miraculously come back into balance. You have to 
take some action, whether it is legislatively or funding-wise 
or whatever. You have to take some action or change benefits.
    So yes, these liabilities have a major impact on a state, 
the economy, the economic conditions that we are operating in 
have a role to play. The overall, you know, financial needs, 
the revenue generation of a state all comes into play, and I 
think as Dr. Giertz indicated, you know, these states and 
localities have to find a balance between how much can they cut 
other sources, how much do they have to fund the plan and where 
is the revenue coming from, can they increase taxes. It is a 
fine balance, but they have to take some action. I think the 
bottom line is they need to take some action and find a fine 
balance between increasing taxes, reducing benefits or if they 
do not take action, the rating agencies are going to definitely 
impact them in lower ratings, which has all kinds of 
implications for the people living in each state.
    Mr. Kline. I guess that would apply state by state or 
perhaps even municipality by municipality or whatever the 
governmental unit is that has the pension plan.
    Mr. Weiss. Yes, absolutely.
    Mr. Kline. OK, thank you.
    Mrs. Biggert, I will yield to you.
    Ms. Biggert. Thank you. Mr. Weiss, you talked about some of 
the things that contribute to perhaps under-funding, such as 
early retirements. Could you comment on a couple of those?
    Mr. Weiss. Sure. Many states, similar to what the private 
sector did, you know, many years ago, was to increase, improve 
early retirement provisions. To the extent we are now--and it 
is not universal, but in many plans, localities, states, et 
cetera, employees can retire as early as age 50 with unreduced 
benefits. Now it is not always 50, it might be 55, it might be 
60. These provisions vary greatly across the plan. But they are 
extremely expensive. By allowing an employee to retire early 
with unreduced benefits, the cost of that is phenomenal. And it 
also is not only costly, but then you lose all of that talent 
and every projection we see, every survey we see now is 
projecting a future shortage of skilled workers coming into the 
workforce. So if we are losing all this talent and we do not 
have the skilled workers available to replace them, it is going 
to be even more of a problem.
    So one suggestion we had similarly to what the private 
sector has done is to tighten some of these early retirement 
provisions.
    Ms. Biggert. I think that happened here.
    Mr. Brainard.
    Mr. Brainard. Ma'am, if I might, I infer that your question 
is referring particularly to early retirement windows where a 
state or a plan sponsor will say that you will have an 
incentive to retire until such and such a date. And the actual 
cost of an early retirement window really depends on the way it 
is structured and the incentives that are provided. 
Particularly in down economic times, some states and 
municipalities have benefited from such windows because, for 
example, it can allow you to replace an employee who is making 
say $65,000 with somebody who is making $35,000. So you are 
generating some immediate savings. And then, of course, you 
have an actuarial cost to the pension plan. It really depends 
on how you structure it and how well you manage it.
    Illinois offered an early retirement window a couple of 
years ago that, for whatever reason, ended up costing them a 
lot more than was initially projected. But by definition, an 
early retirement window is not expensive and does not 
necessarily have a cost to it.
    Dr. Giertz. I am not a defender of early retirement. In 
fact, I do not think it is a good idea in most cases, but in 
Illinois it has been used in the same old pattern. What we do 
is to have--if we have a budget problem, we will have an early 
retirement program, window, as was mentioned here. People will 
retire, the State saves money in the short run. The consequence 
is that pension liabilities increase on the back end and we 
never fund those. They use the money saved in the early 
retirement to build a bridge in the short run and then throw 
the costs onto the pension system. So it is not necessarily bad 
per se, it is just bad in the way that it is financed. And we 
have tended not to use the savings in early retirements to 
bolster up the pension systems.
    Ms. Biggert. Dr. Giertz, going back to the changes in 
Senate Bill 27 from the former law, which allowed the State to 
contribute less, $2.3 billion less in pension contributions for 
fiscal year 2006 and 2007, will this end up costing more in the 
long run, you know, over a period of years?
    Dr. Giertz. Again, there were two parts of the bill, the 
part of the bill that is to reduce future pension benefits will 
save money. And the next question was how do you allocate those 
savings over time, and we chose to allocate a lot of the 
savings early, early on. So the fact that we are not making 
those contributions to the pension system means that those 
funds are not going to be generating revenue in the future, so 
it is going to be somewhat more costly. But you have to be 
careful and not compare directly future versus current cost and 
benefits, because of the value issue. But there is at least a 
modest cost in moving up the savings in the early years.
    Ms. Biggert. So did most of this increase take place in 
fiscal year 2004?
    Dr. Giertz. Most of the----
    Ms. Biggert. The increase of the payback?
    Dr. Giertz. I mean, we were scheduled to have some large 
increases, according to the 1995 law, that would have taken 
place in fiscal year 2006 and 2007. Then we passed this new law 
which sort of recalibrated the payment schedule and what we did 
was reduced what we would have paid and we had substantial 
reductions in funding for last year and this year, and the 
consequence is we will have higher payments in the future.
    Ms. Biggert. Well, like in fiscal year 2004 then, the ratio 
went up to 60.9 percent and then it fell to 57.7 in fiscal year 
2007?
    Dr. Giertz. Right. There were several things happening, but 
it went up hugely when we put in the 7.5 or $10 billion pension 
bonding proceeds and then the market also took off at that 
time, so we did very well, but then this last year, the lower 
contributions did have an impact on funding. For example, with 
SERS, my understanding is that SERS earned about 11 percent 
plus for this last fiscal year, which is really great 
performance, 3 percentage points above our benchmark. But our 
funding ratio did not improve at all because of the lack of 
state contributions. So again, that hurt us, but the State is 
supposed to make that up in the future.
    Ms. Biggert. Thank you.
    Mr. Kline. OK, thank you very much.
    I would like to thank the panel. Really a terrific panel of 
witnesses, a great level of expertise and coming at it from 
different angles. Because we have just come through this 
experience of the Pension Protection Act, I think we are more 
keenly aware on this Committee of the dangers of an under-
funded plan and all the problems that that can lead to.
    So I want to thank everybody here today for coming to this 
beautiful room in this beautiful building to participate with 
us. I want to thank the witnesses for their very valuable time 
and testimony. I would like to thank my friend and colleague, 
Mrs. Biggert.
    And if there is no further business, the Subcommittee 
stands adjourned.
    [Whereupon, at 12:42 p.m., the Subcommittee was adjourned.]
    [Additional submissions for the record follow:]
    [Article submitted by Mr. Filan follows:]

[Article from Governing.com, Management Insights column, July 12, 2006]

                          Paying for Tomorrow

                          By William D. Eggers

    When Rod Blagojevich began his first term as governor of Illinois 
in January 2003, he had a host priorities he wanted to address: 
Improving schools, investing in the state's underfunded infrastructure, 
increasing access to health care and so on. There was only one problem: 
A few months into office, he learned that the state's public employee 
retirement system was starting at an unfunded liability of $43.1 
billion (with a funding ratio of under 50 percent).
    If things continued on their path, annual state payments into the 
system would have to jump from $1 billion in 2006 to $4 billion in 2013 
and $16 billion in 2045. ``Unless we reform the way we fund our 
pensions,'' explained the governor, ``we will never eliminate the 
structural deficit that takes money away from education, from health 
care, from law enforcement, from parks, and from everything else we 
care about.''
    Illinois has a lot of company. More than 87 percent of state 
pension systems are underfunded, dwarfing the much-publicized corporate 
pension problems. In New Jersey alone, state and local public 
retirement systems are underfunded by as much as $35 billion. 
Meanwhile, the bill for paying future medical benefits for state and 
local employees who retire could top $1 trillion. And the problem will 
only get worse with the impending huge wave of baby boomer retirements.
    So what's to be done?
    Some experts say the solution is to transition public pension 
systems from defined benefit to defined contribution 401(k)-style 
retirement programs. While this may be the right thing to do for the 
long term, it's unfortunately not a solution to managing today's near-
term runaway retirement costs. Reason: Governments must phase in 
defined contribution pension plans gradually as new workers enter the 
system, meaning they may not see significant relief for 20 to 30 years. 
In fact, thanks to transition costs, defined contributions would likely 
increase costs in the near term.
    So if that's not the answer, what is? From an actuarial 
perspective, the ``solutions'' are quite simple--costs must either be 
reduced to solve the problem or deferred to postpone the problem. And 
continuing to defer the problem to future generations is both unfair 
and irresponsible.
    That leaves one option: reduce costs. This brings us back to 
Illinois. Facing one of the most underfunded public pension plans in 
the country, resulting from decisions made long before he took office, 
Blagojevich has methodically gone about taking out costs and 
liabilities from Illinois' five state retirement systems.
    Loopholes and abuses have been curtailed. School districts, for 
example, had routinely approved generous salary increases for teachers 
in their final years of employment, producing inflated pension amounts 
that became the responsibility of state taxpayers when teachers 
retired. No more. School districts must now pick up the tab for pension 
increases triggered by pay raises in excess of 6 percent.
    Another big cost driver in Illinois was expensive special benefits 
once reserved for police officers for risking their lives in the line 
of duty, which over the years had somehow spread to one-third of all 
state workers. Eligibility for these benefits was cut back to those 
they were originally intended for: public safety workers.
    To avoid making the same kinds of mistakes again that got Illinois 
into the trouble it's in now, the governor convinced the legislature to 
mandate that all future benefit enhancements will expire after five 
years unless they are renewed by the governor and the state 
legislature. In addition, every future benefit increase is required to 
have a dedicated revenue source.
    Illinois offers important lessons for other states and localities 
embarking on fixing their pension systems. The first is to gain a firm 
understanding of your current pension situation. What are your real 
pension costs? How big is the problem? If your fund is only 65 percent 
funded, say, you'll first have to stop the bleeding. Once that is 
accomplished, you can focus attention on longer-term reforms.
    Second, involve stakeholders. Pension reform often involves 
difficult and politically sensitive changes. Involving political 
officials, business leaders, labor unions and other stakeholders helps 
build support and buy-in for these initiatives.
    Once reform proposals are developed, you'll need a broad education 
campaign to explain their value to constituents. Illinois state 
officials launched an extensive communications campaign to promote the 
governor's pension-reform plan. They met with most members of the state 
legislature and with union representatives. They also met with almost 
every major newspaper in the state and sent letters to teachers and 
other retirement plan participants.
    Third, while it's true that public-pension-plan underfunding is a 
financially driven crisis, it should not be viewed purely through a 
financial prism. Pension issues cannot be divorced from their impact on 
talent acquisition and management. The underlying plans are, after all, 
``employee benefit'' plans that were designed, even if flawed, to 
attract, retain and motivate talented individuals to seek and remain in 
employment. All financial decisions are also human-resource decisions 
that may have significant workforce consequences.
    Lastly, Illinois teaches us that few of the pension-reform options 
are painless. Indeed, all of them demand strong political leadership 
and the willingness to confront entrenched interests. Yet, the stakes 
are too high to ignore--and the time for action is now.

    William D. Eggers is the co-author of ``Paying for Tomorrow: 
Practical Strategies for Tackling the Public Pension Crisis,'' to be 
published by Deloitte Research in mid-July.
                                 ______
                                 
    [Commission report submitted by Mr. Filan follows:]

         Report on the 90% Funding Target of Public Act 88-0593

        Commission on Government Forecasting and Accountability,
          703 Stratton Office Building, Springfield, IL 62706

                              January 2006

                         commission co-chairmen

  Representative Terry R. Parke  Senator Jeffrey M. Schoenberg

                                 senate

 Don Harmon  Christine Radogno  Steven Rauschenberger 
              David Syverson  Donne Trotter

                                 house

  Mark H. Beaubien, Jr.  Frank Mautino  Robert Molaro 
              Richard Myers  Elaine Nekritz

                           executive director

                              Dan R. Long

                            deputy director

                          Trevor J. Clatfelter

                            author of report

                             Dan Hankiewicz

                            office assistant

                            Briana Stafford

Executive Summary
    This report looks at the financial status of the State retirement 
systems in Illinois. The following is a summary of the findings:
     P.A. 88-593 requires the State to make contributions to 
the State retirement systems so that total assets of the systems will 
equal 90% of their total actuarial liabilities by fiscal year 2045. The 
contributions are required to be a level percent of payroll in fiscal 
years 2011 through 2045, following a phase-in period that began in FY 
1996.
     P.A. 88-593 also requires the Commission on Government 
Forecasting and Accountability to make a periodic evaluation of whether 
the 90% target funded ratio continues to represent an appropriate 
funding goal for State-funded retirement systems in Illinois.
     The funded ratio places the unfunded liabilities in the 
context of the retirement system's assets. Expressed as a percentage of 
a system's liabilities, the funded ratio is calculated by dividing net 
assets by the accrued actuarial liabilities. The result is the 
percentage of the accrued liabilities that are covered by assets.
     At the end of FY 1995 (the year before the implementation 
of P.A. 88-593), the systems' total unfunded liabilities were almost 
$19.5 billion. By the end of FY 2005, the liabilities totaled $38.6 
billion, an increase of 97% from the FY 1995 level.
     Investment returns performed above expectations in the 
early years of the current funding plan, however Fiscal Years 2001 and 
2002 saw significant investment losses when compared to actuarial 
assumptions. Investment losses were also recorded in Fiscal Year 2003. 
The five State-funded retirement systems have benefited significantly 
from the upturn in the financial markets over the last two fiscal 
years.
     P.A. 93-0002 authorized the State to issue $10 billion in 
general obligation bonds for the purpose of making required 
contributions to the five state-funded retirement systems.
     P.A. 94-0004 (SB 27) contained several important reforms 
that are expected to reduce the rate of growth of the accrued 
liabilities of the five State-funded retirement systems.
    Commission staff analyzed projected contributions based on the 1994 
actuarial valuations of the five State-funded retirement systems and 
compared them with the most recent actuarial forecasts. This analysis, 
shown on pages 16 and 17, shows that the total cost of the current 
funding plan has not grown appreciably from what the 1994 forecasts had 
predicted (this despite counteractive factors such as formula 
increases, investment gains and losses, the infusion of pension 
obligation bond proceeds, and the funding reductions and reforms 
contained in P.A. 94-0004). While the current pension funding plan will 
continue to present significant challenges from a budgetary 
perspective, the Commission believes that the goal of reaching a 90% 
funded ratio by 2045 as called for in P.A. 88-593 should be maintained.
I. Public Act 88-593
    Public Act 88-593 amended the State-funded retirement systems' 
Articles of the Pension Code to require annual appropriations to the 
systems as a level percent of payroll, beginning in FY 2010, following 
a 15 year phase-in period which began in FY 1996. The goal of P.A. 88-
593 is to attain a 90% funding ratio by FY 2045. After FY 2045, the 
State must contribute the annual amount needed to maintain a 90% 
funding ratio.
    P.A. 88-593 requires the Board of Trustees of each retirement 
system to certify the required State contributions for each fiscal year 
by the preceding November 15th. The Act contains language authorizing a 
continuing appropriation of the required State contributions, which has 
removed the contributions from the budgeting process and ensures the 
certified contributions will be made.
    The General Provisions Article of the Pension Code was amended by 
Public Act 88-593 to state that the General Assembly finds that a 
funding ratio of 90% is an appropriate goal for the State-funded 
retirement systems in Illinois. The Act further states ``that a funding 
ratio of 90% is now the generally-recognized norm throughout the nation 
for public employee retirement systems that are considered to be 
financially secure and funded in an appropriate and responsible 
manner.''
    P.A. 88-593 requires the Commission on Government Forecasting and 
Accountability (CGFA), in consultation with the retirement systems and 
the Governor's Office of Management and Budget, to make a determination 
every five years as to whether the 90% funding ratio continues to 
represent an appropriate funding goal.
            Rationale for 90% Funding Target
    According to the June 1994 Survey of State and Local Government 
Employee Retirement Systems, prepared by the Public Pension 
Coordinating Council (PPCC), the value of assets as a percentage of the 
Pension Benefit Obligation averaged 90.2% for the retirement systems 
surveyed by the PCCC in the summer of 1993. It can be assumed that P.A. 
88-593 was referring to this survey when it stated ``that a funding 
ratio of 90% is now the generally recognized norm throughout the nation 
for public employee retirement systems.'' A snapshot of national trends 
in the funding status of public pension funds is shown at the end of 
Section II. While the volatility in the financial markets in recent 
years has clearly had a negative impact on the funding status of public 
pension systems nationwide, the Commission reaffirms the endorsement of 
a 90% funding target contained in P.A. 88-593.
II. National Overview
    The chart below reflects data contained in the 2005 Wilshire Report 
on State Retirement Systems. The chart provides an overview of the 
financial condition of 64 State Retirement Systems which provided 
actuarial values for fiscal years 2000 through 2004. The chart also 
shows that at the end of FY 2004, 84% of these 64 state pension 
systems, or 54 systems, have liabilities that exceed assets. Also, the 
average funded ratio for all 64 state systems was 83 % at the end of FY 
04.

                                FINANCIAL OVERVIEW OF 64 STATE RETIREMENT SYSTEMS
                                                 [$ in Billions]
----------------------------------------------------------------------------------------------------------------
                                                         2000        2001        2002        2003        2004
----------------------------------------------------------------------------------------------------------------
Total Pension Assets:
    Market Value....................................     $795.0      $730.1      $669.1      $681.7      $778.9
Total Pension Liabilities...........................     $727.4      $792.7      $850.1      $889.4      $942.3
Average Funded Ratio................................       109%         92%         79%         77%         83%
Underfunded Plans...................................        39%         69%         92%         97%         84%
----------------------------------------------------------------------------------------------------------------

III. Calculating the Funded Ratio
            The Funded Ratio
    The funded ratio places the unfunded liabilities in the context of 
the retirement system's assets. Expressed as a percentage of a system's 
liabilities, the funded ratio is calculated by dividing net assets by 
the accrued liabilities. The result is the percentage of the accrued 
liabilities that are covered by assets. At 100%, a fully funded system 
has sufficient assets to pay all benefits earned to date by all its 
members. Of course, in order to calculate the funded ratio, the accrued 
actuarial liabilities must be calculated and the actuarial value of 
plan assets must be determined.
            Determining the Actuarial Accrued Liability
    Various actuarial cost methods have been devised to allocate 
systematically to employers and employees the expenses incurred under a 
pension plan as employees earn benefits. In other words, an actuarial 
cost method determines how much money should be set aside each year so 
that, when the employee retires, the system will be able to pay the 
earned benefits. An actuarial funding method is also used to determine 
the contributions needed in order to meet the costs of currently 
accruing benefits and improve or stabilize the system's financial 
condition. The state-funded retirement systems calculate accrued 
liability based on the projected unit credit method, as explained 
below.
            Projected Unit Credit Method
    The pension benefit obligation (PBO) is the actuarial accrued 
liability calculated using the projected unit credit actuarial method. 
The PBO is the sum of the present value of:
     benefits payable to current retirees;
     benefits that will become payable to inactive vested 
members;
     accrued benefits of active vested members;
     accrued benefits of active employees who are likely to 
become vested; and
     benefits due to future salary increases.
            Calculation of Actuarial Assets
    There are four different methods that can be used to determine the 
actuarial value of plan assets. Assets may be valued at the original 
purchase price or at the market value on the date of the actuarial 
valuation. Two methods of valuing assets which smooth short-term market 
fluctuations are the smoothed market method and the blended method. The 
smoothed market method uses a moving average to smooth market 
fluctuations, while the blended method uses the average of the cost and 
market value of assets. The State-funded retirement systems currently 
determine the actuarial value of their plans' assets using the market 
value of the assets on the date of the actuarial valuation.
            The Significance of Actuarial Funding Ratios
    The ratio of assets to liabilities in a defined benefit pension 
plan, commonly known as the ``funding ratio,'' is a widely utilized 
method for gauging the health of a retirement system. If a pension 
plan's assets are equal to its liabilities, the plan is considered to 
be fully funded (or funded at 100%). If a plan has a shortfall of 
assets to liabilities (or a funded ratio of less than 100%) then the 
plan carries an unfunded liability. Hence, such a plan would be 
considered underfunded. If a pension plan is underfunded, that does not 
mean that the plan cannot pay the benefits that its current employees 
and retirees have earned. Indeed, virtually all underfunded defined 
benefit public employee pension plans, including the five State-funded 
plans, continue to meet their current obligations.
    All pension plans, whether fully funded or not, depend on employee/
employer contributions and investment income in order to remain 
financially solvent. The primary difference between a fully funded plan 
and an underfunded plan is that the underfunded plan requires 
contributions to pay for benefits that are currently being accrued as 
well as to eliminate the shortfall between assets and accrued 
liabilities. A fully funded pension plan has no such shortfall and 
therefore only requires contributions to pay for benefits that are 
currently being accrued. This does not mean that no future 
contributions will be required for a fully funded plan, but rather that 
the actuarial value of the plan's assets equal its accrued liabilities 
at that moment in time.
    It should be stressed that the funded ratio is merely a snapshot 
based on an assortment of long-term financial and demographic 
assumptions. It is merely a way of attempting to ascertain what the 
fund's obligations would be if the plan ended as of the actuarial 
valuation date and all of the plan's future obligations became payable 
at once. However, all of the plan's future obligations are not payable 
at once, but rather they are payable over many years into the future. 
This period of years allows the plan the necessary time to accrue the 
assets needed to pay future obligations.
    Achieving full funding of a pension plan is not unlike a mortgage, 
in which a homeowner has a long period of time--usually 30 years--to 
amortize the mortgage. If the homeowner makes all of his or her 
scheduled payments, the mortgage would be considered fully funded at 
the end of the 30-year period. At any point during the 30-year 
amortization period, the outstanding amount of the mortgage is akin to 
a pension fund's unfunded liability.
IV. The Financial Health of the State Retirement Systems Under P.A. 88-
        593
    The following table provides a summary of the financial condition 
of each of the five State retirement systems, showing their respective 
liabilities and assets as well as their combined unfunded liabilities 
and funded ratios, as of June 30, 2005.

                         SUMMARY OF FINANCIAL CONDITION: STATE-FUNDED RETIREMENT SYSTEMS
                                         [June 30, 2005; $ in Millions]
----------------------------------------------------------------------------------------------------------------
                                                                         Accrued        Unfunded        Funded
                       System                          Net assets      liabilities      liability       ratio
----------------------------------------------------------------------------------------------------------------
TRS................................................       $34,085.2       $56,075.0       $21,989.8        60.8%
SERS...............................................        10,494.1        19,304.6         8,810.5        54.4%
SURS...............................................        13,350.2        20,349.9         6,999.7        65.6%
JRS................................................           565.0         1,236.5           671.5        45.7%
GARS...............................................            83.3           212.9           129.6        39.1%
                                                    ------------------------------------------------------------
      Total........................................      $58,577.80      $97,178.90      $38,601.10        60.3%
----------------------------------------------------------------------------------------------------------------

            Changes in Funded Ratios and Unfunded Liability since 
                    Passage of Public Act 88-593
    Several factors influence the unfunded liabilities of a retirement 
system. For the purpose of determining the reasons for the changes in 
the unfunded liabilities (and the funded ratios) these factors have 
been grouped in six categories, as follows:
    1) Salary Increases. The actuary assumes an average rate of growth 
of employees' salaries, based on historical figures. Because pension 
benefits are calculated as a percentage of employees' wages, salary 
levels are an important factor in determining an employee's future 
level of benefits. If actual salaries increase more than assumed, the 
unfunded liabilities also increase. Conversely, if actual salary 
increases are less than assumed, the unfunded liabilities decrease.
    2) Investment Returns. Based on historical averages, the actuary 
assumes an annual rate of return on assets. If actual returns are 
greater than the assumed rate, the unfunded liabilities decrease. If 
actual returns are less than assumed, the unfunded liabilities will 
increase.
    3) Employer Contributions. A widely applied measure of the adequacy 
of funding compares an employer's actual contributions to the 
actuarially recognized standard of ``normal cost plus interest.'' Under 
this funding method, an employer makes contributions sufficient to 
cover the cost of all benefits earned by employees during the year (the 
normal cost) plus makes an interest payment on the unfunded liabilities 
of the retirement system. This funding method attempts to freeze the 
unfunded liabilities without reducing them in total. If employer 
contributions are insufficient based on this measure, a system's 
unfunded liabilities grow. If contributions are equal to or greater 
than required by this method, the system's unfunded liabilities either 
remain constant or diminish.
    4) Benefit Increases. Under the State Constitution, pension 
benefits cannot be lowered for current employees, but are often 
increased for a variety of reasons. Any improvement in benefits causes 
an immediate rise in the unfunded liabilities of the system.
    5) Changes in Actuarial Assumptions. Actuaries periodically revise 
previous assumptions based on recent experience which they feel more 
accurately reflects what may occur in the future. These changes could 
relate to investment returns, salary increases, mortality rates, staff 
turnover, and many other factors. Some changes, such as a decrease in 
the assumption on investment returns, cause an immediate increase in 
the unfunded liabilities. Other changes, such as a reduction in the 
assumed rate of salary growth, cause a decrease in the unfunded 
liabilities.
    6) Other factors. This factor encompasses all other events that do 
not fall into one of the previous categories. These factors include a 
change in the actuarial assumptions, or elements that had previously 
been overlooked but now must be considered.
    This section of the study focuses on how these six factors have 
affected the unfunded liabilities, and therefore the funded ratios, of 
the State funded retirement systems since the implementation of P.A. 
88-593.
State-Funded Retirement Systems, Combined
    At the end of FY 1995 (the year before the implementation of P.A. 
88-593), the systems' total unfunded liabilities were almost $19.5 
billion. By the end of FY 2005, unfunded liabilities totaled $38.6 
billion, an increase of 97% from the FY 1995 level. The following table 
shows how six factors affected the combined unfunded liabilities of the 
State-funded retirement systems between FY 1995 and FY 2005.

                               TABLE 1.--STATE-FUNDED RETIREMENT SYSTEMS: CHANGE IN UNFUNDED LIABILITIES  FY 1996-FY 2005
                                                                      [In millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Salary     Investment     Employer      Benefit    Actuarial      Other
                                                               increases     returns    contributions   increases  assumptions    factors       Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996........................................................      $278.1      ($950.4)     $1,648.4         $17.8     ($781.7)      $316.7       $528.9
1997........................................................      (174.6)    (1,718.0)      1,571.6         179.1    (6,629.2)       456.3     (6,314.9)
1998........................................................      (113.2)    (2,788.1)        984.2       2,250.2         0.0        275.7        608.7
1999........................................................        77.1       (988.6)        883.4          33.9       125.2        893.5      1,024.5
2000........................................................       154.5     (1,307.1)        902.6           3.0         0.0        471.6        224.6
2001........................................................        64.2      6,610.6         887.5         652.1         2.5      1,261.0      9,478.0
2002........................................................       134.4      5,575.4       1,624.1         234.1     1,377.7      1,020.2      9,966.0
2003........................................................       125.6      2,071.5       2,426.0       2,425.0         0.0      1,110.1      8,158.2
2004........................................................       135.8     (3,841.7)     (4,713.1)          0.0         0.0        408.5     (8,010.5)
2005........................................................        35.0     (1,033.6)      2,393.9           0.0        26.4      2,085.6      3,507.3
                                                             -------------------------------------------------------------------------------------------
      Total.................................................      $716.9     $1,630.0      $8,608.7      $5,795.2   ($5,879.1)    $8,299.1    $19,170.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As Table 1 shows, the failure to make employer contributions at a 
normal-cost-plusinterest level over the ten-year reporting period was 
the most significant catalyst in the increase in unfunded liabilities 
of all five State-funded systems. A change to a market valuation of 
assets in FY 1997 served to mitigate the total actuarial loss over this 
period. Despite strong investment returns during the first half of the 
reporting period, two years of very poor returns in FY 2001 and FY 2002 
contributed to an overall actuarial loss in that category. Pension 
Obligation Bond (POB) proceeds in FY 2004 had a positive actuarial 
impact on both investment returns and employer contributions. Because 
of the POB proceeds, FY 2004 was one of only two years in which the 
systems' overall actuarial liabilities decreased to a significant 
degree. Benefit increases and other miscellaneous factors also 
contributed to the increase in liabilities.
Teachers' Retirement System
    The unfunded liabilities of the Teachers' Retirement System have 
increased by over $10 billion since the end of FY 1995. Table 2 details 
the factors that caused the increase in unfunded liabilities.

                                 TABLE 2.--TEACHERS' RETIREMENT SYSTEM: CHANGE IN UNFUNDED LIABILITIES  FY 1996-FY 2005
                                                                      [In millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Salary     Investment     Employer      Benefit    Actuarial      Other
                                                               increases     returns    contributions   increases  assumptions    factors       Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996........................................................      $400.4      ($577.3)       $966.0         $17.8        $0.0       $166.5       $973.4
1997........................................................       (59.1)      (830.9)        992.4           0.0    (2,944.7)        88.8     (2,753.5)
1998........................................................       (46.0)    (1,417.7)        776.2       1,000.3         0.0         71.2        384.0
1999........................................................        44.0       (389.0)        677.4          33.9       125.2        533.9      1,025.4
2000........................................................       (33.4)      (450.4)        723.6           0.0         0.0        197.3        437.1
2001........................................................       (10.3)     3,089.8         733.9           0.0         0.0        632.7      4,446.1
2002........................................................         4.9      2,696.2       1,074.4           0.0       694.7        360.0      4,830.2
2003........................................................       171.8        827.4       1,415.6          53.8         0.0        658.5      3,127.1
2004........................................................       217.3     (2,168.9)     (2,811.5)          0.0         0.0        357.2     (4,405.9)
2005........................................................       236.7       (682.3)      1,299.8           0.0        26.4      1,706.2      2,587.1
                                                             -------------------------------------------------------------------------------------------
      Total.................................................      $926.3        $96.9      $5,847.8      $1,105.8   ($2,098.4)    $4,772.3    $10,651.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The leading causes of the increase in unfunded liabilities of TRS 
were insufficient employer contributions and other miscellaneous 
factors (such as waiving ERO payments for teachers with 34 years of 
service). Over the ten-year period, years of strong investment returns 
in the first half of the reporting period were offset by two 
particularly poor years in 2001 and 2002. The POB proceeds in FY 2004 
served to offset the overall actuarial losses in both investment 
returns and employer contributions.
State Universities' Retirement System
    Table 3 shows the factors that caused the unfunded liabilities of 
SURS to increase approximately $2.3 billion from the end of FY 1995 to 
the end of FY 2005.

                            TABLE 3.--STATE UNIVERSITIES RETIREMENT SYSTEMS: CHANGE IN UNFUNDED LIABILITIES  FY 1996-FY 2005
                                                                      [In millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Salary     Investment     Employer      Benefit    Actuarial      Other
                                                               increases     returns    contributions   increases  assumptions    factors       Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996........................................................      ($70.5)     ($105.4)       $456.0          $0.0        $0.0        $86.8       $366.9
1997........................................................       (44.0)      (312.3)        424.8         179.1    (3,342.4)       198.5     (2,896.3)
1998........................................................         5.2       (765.7)        158.8           0.0         0.0         48.1       (553.6)
1999........................................................        44.3       (273.3)        147.2           0.0         0.0        314.9        233.1
2000........................................................       171.5       (587.5)        162.0           0.0         0.0         13.7       (240.3)
2001........................................................        70.3      2,068.5         141.4           0.0         0.0        266.7      2,546.9
2002........................................................        90.8      1,568.7         313.9          63.0       485.3        155.6      2,677.3
2003........................................................        10.3        583.0         549.4           0.0         0.0        328.4      1,471.1
2004........................................................       (62.9)      (950.5)       (846.0)          0.0         0.0         41.2     (1,818.2)
2005........................................................       (19.4)      (218.0)        536.8           0.0         0.0        208.0        507.4
                                                             -------------------------------------------------------------------------------------------
      Total.................................................      $195.6     $1,007.5      $2,044.3        $242.1   ($2,857.1)    $1,661.9     $2,294.3
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The leading causes of the increase in unfunded liabilities of SURS 
were investment losses, driven mainly by two years of particularly poor 
returns in FY 2001 and FY 2002, and also insufficient employer 
contributions over the ten-year time period (with the exception of the 
Pension Obligation Bond proceeds in FY 2004). Offsetting the increase 
in unfunded liabilities somewhat was the changeover to valuation of 
assets at market value in FY 1997, which caused a decline in the 
unfunded liabilities of SURS of over $3.3 billion.
State Employees' Retirement System
    Table 4 shows the elements that caused the unfunded liabilities of 
SERS to increase by more than $5.7 billion from the end of FY 95 to the 
end of FY 05.

                              TABLE 4.--STATE EMPLOYEES' RETIREMENT SYSTEM: CHANGE IN UNFUNDED LIABILITIES  FY 1996-FY 2005
                                                                      [In millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Salary     Investment     Employer      Benefit    Actuarial      Other
                                                               increases     returns    contributions   increases  assumptions    factors       Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996........................................................      ($63.8)     ($251.4)       $196.6          $0.0     ($781.7)       $47.1      ($853.2)
1997........................................................       (65.1)      (541.6)        121.7           0.0      (379.9)       152.9       (712.0)
1998........................................................       (62.0)      (568.8)          9.4       1,249.9         0.0        148.7        777.2
1999........................................................       (12.5)      (307.0)         21.0           0.0         0.0         32.9       (265.6)
2000........................................................        14.6       (252.7)        (21.8)          0.0         0.0        250.2         (9.7)
2001........................................................        (8.0)     1,368.8         (29.4)        652.1         0.0        310.0      2,293.5
2002........................................................        52.0      1,247.3         186.9         171.1       168.1        496.2      2,321.6
2003........................................................       (28.3)       629.5         404.5       2,371.2         0.0         97.8      3,474.7
2004........................................................       (22.3)      (679.7)       (944.1)          0.0         0.0          6.8     (1,639.3)
2005........................................................      (166.5)      (123.1)        503.5           0.0         0.0        144.1        358.0
                                                             -------------------------------------------------------------------------------------------
      Total.................................................     ($361.9)      $521.3        $448.3      $4,444.3     ($993.5)    $1,686.7     $5,745.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The unfunded liabilities of SERS increased by over $5.7 billion 
from FY 96 through FY 05, driven primarily by benefit increases in FY 
98 (retirement formula increase) and FY 2003 (the 2002 Early Retirement 
Incentive). The actuarial loss in investment returns over the ten-year 
period was due in large part to two years of poor returns in FY 2001 
and FY 2002. Also adding to the overall increase in unfunded 
liabilities were insufficient employer contributions in each year over 
the ten-year period (with the exception of the POB proceeds in FY 2004) 
and other miscellaneous factors.
Judges' Retirement System
    The unfunded liabilities of the Judges' Retirement System increased 
by $362.0 million between FY 1995 and FY 2005. Table 5 details the 
factors that caused this increase in unfunded liabilities.

                                  TABLE 5.--JUDGES' RETIREMENT SYSTEM: CHANGE IN UNFUNDED LIABILITIES  FY 1996-FY 2005
                                                                      [In millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Salary     Investment     Employer      Benefit    Actuarial      Other
                                                              increases     returns    contributions   increases  assumptions    factors        Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996.......................................................       $10.0       ($13.7)        $24.5          $0.0         $0.0       $14.9         $35.7
1997.......................................................        (7.7)       (28.1)         27.2           0.0         37.9        15.3          44.6
1998.......................................................       (10.2)       (30.5)         34.1           0.0          0.0         7.2           0.6
1999.......................................................         0.5        (16.5)         32.5           0.0          0.0         8.8          25.3
2000.......................................................         2.2        (14.1)         33.2           3.0          0.0         8.3          32.6
2001.......................................................        (7.5)        61.8          35.8           0.0          0.0        17.0         107.1
2002.......................................................       (11.8)        54.5          42.2           0.0         28.4         8.6         121.9
2003.......................................................       (26.4)        27.2          49.3           0.0          0.0        18.9          69.0
2004.......................................................         6.3        (36.7)        (92.3)          0.0          0.0        (2.0)       (124.7)
2005.......................................................       (15.1)        (8.9)         46.4           0.0          0.0        27.5          49.9
                                                            --------------------------------------------------------------------------------------------
      Total................................................      ($59.7)       ($5.0)       $232.9          $3.0        $66.3      $124.5        $362.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Insufficient employer contributions, along with changes in 
actuarial assumptions and miscellaneous other factors caused the 
unfunded liabilities to increase over the FY 1995 levels. Investment 
income and slower-than-anticipated salary growth both served to offset 
a portion of the increase.
General Assembly Retirement System
    As shown in Table 6, the unfunded liabilities of the General 
Assembly Retirement System increased by more than $50 million from the 
end of FY 95 to the end of FY 05.

                              TABLE 6.--GENERAL ASSEMBLY RETIREMENT SYSTEM: CHANGE IN UNFUNDED LIABILITIES  FY 1996-FY 2005
                                                                      [In millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Salary     Investment     Employer      Benefit    Actuarial      Other
                                                              increases     returns    contributions   increases  assumptions    factors        Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996.......................................................        $2.0        ($2.6)         $5.3          $0.0        $0.0         $1.4          $6.1
1997.......................................................         1.3         (5.1)          5.5           0.0        (0.1)         0.8           2.3
1998.......................................................        (0.2)        (5.4)          5.7           0.0         0.0          0.5           0.5
1999.......................................................         0.8         (2.8)          5.3           0.0         0.0          3.0           6.4
2000.......................................................        (0.4)        (2.4)          5.6           0.0         0.0          2.1           4.9
2001.......................................................        (0.6)        10.1           5.8           0.0         0.0          1.3          16.7
2002.......................................................        (1.5)         8.7           6.7           0.0         1.2         (0.2)         15.0
2003.......................................................        (1.8)         4.4           7.2           0.0         0.0          6.5          16.3
2004.......................................................        (2.6)        (5.9)        (19.2)          0.0         0.0          5.3         (22.4)
2005.......................................................        (0.7)        (1.3)          7.4           0.0         0.0         (0.2)          5.2
                                                            --------------------------------------------------------------------------------------------
      Total................................................       ($3.7)       ($2.3)        $35.4          $0.0        $1.1        $20.4         $50.9
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The increase in the unfunded liabilities of the General Assembly 
Retirement System from FY 96 through FY 05 was caused primarily by 
insufficient employer contributions (with the exception of the FY 04 
POB proceeds) and other miscellaneous factors. Some of the factors that 
mitigated the overall increase were actuarial gains realized from 
lower-than-expected salary increases and higher-than-assumed investment 
returns.
V. Original and Current Projections of State Contributions and Funded 
        Ratios
    This section of the study compares the original 1994 estimates of 
annual required contributions (and the resulting funded ratios) with 
the current projections of annual required contributions, which are 
based on the June 30, 2005 actuarial valuations for each system.
            Original Projections (1994 Projections)
    The original projections of required annual contributions for the 
funding plan created by Public Act 88-593 were based on the June 30, 
1994 actuarial valuation. The first year of the funding plan was FY 
1996 and the contributions for FY 1996 were certified in November 1994. 
At that time, the assets of the retirement systems were valued at cost, 
the actuarial assumptions of the systems were more conservative, and 
the benefit formulas of the 3 large retirement systems had not yet been 
increased.
            Current Projections (2005 Projections)
    The current projections of required annual contributions are based 
on the June 30, 2005 actuarial valuation. These projections take into 
account changes in actuarial assumptions, the valuation of assets at 
market value, Pension Obligation Bond proceeds and changes contained in 
P.A. 94-0004 such as the elimination of the Money Purchase program in 
SURS for new hires and the modification of the Early Retirement Option 
in TRS, as well as the funding reductions in FY 2006 and FY 2007.
State-Funded Retirement Systems, Combined
    Table 7 compares the original estimate of the required annual 
contributions to all of the State retirement systems with the current 
estimate, as prepared by the retirement systems. Also shown are the 
original and current projections of the funded ratios. The original 
contribution column includes the FY 1996 certified appropriations and 
the estimated contributions for selected fiscal years for the remainder 
of the funding plan. The current contribution column includes the 
actual State contributions for FY 1996 through FY 2005, the actual 
appropriation amounts for FY 2006, the certified contributions for FY 
2007 (per P.A. 94-0004), and estimated contributions for selected 
fiscal years for the remainder of the funding plan.
    Except for federal and trust funds paid to SERS, the contributions 
include only State appropriations from the General Revenue Fund, Common 
School Fund, and State Pensions Fund. Employer contributions from 
school districts and all other sources are excluded.

                               TABLE 7.--STATE-FUNDED RETIREMENT SYSTEMS, COMBINED
                 [Original and Current Projected Contributions and Funded Ratios; $ in Millions]
----------------------------------------------------------------------------------------------------------------
                                  1994 Projection P.A. 88-   2005 Projection P.A. 88-    Difference (2005-1994)
                                            593                        593            --------------------------
               FY               ------------------------------------------------------
                                                   Funded                     Funded    Contribution     Funded
                                  Contribution     ratio     Contribution     ratio                      ratio
----------------------------------------------------------------------------------------------------------------
1996...........................          $607.2      52.3%          $609.1      54.9%            $1.9       2.6%
1997...........................          $718.7      52.6%          $712.2      70.1%           -$6.5      17.6%
1998...........................          $839.6      52.0%          $881.5      72.2%           $41.9      20.3%
1999...........................          $970.4      51.6%        $1,122.6      73.0%          $152.2      21.3%
2000...........................        $1,109.4      51.4%        $1,224.7      74.7%          $115.3      23.3%
2001...........................        $1,256.8      51.0%        $1,346.6      63.1%           $89.8      12.1%
2002...........................        $1,419.3      51.5%        $1,469.3      53.5%           $50.0       2.1%
2003...........................        $1,591.7      51.7%        $1,628.3      48.6%           $36.6      -3.1%
2004...........................        $1,776.5      52.1%        $9,178.5      60.9%        $7,402.0       8.9%
2005...........................        $1,967.6      52.5%        $1,638.0      60.3%         -$329.6       7.8%
2006...........................        $2,172.3      52.9%          $935.6      58.8%       -$1,236.7       6.0%
2007...........................        $2,390.3      53.4%        $1,372.2      57.7%       -$1,018.1       4.3%
2008...........................        $2,623.8      54.0%        $1,981.3      57.2%         -$642.5       3.2%
2009...........................        $2,871.4      54.7%        $2,662.0      57.2%         -$209.4       2.5%
2010...........................        $3,140.4      55.4%        $3,401.2      57.7%          $260.8       2.2%
2011...........................        $3,271.7      56.2%        $3,641.3      58.2%          $369.6       2.0%
2012...........................        $3,411.1      56.9%        $3,774.3      58.7%          $363.2       1.8%
2013...........................        $3,536.7      57.6%        $3,938.6      59.1%          $401.9       1.5%
2014...........................        $3,709.1      58.3%        $4,097.5      59.5%          $388.4       1.2%
2015...........................        $3,881.6      59.0%        $4,262.0      59.9%          $380.4       0.9%
2016...........................        $4,062.9      59.7%        $4,435.4      60.3%          $372.5       0.6%
2017...........................        $4,253.1      60.4%        $4,617.1      60.6%          $364.0       0.2%
2018...........................        $4,452.8      61.1%        $4,808.7      61.0%          $355.9      -0.1%
2019...........................        $4,662.7      61.9%        $5,010.6      61.3%          $347.9      -0.6%
2020...........................        $4,898.2      62.5%        $5,223.7      61.7%          $325.6      -0.8%
2021...........................        $5,146.2      63.0%        $5,448.1      62.1%          $301.9      -0.9%
2022...........................        $5,407.2      63.5%        $5,683.9      62.5%          $276.8      -1.0%
2023...........................        $5,681.8      64.0%        $5,932.2      62.9%          $250.4      -1.1%
2024...........................        $5,969.2      64.6%        $6,193.9      63.4%          $224.8      -1.2%
2025...........................        $6,271.3      65.2%        $6,464.7      63.9%          $193.4      -1.3%
2026...........................        $6,568.1      65.8%        $6,747.8      64.5%          $179.7      -1.3%
2027...........................        $6,920.2      66.5%        $7,040.5      65.1%          $120.4      -1.4%
2028...........................        $7,269.1      67.2%        $7,351.4      65.7%           $82.3      -1.5%
2029...........................        $7,635.7      68.0%        $7,676.9      66.5%           $41.1      -1.5%
2030...........................        $8,020.8      68.8%        $8,018.8      67.3%           -$2.0      -1.5%
2031...........................        $8,425.1      69.7%        $8,377.0      68.1%          -$48.2      -1.5%
2032...........................        $8,849.2      70.7%        $8,752.2      69.1%          -$97.1      -1.6%
2033...........................        $9,294.9      71.5%        $9,145.3      70.1%         -$149.7      -1.4%
2034...........................        $9,763.6      72.6%        $9,558.3      71.2%         -$205.4      -1.3%
2035...........................       $10,255.5      73.7%        $9,989.9      72.4%         -$265.7      -1.2%
2036...........................       $10,772.0      74.8%       $10,442.1      73.7%         -$329.9      -1.1%
2037...........................       $11,314.2      76.0%       $10,916.1      75.1%         -$398.1      -0.9%
2038...........................       $11,884.7      77.3%       $11,414.9      76.6%         -$469.8      -0.7%
2039...........................       $12,485.1      78.6%       $11,937.4      78.2%         -$547.7      -0.4%
2040...........................       $13,115.8      80.0%       $12,485.7      79.9%         -$630.1      -0.1%
2041...........................       $13,778.9      81.5%       $13,058.9      81.7%         -$719.9       0.2%
2042...........................       $14,475.3      83.1%       $13,659.9      83.6%         -$815.4       0.5%
2043...........................       $15,208.2      84.8%       $14,289.7      85.6%         -$918.5       0.8%
2044...........................       $15,978.3      86.6%       $14,947.9      87.7%       -$1,030.4       1.2%
2045...........................       $16,786.6      90.0%       $15,636.4      90.0%       -$1,150.2       0.0%
                                --------------------------------------------------------------------------------
      Total....................      $312,872.4  .........      $315,142.3  .........        $2,269.9  .........
----------------------------------------------------------------------------------------------------------------

    The factors that have contributed to the changes in overall 
projected contributions are detailed system-by-system on the following 
pages.
Teachers' Retirement System
    Table 8 provides a summary of the original projected annual 
employer contributions and funded ratios, per P.A. 88-593.

                                      TABLE 8.--TEACHERS' RETIREMENT SYSTEM
                 [Original and Current Projected Contributions and Funded Ratios; $ in Millions]
----------------------------------------------------------------------------------------------------------------
                                 1994 Projection P.A. 88-   2005 Projection P.A. 88-    Difference (2005-1994)
                                           593                        593            ---------------------------
              FY               ------------------------------------------------------
                                                  Funded                     Funded     Contribution     Funded
                                 Contribution     ratio     Contribution     ratio                       ratio
----------------------------------------------------------------------------------------------------------------
1996..........................          $324.3      54.3%          $324.3      57.8%            $0.0        3.5%
1997..........................           390.8      53.4%           378.0      64.5%           (12.8)      11.1%
1998..........................           463.1      52.7%           460.4      66.8%            (2.7)      14.1%
1999..........................           541.6      52.3%           567.1      67.0%            25.5       14.7%
2000..........................           623.8      52.0%           634.0      68.2%            10.2       16.2%
2001..........................           712.1      51.9%           719.4      59.5%             7.3        7.6%
2002..........................           807.0      52.0%           810.6      52.0%             3.6        0.0%
2003..........................           909.1      52.2%           926.0      49.3%            16.9       -2.9%
2004..........................         1,018.5      52.6%         5,358.7      61.9%         4,340.2        9.3%
2005..........................         1,128.9      53.0%           903.9      60.8%          (225.0)       7.8%
2006..........................         1,247.0      53.4%           531.8      59.5%          (715.2)       6.1%
2007..........................         1,372.4      53.9%           735.5      58.6%          (636.9)       4.7%
2008..........................         1,505.9      54.5%         1,049.8      58.2%          (456.1)       3.7%
2009..........................         1,647.1      55.1%         1,418.6      58.4%          (228.5)       3.3%
2010..........................         1,801.9      55.7%         1,814.4      59.1%            12.5        3.4%
2020..........................         2,757.6      58.8%         2,739.5      63.9%           (18.1)       5.1%
2030..........................         4,477.4      62.1%         4,261.8      70.2%          (215.6)       8.1%
2040..........................         7,268.6      75.0%         6,658.6      81.7%          (610.0)       6.7%
2045..........................         9,261.1      90.0%         8,371.6      90.0%          (889.5)       0.0%
----------------------------------------------------------------------------------------------------------------

    Contributions to TRS are generally expected to be lower than 
originally projected for the remainder of the funding plan. This is due 
primarily to the infusion of over $4.0 billion in Pension Obligation 
Bond proceeds in FY 2004 and the reforms contained in SB 27 such as the 
Modified Early Retirement Option (ERO), the elimination of the Money 
Purchase Option for new employees, the shifting of costs to school 
districts for end-of-career salary increases, and requiring school 
districts to pay the normal cost for granting sick leave in excess of 
two years.
State Universities' Retirement System
    Table 9 compares the original and current projections of estimated 
annual contributions and the resulting funded ratios for SURS. The 
current contributions column includes the annual employer contributions 
to the accounts of participants in the Self-Managed Plan (detailed 
below Chart 9).

                                 TABLE 9.--STATE UNIVERSITIES' RETIREMENT SYSTEM
                 [Original and Current Projected Contributions and Funded Ratios; $ in Millions]
----------------------------------------------------------------------------------------------------------------
                                 1994 Projection P.A. 88-   2005 Projection P.A. 88-    Difference (2005-1994)
                                           593                        593            ---------------------------
              FY               ------------------------------------------------------
                                                  Funded                     Funded     Contribution     Funded
                                 Contribution     ratio     Contribution     ratio                       ratio
----------------------------------------------------------------------------------------------------------------
1996..........................           123.9      50.1%           123.9      50.1%           $0.00     0.0%199
7.............................           154.1      49.6%           159.5      79.4%           $5.40       29.8%
1998..........................           186.9      49.3%           201.6      85.8%          $14.70       36.5%
1999..........................           222.5      49.3%           217.6      85.3%           ($4.9)      36.0%
2000..........................           261.3      49.4%           224.5      88.2%          ($36.8)      38.8%
2001..........................           303.3      49.7%           232.6      72.1%          ($70.7)      22.5%
2002..........................           348.6      50.0%           240.4      58.9%         ($108.2)       8.9%
2003..........................           397.5      50.5%           269.6      53.9%         ($127.9)       3.4%
2004..........................             450      51.1%         1,743.7      66.0%        $1,293.7       14.9%
2005..........................           506.5      51.8%           270.0      65.6%         ($236.5)      13.8%
2006..........................           567.3      52.5%           166.6      63.9%         ($400.7)      11.4%
2007..........................           632.5      53.3%           252.1      62.5%         ($380.4)       9.3%
2008..........................           702.5      54.1%           357.9      61.5%         ($344.6)       7.4%
2009..........................           777.3      55.1%           456.5      60.7%         ($320.8)       5.6%
2010..........................           857.8      56.2%           572.4      60.3%         ($285.4)       4.1%
2020..........................        1,393.40      70.0%         1,021.9      58.1%         ($371.5)     -11.9%
2030..........................        2,336.40      77.6%         1,636.7      58.0%         ($699.7)     -19.6%
2040..........................        3,909.40      85.2%         2,667.7      72.6%       ($1,241.7)     -12.6%
2045..........................        5,054.40      90.0%         3,407.9      90.0%       ($1,646.5)       0.0%
----------------------------------------------------------------------------------------------------------------

    Due to the Pension Obligation Bond proceeds, FY 2004 was the only 
year in which contributions to SURS significantly exceeded projections. 
Contributions are expected to be significantly lower than projected 
when P.A. 88-593 was enacted due to the changeover to a valuation of 
assets at market value in FY 1997 and, to a lesser extent, the 
elimination of the Money Purchase option for new members after July 1, 
2005 as contained in P.A. 94-0004 (SB 0027).
State Employees' Retirement System
    Table 10 provides a summary of the current projected State 
contributions to SERS, as well as the original projected contributions 
and corresponding funded ratios, per Public Act 88-593, based on the 
June 30, 1994 actuarial valuation.

                                  TABLE 10.--STATE EMPLOYEES' RETIREMENT SYSTEM
                 [Original and Current Projected Contributions and Funded Ratios; $ in Millions]
----------------------------------------------------------------------------------------------------------------
                                  1994 Projection P.A. 88-   2005 Projection P.A. 88-    Difference (2005-1994)
                                            593                        593            --------------------------
               FY               ------------------------------------------------------
                                                   Funded                     Funded    Contribution     Funded
                                  Contribution     ratio     Contribution     ratio                      ratio
----------------------------------------------------------------------------------------------------------------
1996...........................          $144.5      56.1%          $146.4      70.1%            $1.9      14.0%
1997...........................           157.5      55.4%           158.2      80.1%             0.7      24.7%
1998...........................           171.3      54.8%           200.7      75.6%            29.4      20.8%
1999...........................           185.9      54.4%           315.5      79.9%           129.6      25.5%
2000...........................           201.5      54.0%           340.8      81.7%           139.3      27.7%
2001...........................           216.1      53.7%           366.0      65.8%           149.9      12.1%
2002...........................           235.7      53.5%           386.1      53.7%           150.4       0.2%
2003...........................           254.2      53.4%           396.1      42.6%           141.9     -10.8%
2004...........................           273.9      53.3%         1,864.7      54.2%         1,590.8       0.9%
2005...........................           294.7      53.3%           427.4      54.4%           132.7       1.1%
2006...........................           316.9      53.4%           203.8      52.6%          -113.1      -0.8%
2007...........................           340.5      53.5%           344.2      51.4%             3.7      -2.1%
2008...........................           366.4      53.6%           520.0      50.8%           153.6      -2.8%
2009...........................           393.5      53.9%           718.0      51.0%           324.5      -2.9%
2010...........................           422.4      54.2%           929.0      51.9%           506.6      -2.3%
2020...........................           659.8      60.4%         1,328.0      59.1%           668.2      -1.4%
2030...........................         1,065.6      68.2%         1,912.0      65.1%           846.4      -3.1%
2040...........................         1,707.5      80.7%         2,836.0      78.4%         1,128.5      -2.3%
2045...........................         2,177.4      90.0%         3,454.0      90.0%         1,276.6       0.0%
----------------------------------------------------------------------------------------------------------------

    Contributions to the State Employees' Retirement System are 
projected to be appreciably greater than the original assumptions under 
P.A. 88-593. The increased funding requirements in future years are due 
in large part to reductions in contributions of $974.0 million in both 
FY 06 and FY 07 as contained in P.A. 94-0004. The additional funding 
obligations created by the 2002 Early Retirement Incentive and the 
steep market downturn in Fiscal Years 2001 and 2002 have also driven up 
future contributions pursuant to the current funding plan.
    Two significant benefit increases have contributed to the increased 
cost as well: P.A. 90-065 provided a new flat-rate regular SERS formula 
of 1.67% of final average salary per year of service for members 
contributing to Social Security (coordinated), and 2.2% of final 
average salary per year of service for employees not contributing to 
Social Security (non-coordinated).
    P.A. 92-0014 increased the alternative retirement formula to 3.0% 
of final average salary per year of service for employees not 
contributing to Social Security and 2.5% for employees contributing to 
Social Security.
Judges' Retirement System
    Table 11 compares the original and current projections of estimated 
annual contributions and the resulting funding ratios for the Judges' 
Retirement System.

                                      TABLE 11.--JUDGES' RETIREMENT SYSTEM
                 [Original and Current Projected Contributions and Funded Ratios; $ in Millions]
----------------------------------------------------------------------------------------------------------------
                                  1994 Projection P.A. 88-   2005 Projection P.A. 88-    Difference (2005-1994)
                                            593                        593            --------------------------
               FY               ------------------------------------------------------
                                                   Funded                     Funded    Contribution     Funded
                                  Contribution     ratio     Contribution     ratio                      ratio
----------------------------------------------------------------------------------------------------------------
1996...........................           $12.1      40.7%           $12.1      48.0%            $0.0       7.3%
1997...........................            13.6      39.5%            13.7      44.7%            $0.1       5.2%
1998...........................            15.3      38.4%            15.7      47.7%            $0.4       9.3%
1999...........................            17.1      37.5%            18.7      48.4%            $1.6      10.9%
2000...........................            19.1      36.7%            21.4      48.5%            $2.3      11.8%
2001...........................            21.3      36.2%            24.3      40.7%            $3.0       4.5%
2002...........................            23.5      35.9%            27.5      33.7%            $4.0      -2.2%
2003...........................            26.0      35.9%            31.4      30.7%            $5.4      -5.2%
2004...........................            28.7      36.2%           178.6      46.2%          $149.9      10.0%
2005...........................            31.6      36.6%            32.0      45.7%            $0.4       9.1%
2006...........................            34.6      37.3%            29.2      44.7%           -$5.4       7.4%
2007...........................            37.9      38.1%            35.2      43.4%           -$2.7       5.3%
2008...........................            41.4      39.1%            47.1      42.8%            $5.7       3.7%
2009...........................            45.2      40.3%            60.9      42.9%           $15.7       2.6%
2010...........................            49.3      41.6%            75.6      43.9%           $26.3       2.3%
2020...........................            80.7      53.6%           118.3      54.3%           $37.6       0.7%
2030...........................           130.9      65.0%           183.8      65.7%           $52.9       0.7%
2040...........................           213.6      80.1%           284.4      80.4%           $70.8       0.3%
2045...........................           272.6      90.0%           355.6      90.0%           $83.0       0.0%
----------------------------------------------------------------------------------------------------------------

    The estimated annual contributions based on the current actuarial 
valuation are larger than those estimated in the original projections 
for the remainder of the funding period. This is due in large part to 
insufficient employer contributions, funding reductions contained in 
P.A. 94-0004, and two years of negative investment returns in FY 2001 
and FY 2002.
General Assembly Retirement System
    Table 12 compares the original and current projections of estimated 
annual contributions and the resulting funded ratios for GARS.

                                  TABLE 12.--GENERAL ASSEMBLY RETIREMENT SYSTEM
                 [Original and Current Projected Contributions and Funded Ratios; $ in Millions]
----------------------------------------------------------------------------------------------------------------
                                 1994 Projection P.A. 88-   2005 Projection P.A. 88-    Difference (2005-1994)
                                           593                        593            ---------------------------
              FY               ------------------------------------------------------
                                                  Funded                     Funded     Contribution     Funded
                                 Contribution     ratio     Contribution     ratio                       ratio
----------------------------------------------------------------------------------------------------------------
1996..........................            $2.4      33.2%            $2.4      40.4%            $0.0        7.2%
1997..........................             2.7      31.3%             2.8      39.4%            $0.1        8.1%
1998..........................             3.0      29.3%             3.1      41.7%            $0.1       12.4%
1999..........................             3.3      27.4%             3.7      41.5%            $0.4       14.1%
2000..........................             3.7      25.6%             4.0      41.6%            $0.3       16.0%
2001..........................             4.0      23.7%             4.3      34.9%            $0.3       11.2%
2002..........................             4.5      22.2%             4.7      29.3%            $0.2        7.1%
2003..........................             4.9      20.8%             5.2      25.3%            $0.3        4.5%
2004..........................             5.4      19.6%            32.9      40.1%           $27.5       20.5%
2005..........................             5.9      18.7%             4.7      39.1%           -$1.2       20.4%
2006..........................             6.5      18.1%             4.2      37.2%           -$2.3       19.1%
2007..........................             7.0      17.6%             5.2      34.4%           -$1.8       16.8%
2008..........................             7.6      17.3%             6.5      31.9%           -$1.1       14.6%
2009..........................             8.3      17.3%             8.0      30.1%           -$0.3       12.8%
2010..........................             9.0      17.6%             9.8      28.8%            $0.8       11.2%
2020..........................            14.5      26.8%            16.0      25.7%            $1.5       -1.1%
2030..........................            23.5      44.9%            24.5      37.0%            $1.0       -7.9%
2040..........................            38.3      72.2%            38.0      67.5%           -$0.3       -4.7%
2045..........................            48.9      90.0%            47.3      90.0%           -$1.6        0.0%
----------------------------------------------------------------------------------------------------------------

    The estimated annual contributions to GARS based on the June 30, 
2005 actuarial valuation track closely with the original projections 
under P.A. 88-593.
VI. Commission Funding Recommendation
            Commission Recommendation
    P.A. 88-593 requires a periodic evaluation of whether the 90% 
target funded ratio represents an appropriate goal for the five State-
funded retirement systems. As evidenced by the national overview on 
page 2, the average funded ratio of 64 state retirement systems at the 
end of FY 2004 was 83 %. While the average funded ratio for all the 
systems in the survey fell considerably from FY 2001 through FY 2003 
due to the downturn in the financial markets, it can be assumed that 
the average funded ratio for these 64 systems will approach or exceed 
90% by the end of FY 2006. Therefore, the Commission believes that a 
90% funding target is appropriate in light of national trends. In 
addition, despite multiple benefit increases and the aforementioned 
bear market years, the current projections of future contributions are 
generally on course with the original projections based on the June 30, 
1994 actuarial valuations of each of the five State-funded systems. 
Furthermore, the Commission believes that adhering to an explicit and 
well-defined funding schedule will produce stable, predictable results 
for both the state and retirement system members and annuitants.

  Office of Management and Budget Letter Concerning 90% Funding Ratio

          Governor's Office of Management & Budget,
                          Executive Office of the Governor,
                                Springfield, IL, December 22, 2005.
Senator Jeffrey Schoenberg,
State House, Room 218-B, Springfield, Illinois.
Representative Terry Parke,
State House, Room 220, Springfield, Illinois.
Re: Review of Public Act 88-593

    Dear Senator Schoenberg and Representative Parke: Public Act 88-593 
established a 50-year payment plan for the live state pension systems. 
This payment plan was adopted to address the State's inability to pay 
normal cost and interest on the unfunded liability each year since 
1978. The basic principal of this 50-year payment plan is to attain a 
90% funded ratio by the end of fiscal 2045 and maintenance of that 90% 
funded ratio thereafter. The Act also requires the Office of Management 
and Budget, every five years, to consider and determine whether the 90% 
funding ratio continues to represent an appropriate goal for state 
sponsored retirement plans in Illinois.
    Following are the findings and recommendations of the Office of 
Management and Budget with regard to continued appropriateness of the 
90% funding ratio.
Illinois Pension System Challenge
    Funding of the State's past pension debits, accumulated over three 
decades, represents the greatest financial challenge for the State of 
Illinois.
    The unfunded liability of the State pension systems more than 
doubled from $19.5 billion as of June 30, 1995 (the year before 
implementation of the 50-year payment plan) to $43.1 billion as of June 
30, 2003 (with a funded ratio of 48.6%). Due primarily to infusion of 
proceeds of the 2003 Pension Obligation Bonds (POB), and associated 
earnings, the unfunded liability is currently at $38.6 billion as of 
June 30, 2005 (as a funded ratio of 60.3%).
    The primary drivers of the increase in unfunded liability between 
1995 and 2003 include:
     Slate contributions determined in accordance with the 50-
year payment plan that were designed to underfund the normal cost and 
interest on the unfunded liability, thus increasing the liability.
     Significant investment losses incurred during the free 
fiscal years ended June 30, 2003.
     Unfunded benefit improvements adopted between 1995 through 
2002.
    Total required State contributions to the pension system, 
determined in accordance with the 511-year payment plan, are projected 
to increase from $609 million for fiscal 1996 to $15.6 billion in 2045. 
(Reduced from a projected 2045 contribution of $16.8 billion determined 
when the 50-year payment was first implemented.)
Appropriateness of 90% Funded Ratio
    Public Act 88-593 requires the Office of Management and Budget to 
consider and determine whether the 90% funding ratio continues to 
represent an appropriate goal for state sponsored retirement plans in 
Illinois.
    For comparison purposes, please note that the private sector has no 
equivalent percentage funding target, but is subject to additional 
minimum contribution requirements if the funded level falls below 90%.
    Adopting a statutory payment plan for the state pension systems was 
needed. The 50-year payment plan, however, was structurally 
unaffordable when it was enacted though. First of all, it incorporated 
a 15 year ramp-up period, which increased contributions over a period 
of 15 years from a starting level that was arbitrary and significantly 
less than the amount needed to keep the unfunded liability from 
increasing, thereby further increasing the unfunded liability. Thus the 
state was guaranteed to experience a growing unfunded liability into 
the future.
    Contributions for years after 2010, although determined as a 
percent of pay, are also not sufficient to pay normal cost and interest 
on the unfunded liability until around 2034. Therefore, as a result of 
the 50-year payment plan, the unfunded liability was actually projected 
to grow from the 6/30/95 level of $19.5 billion to as much as $78 
billion by 2034 before it finally begins to reduce to $53 billion in 
2045.
    The fact that the 50-year payment plan called for continued 
underfunding for 40 years until 2035, with the underfunding being paid 
back at an 8.5% interest rate, caused the annual contribution schedule 
to quickly become unaffordable. Both the payment plan structure and 
high interest cost of the liability required a full examination of how 
to resolve this decades long structural issue.
    The 90% funded target for a state pension plan represents a 
reasonable and appropriate funding target. The Office of Management and 
Budget concurs with the majority report of the Advisory Commission on 
Pension Benefits (established by Public Act. 94-4) which recommends a 
series of changes needed to attain a 90% funded ratio for state pension 
systems. (See recommendations of Advisory Commission Report below.)
Governor's Pension Reform Plan
    The first step taken by the Governor to address these structural 
issues was to provide the state pension systems with a cash infusion 
and reduce the states pension debt. During June of 2003, the state 
issued $10 billion of Pension Obligation Bonds, all of which, except 
for $500 million which was used to cover issuance costs and initial 
debt service payments, was paid into pension systems. Of this $10 
billion total, $7.3 billion was disbursed to the pension systems as an 
additional state contribution over an above any annual contribution 
requirements. This additional cash infusion on July 3, 2003 immediately 
reduced the pension system's unfunded liability from $43 billion to 
approximately $36 billion, and increased the system's funded ratio from 
49% as of June 30, 2003 to over 57% literally overnight. (With 
investment earnings, the funded ratio actually improved to over 60% by 
June 30, 2005.)
    With this single action, the security of the members and retirees' 
pensions improved significantly. This reduction in liability was never 
anticipated or included in the 50-year payment plan.
Public Act 94-4
    Deloitte Consulting LLP, (the consulting actuary to the Governor's 
Pension Commission and the Governor's Office of Management & Budget) 
reports that, of several estimates prepared by different actuaries, the 
most appropriate, reasonable and complete estimate of the net savings 
associated with Public Act 94-4 is a projected reduction in the 2045 
actuarial accrued liability of approximately $44 billion (or 8%), as 
well as a reduction in state contribution requirements of approximately 
$53 billion over the next 40 years.
    The Governor's management and budgetary actions have resulted in 
the reduction of headcount to its lowest level in more than 30 years. 
In addition to the annual payroll savings this headcount reduction 
effort has generated, SERS, in their 6/30/05 actuarial valuation, 
recognized savings of approximately $5 billion in state contribution 
requirements between fiscal year 2006 and 2045 as a result of this 
effort. This $5 billion contribution savings is in addition to the $3 
billion discussed above.
Governor's Pension Reforms
    The reforms included in Pubic Act 94-4 represent the first time 
future liabilities and benefits of the Illinois pension system have 
ever been reduced.
    In addition to the changes included in Public Act 94-4, payments to 
the State's pension systems have substantially increased in each of the 
last four year periods since fiscal 1992.
    The following table illustrates payments for the State's pension 
systems in four year periods between fiscal year 1992 and 2007:


----------------------------------------------------------------------------------------------------------------
                                                                                              Percent of general
                Fiscal year period                 Payments (billions)     Average annual        revenue fund
                                                                              payment             resources
----------------------------------------------------------------------------------------------------------------
2004--2007.......................................              $7,497               $1,874                7.29%
2000--2003.......................................              $5,818               $1,455                6.08%
1996--1999.......................................              $3,433                 $858                4.30%
1992--1995.......................................              $2,067                 $517                3.28%
----------------------------------------------------------------------------------------------------------------
Note: Payment numbers DO NOT include the additional infusion of $7.317 billion from the June 2003 Pension
  Obligation Bonds. If included, the $7.497 billion payment for the period 2004 through 2007 would be increased
  by an additional $5.829 billion ($7.317 billion net of debt service of $1.488 billion).

Advisory Commission on Pension Benefits
    As required under Public Act 94-4, the Governor's established an 
Advisory Commission on Pension Benefits. The mandate of this Advisory 
Commission on Pension Benefits (the ``Commission'') was to consider and 
make recommendations concerning changing the age and service 
requirements, automatic annual increase benefits, and employee 
contribution rate of the State-funded retirement systems and other 
pension-related issues.
    The Commission met five times between September 23 and October 27, 
2005 and recommended the following be considered by an agreed bill 
process:
     The Commission recommends that the State adopt means by 
which to dedicate revenues in excess of a specific target percentage of 
growth towards the additional funding of the pension systems when those 
targets are met, and establish a minimum when those targets are not 
met.
     The Commission recommends that if the State sells certain 
assets, then 100% of the resulting revenues should be dedicated towards 
reducing liabilities, including the Pension Systems' unfunded 
liabilities, as a component part of a broader plan to reduce those 
unfunded liabilities.
     The Commission recommends that the General Assembly 
consider creating incentives for employees to continue working beyond 
the year when they achieve maximum pension percentage as a means to 
reduce the State's pension costs.
     The Commission recommends that the General Assembly 
consider the issuance of Pension Obligation Bonds as quickly as 
practicable as a financing instrument to reduce the State's pension 
costs, as long as (1) there are favorable market conditions and (2) the 
issuance of such POBs is a component part of a broader plan to reduce 
the Pension Systems' unfunded liabilities.
     The Commission recommends that the General Assembly should 
explore new revenue sources dedicated to reducing the Pension Systems' 
debt, as a component part of a broader plan to reduce the Pension 
Systems' unfunded liabilities.
     The Commission affirms the significance of the benefit 
reforms achieved in the 2005 Spring legislative session, and also 
affirms that, at the present time, most SERS, TRS and SURS benefits and 
employee contributions are comparable to other public pension systems 
in the United States. The Commission further recommends that the 
General Assembly should regularly review, as part of the agreed bill 
process as well as their normal budgetary review process, the 
affordability of the Pension Systems' plan provisions regarding 
benefits and make an affirmative determination thereon.
    In conclusion, the 90% funded target for a state pension plan 
represents a reasonable and appropriate funding target. The Office of 
Management and Budget concurs with the majority report of the Advisory 
Commission on Pension Benefits (established by Public Act. 94-4) which 
recommends a series of changes needed to attain a 90% funded ratio for 
the state pension systems.
            Sincerely,
                                                John Filan,
                                                          Director.
                                 ______
                                 
                                  Executive Office,
                                  State Retirement Systems,
                                Springfield, IL, December 30, 2005.
Senator Jeffrey Schoenberg,
Co-Chairman, CGFA, Evanston, IL.
Representative Terry Parke,
Co-Chairman, CGFA, Schaumburg, IL.
    Dear Senator Schoenberg and Representative Parke: Public Act 88-
0503 established a funding goal for the five state pension systems with 
a 90% funding ratio by the year 2045, and to maintain the funding ratio 
thereafter. This Act also called for the 90% funding goal to be 
reviewed every five years by the Systems and the Governor's Office of 
Management and Budget.
    It is not certain why the 90% target was initially included in the 
legislation, but in view of the length of the funding plan and the 
consensus of the public funds, we would recommend this goal be raised 
to 100%. We believe the long term funding target should equal the total 
obligations, over 40 years, the increased contributions should be 
relatively small.
            Very truly yours,
                                            Robert V. Knox,
                     Executive Secretary, State Retirement Systems.
                                                Jon Bauman,
                   Executive Director, Teachers' Retirement System.
                                                 Dan Slack,
          Executive Director, State Universities Retirement System.
Appendix I. Legislative Overview
    This section of the report summarizes the major legislative actions 
that have significantly impacted the State-funded retirement systems 
since the Commission last reported on the appropriateness of the 90% 
funding target.
            2002 Early Retirement Incentive (ERI)
    Public Act 92-0566 (HB 2671) created an Early Retirement Incentive 
(ERI) Program for certain members of the State Employees' Retirement 
System (SERS) and State employees covered by the Teachers' Retirement 
System (TRS). To be eligible for the ERI, members must have been, 
during June 2002: in active payroll status; on layoff status with a 
right of recall, or receiving a disability benefit for less than 2 
years. Members were required to file the ERI application with the Board 
of Trustees prior to December 31, 2002 and leave employment between 
July 1, 2002, and December 31, 2002.
    According to SERS, 11,039 members elected to participate in the 
ERI. Of these, 10,301 were eligible to retire immediately (Option 1), 
while 738 members elected to terminate employment and receive benefits 
at a later date (Option 2). The average number of ERI months purchased 
was 58 and the average age at termination was 57 for Option 1 
participants and 48 for Option 2 participants. According to the System, 
the average cost of purchasing the ERI service credit was $11,624 per 
participant and the average total monthly benefit of all ERI 
participants was almost $2,505.
            Pension Obligation Bonds
    On April 7, 2003, Governor Blagojevich signed House Bill 2660 into 
law as Public Act 93-0002. The legislation authorized the State to 
issue $10 billion in general obligation bonds for the purpose of making 
required contributions to the five state-funded retirement systems. 
After payment of fees, commissions, and interest, a total of $9,477.3 
million was deposited into the newly-created Pension Contribution Fund 
(PCF). The act specified that the first $300 million was to be used to 
reimburse the General Revenue Fund for a portion of the FY 2003 State 
contributions to the retirement systems. In addition, the next $1,860.0 
million was reserved to reimburse GRF for all of the FY 2004 employer 
contributions to the State-funded retirement systems. The remainder of 
the POB proceeds, $7,317.3 million, was distributed to the retirement 
systems in proportion to their unfunded liabilities, as outlined in the 
chart below.

                                            PENSION OBLIGATION BONDS
----------------------------------------------------------------------------------------------------------------
                                      Pre-POB                        Post-POB      Funded ratio    Funded ratio
             System                  unfunded      POB proceeds      unfunded       before POB       after POB
                                     liability                       liability       proceeds        proceeds
----------------------------------------------------------------------------------------------------------------
TRS.............................       $23,809.0        $4,330.0       $19,478.0           49.3%           58.5%
SERS............................        10,092.0         1,386.0         8,706.0           42.6%           50.5%
SURS............................         8,311.0         1,432.0         6,879.0           53.9%           61.8%
JRS.............................           746.0           142.0           604.0           30.7%           43.9%
GARS............................           147.0            27.0           120.0           25.3%           39.1%
                                 -------------------------------------------------------------------------------
      Combined..................       $43,105.0        $7,317.0       $35,787.0           48.6%           57.3%
----------------------------------------------------------------------------------------------------------------

            P.A. 94-0004 (SB 0027)
    On June 1, 2005, Governor Blagojevich signed SB 0027 into law as 
Public Act 94-0004. The Act makes several changes to the Illinois 
Pension Code, including a reduction in the required FY 2006 and FY 2007 
State contributions to the State-funded retirement systems, as shown in 
the chart below:

                                       CERTIFIED AND PROJECTED CONTRIBUTIONS VS. PUBLIC ACT 94-0004 CONTRIBUTIONS
                                                                     [In millions $]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              FY 2006                                         FY 2007
                                                         -----------------------------------------------------------------------------------------------
                         System                              Certified                                       Projected
                                                           contributions   P.A. 94-0004     Reducation     contributions   P.A. 94-0004      Reduction
--------------------------------------------------------------------------------------------------------------------------------------------------------
TRS.....................................................        $1,058.5          $534.6          $523.9        $1,233.1          $738.0          $495.1
SERS....................................................           690.3           203.8           486.6           832.0           344.2           487.8
SURS....................................................           324.9           166.6           158.2           391.9           252.1           139.8
JRS.....................................................            38.0            29.2             8.8            44.5            35.2             9.3
GARS....................................................             5.5             4.2             1.3             6.3             5.2             1.1
                                                         -----------------------------------------------------------------------------------------------
      Total.............................................        $2,117.1          $938.4        $1,178.7        $2,507.9        $1,374.7        $1,133.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

    P.A. 94-0004 changes the funding plan created in 1994 by Public Act 
88-0593 by setting the State contribution levels for FY 2006 and FY 
2007, rather than requiring the State to make contributions based on 
actuarial calculations. In addition, the separate funding of the 
liability created by the 2002 SERS Early Retirement Incentive was 
eliminated.
    The legislation also contained several reforms that the Commission 
has discussed in previous meetings. These changes are expected to 
curtail the rate of growth in liabilities which may result in lower 
required annual State contributions over the life of the funding plan.
Background
    The Commission on Government Forecasting and Accountability (CGFA), 
a bipartisan, joint legislative commission, provides the General 
Assembly with information relevant to the Illinois economy, taxes and 
other sources of revenue and debt obligations of the State. The 
Commission's specific responsibilities include:
    1) Preparation of annual revenue estimates with periodic updates;
    2) Analysis of the fiscal impact of revenue bills;
    3) Preparation of ``State Debt Impact Notes'' on legislation which 
would appropriate bond funds or increase bond authorization;
    4) Periodic assessment of capital facility plans;
    5) Annual estimates of public pension funding requirements and 
preparation of pension impact notes;
    6) Annual estimates of the liabilities of the State's group health 
insurance program and approval of contract renewals promulgated by the 
Department of Central Management Services;
    7) Administration of the State Facility Closure Act.
    The Commission also has a mandate to report to the General Assembly 
``* * * on economic trends in relation to long-range planning and 
budgeting; and to study and make such recommendations as it deems 
appropriate on local and regional economic and fiscal policies and on 
federal fiscal policy as it may affect Illinois. * * *'' This results 
in several reports on various economic issues throughout the year.
    The Commission publishes several reports each year. In addition to 
a Monthly Briefing, the Commission publishes the ``Revenue Estimate and 
Economic Outlook'' which describes and projects economic conditions and 
their impact on State revenues. The ``Bonded Indebtedness Report'' 
examines the State's debt position as well as other issues directly 
related to conditions in the financial markets. The ``Financial 
Conditions of the Illinois Public Retirement Systems'' provides an 
overview of the funding condition of the State's retirement systems. 
Also published are an Annual Fiscal Year Budget Summary; Report on the 
Liabilities of the State Employees' Group Insurance Program; and Report 
of the Cost and Savings of the State Employees' Early Retirement 
Incentive Program. The Commission also publishes each year special 
topic reports that have or could have an impact on the economic well 
being of Illinois. All reports are available on the Commission's 
website.
    These reports are available from:
    Commission on Government Forecasting and Accountability, 703 
Stratton Office Building, Springfield, Illinois 62706. http://
www.ilga.gov/commission/cgfa/cgfa--home.html
                                 ______
                                 
    [NASRA letter submitted by Mr. Brainard follows:]

   National Association of State Retirement Administrators,
                    National Council on Teacher Retirement,
                                                     July 14, 2006.
Hon. Charles E. Grassley,
Chairman, Committee on Finance, Hart Senate Office Building, 
        Washington, DC.
Hon. Max Baucus,
Ranking Member, Committee on Finance, Hart Senate Office Building, 
        Washington, DC.
    Dear Senators Grassley and Baucus: On behalf of the National 
Association of State Retirement Administrators (NASRA) and the National 
Council on Teacher Retirement (NCTR), we are writing in reference to 
your letter dated July 10, 2006, to the Government Accountability 
Office (GAO) requesting a study of the funding status of public pension 
plans. The membership of NASRA and NCTR collectively administers State, 
territorial, local, university and statewide public pension systems 
that hold over $2.1 trillion in trust for over 18 million public 
employees, retirees and their beneficiaries.
    We appreciate your interest in the general financial health of 
State and local government defined benefit (DB) plans. We are 
concerned, however, about some of the statements made in the letter to 
the GAO, particularly those that could be misleading or are factually 
inaccurate regarding the governance, protections and financial 
condition of public employee retirement systems. It is extremely 
important that an accurate point of departure is used and proper 
metrics are employed. We welcome the opportunity to work closely with 
you and the GAO as you examine the areas outlined in your letter, and 
hope the factual points noted below and future discussions will better 
ensure a balanced study.
    For example, when discussing pensions in the private sector, the 
letter may be correct in stating that ``retirees and workers who 'play 
by the rules' all their careers now find themselves with far lower 
actual or future retirement income on which they had counted.'' 
However, that statement definitely does not apply to participants (both 
active employees and retirees) in the public pension plans represented 
by our two associations. Public DB pension plan promises made are 
promises kept. Accordingly, we do not understand the basis for the 
letter's suggestion that public employees need ``help'' in ``avoid[ing] 
the benefit losses and reduced accruals experienced by their private 
sector counterparts.'' We know of no participant in our members' plans 
who has or may ever lose any part of his or her existing retirement 
benefit.
    Indeed, unlike the private sector in which only the participant's 
accrued benefit to date is protected, in the State and local DB plan 
world the benefit formula itself is typically protected from such 
cutbacks by state constitutions, statutes, or case law that prohibit 
the elimination or diminution of a retirement benefit once it is 
granted. Thus, State and local DB plans typically guarantee not only 
the participant's accrued level of benefit but also protect future 
benefit accruals from being cut back. The implication that lack of 
coverage by the Pension Benefit Guaranty Corporation (PBGC) renders 
government employees at greater risk is a misnomer, and only serves to 
unduly alarm the participants in our members' systems. Even though 
public plans may not have the PBGC as a ``back-up source for guaranteed 
benefit payments,'' the full faith and credit of State and local 
governments has provided insurance far greater than what is provided by 
the PBGC. In fact, public employees may actually find increased comfort 
in knowing that there is no ``escape hatch'' from pension obligations 
once they are promised in the public sector. It is a misconception that 
PBGC coverage will provide any added value to the benefit protections 
already in place for State and local government employees.
    We also wish to take exception to the statement in the letter to 
GAO that ``many'' public sector DB plans are ``even more poorly 
funded'' than their private sector counterparts, and the implication 
that an untenable burden will fall on taxpayers and public employees. 
As a group, public pension plans have funded 86 percent of their 
liabilities, a figure that is expected to begin rising in the near 
future as investment gains since March 2003 are more fully incorporated 
into funding calculations. This figure is also reflective of the 
funding levels of plans covering the substantial majority of public 
pension participants. Unlike private sector plans that must rely on 
uneven employer contributions, State and local DB plans receive a 
steady stream of both employer and employee contributions that 
typically is mandated by statute. In addition, State and local 
government DB plans are long-term investors, whose portfolios are 
professionally-managed and designed to withstand short-term market 
fluctuations while still providing optimal growth potential. When 
placed in context, required contributions to public pension plans 
continue to be well within State and local governments' budgetary 
means, and even represent historically low amounts as a percentage of 
total state and local government spending and payroll.
    Finally, we are concerned with the letter's co-mingling of pension 
benefit funding with the issue of health benefits and the ``funded 
status'' of retiree health plans. We agree that adequate health care is 
essential to overall retirement security, and that health benefit 
commitments are placing significant and increasing pressure on 
government resources. However, meeting the fiscal and other challenges 
in providing healthcare benefits must not be confused with the funding 
of DB retirement plans. Retiree health benefits are handled separately 
and independently and often are not administered or funded as part of a 
government's retirement system.
    NASRA and NCTR appreciate the strong record of support that each of 
you have maintained for State and local government employee retirement 
programs. We share your interest in keeping commitments to providing a 
secure retirement for American workers, particularly those who spend a 
career delivering vital services to the public and whose retirement 
security the members of our associations guarantee. We welcome the 
opportunity to work closely with you and the GAO and hope future 
discussions and consultation will provide an objective and factually 
accurate study.
    To this end, we have attached comments recently sent to the 
President of the Federal Reserve Board of Chicago. These comments are 
intended to constructively promote sound public policy regarding issues 
with far-reaching ramifications affecting millions of working and 
retired Americans.
    We look forward to working with the GAO and are confident that when 
its study is complete, you will be reassured that the status of public 
pension plans and their funding condition is sound. Please feel free to 
call upon either one of us. We would be happy to assist you at any 
time.
            Sincerely,
                                   Jeannine Markoe Raymond,
      Director of Federal Relations, National Association of State 
                                         Retirement Administrators.
                                               Leigh Snell,
   Director of Governmental Relations, National Council on Teacher 
                                                        Retirement.
                                 ______
                                 
    [Letter of support to Messrs. Grassley and Baucus submitted 
by Mr. Brainard follows:]

          National Conference of State Legislatures (NCSL),
        American Federation of State, County and Municipal 
                                        Employees (AFSCME),
           National Association of State Treasurers (NAST),
                     American Federation of Teachers (AFT),
                   National Association of Counties (NACo),
                   Communications Workers of America (CWA),
   National Association of State Auditors Comptrollers and 
                                       Treasurers (NASACT),
                           Fraternal Order of Police (FOP),
                 United States Conference of Mayors (USCM),
   International Association of EMTs and Paramedics (IAEP),
                           National League of Cities (NLC),
         International Association of Fire Fighters (IAFF),
   International City/County Management Association (ICMA),
 International Brotherhood of Correctional Officers (IBCO),
            Government Finance Officers Association (GFOA),
       International Brotherhood of Police Officers (IBPO),
     International Public Management Association for Human 
                                       Resources (IPMA-HR),
International Union of Police Associations, AFL-CIO (IUPA),
   National Association of Government Defined Contribution 
                                   Administrators (NAGDCA),
       National Association of Government Employees (NAGE),
                      National Association of Nurses (NAN),
       National Association of Police Organizations (NAPO),
   National Association of State Retirement Administrators 
                                                   (NASRA),
 National Conference on Public Employee Retirement Systems 
                                                  (NCPERS),
             National Council on Teacher Retirement (NCTR),
                      National Education Association (NEA),
      National Public Employer Labor Relations Association 
                                                  (NPELRA),
              Service Employees International Union (SEIU),
                                                    August 2, 2006.
Hon. Charles E. Grassley,
Chairman, Committee on Finance, Hart Senate Office Building, 
        Washington, DC.
Hon. David M. Walker,
Comptroller General of the United States, U.S. Government 
        Accountability Office, Washington, DC.
Hon. Max Baucus,
Ranking Member, Committee on Finance, Hart Senate Office Building, 
        Washington, DC.
    Dear Gentlemen: On behalf of the 28 national organizations listed 
above--representing state and local governments and officials, public 
employee unions, public retirement systems, and over 20 million State 
and local government employees, retirees, and their beneficiaries--we 
are writing in reference to a July 10, 2006 letter between your offices 
regarding a study into the financial condition of State and local 
government defined benefit pension systems. The interests of our 
numerous organizations may be widely diverse, but we share in the 
desire to ensure such a study is done accurately and results in a 
balanced report, and stand ready to work with you to ensure its highest 
possible quality.
    Indeed, such a study may go a long way to correcting the many 
misperceptions that appear to exist with regard to State and local 
government retirement systems. We hope you will call upon our 
collective expertise as this study ensues, as there are fundamental 
differences between governments and businesses that result in critical 
distinctions between plans in each sector and the way in which they are 
accounted for and measured. These distinctions are often unknown or 
misunderstood. A factual study into the health of public plans must 
ensure appropriate metrics are used and must not employ a private plan 
yardstick to measure government retirement systems.
    Public plans are in sound financial condition and State and local 
governments take seriously their responsibility for paying promised 
benefits to their employees and retirees. Comprehensive State and local 
laws, and significant public accountability and scrutiny, provide 
rigorous and transparent regulation of public plans and have resulted 
in strong funding rules and levels. Public plans are backed by the full 
faith and credit of State and local governments. Additionally, a public 
plan participant's accrued level of benefits and future accruals 
typically are protected by state constitutions, statutes, or case law 
that prohibits the elimination or diminution of a retirement benefit, 
providing far greater protections that what is provided by ERISA and 
the PBGC. A greater understanding of the protections put in place by 
the governments ultimately responsible for funding these plans may 
serve to build support for these arrangements and address the erosion 
of confidence in retirement security in general.
    We also hope you will keep in mind that retiree health benefits are 
handled separately and independently and often are not administered or 
funded as part of a government's retirement system. While adequate 
health care is essential to overall retirement security, and health 
benefit commitments are placing significant and increasing pressure on 
government resources, fiscal and other challenges in providing 
healthcare benefits should not be confused with the funding of state 
and local government retirement plans. It is crucial that retiree 
health care benefits are clearly distinguished from any study into the 
financial health of public pension plans.
    When you look at State and local government pension plans, you will 
find there is a good story to tell. It is our hope that a factual and 
objective analysis might ultimately serve to strengthen retirement 
programs and build on the success many in the public sector have had in 
not only enduring market fluctuations and providing security to 
retirees, but providing stability to our financial markets, and 
distributing consistent and inflation-protected revenue streams to 
local communities as well. We are pleased to share the following 
current facts about state and local plans, which we hope you will keep 
in mind as your work progresses:
     Public pension plans are in good financial condition. As a 
group, public pension plans have funded 86 percent of their 
liabilities, a figure that is projected to begin rising in the near 
future as the three-year market shock earlier this decade is more fully 
offset by strong investment gains. This figure also is consistent with 
funding levels of plans covering the substantial majority of public 
pension participants. Unlike the contribution volatility that may exist 
in a private plan setting, State and local plans receive a steady 
stream of both employer and employee contributions that typically is 
mandated by statute.
     The bulk of public pension funding is not shouldered by 
taxpayers. When placed in context, required contributions to public 
pension plans continue to be well within State and local governments' 
budgetary means, and even represent historically low amounts as a 
percentage of total state and local government spending and payroll. 
This is because the vast majority of public plan funding comes from 
investment income. Employer (taxpayer) contributions to state and local 
pension systems over the last two decades have made up only one-fourth 
of total public pension revenue. Earnings from investments and employee 
contributions comprise the remainder. This ratio has improved over 
time. In 2004, investment earnings accounted for 77 percent of all 
public pension revenue; employer contributions were 15 percent.
     State and local retirement plan assets are professionally-
managed and provide valuable long-term capital for the nation's 
financial markets. The $2.8 trillion held in plan portfolios are an 
important source of stability for the marketplace and are designed to 
withstand short-term fluctuations while still providing optimal growth 
potential.
     State and local pension plans fuel national, state and 
local economies. Public plans distribute more than $130 billion 
annually (an amount greater than the total economic output of 22 
states) in benefits to over 6 million retirees and beneficiaries, with 
an average annual pension benefit of roughly $19,500. These payments 
are steady, continuous, in great part adjusted for inflation and 
provide a strong economic stimulus to local economies throughout the 
nation.
     Public plans are subject to comprehensive oversight. While 
private sector plans are subject solely to federal regulation, state 
and local government plans are creatures of state constitutional, 
statutory and case law and must comply with a vast landscape of state 
and local requirements, as well as industry accounting standards. These 
plans are accountable to the legislative and executive branches of the 
state; independent boards of trustees that include employee 
representatives and/or ex-officio publicly elected officials; and 
ultimately, the taxpaying public.
     Public retirement plans attract and retain the workforce 
that provides essential public services. Active public employees 
comprise more than 10 percent of the nation's workforce, and two-thirds 
are employed in education, public safety, corrections, or the 
judiciary. Retention of experienced and trained personnel in these and 
other positions is critical to the continuous and reliable delivery of 
taxpayer services.
    We share your continued interest in providing a secure retirement 
for American workers, particularly those that have spent a career in 
public service--protecting the homeland, caring for the sick, and 
educating our children. We believe many public sector systems indeed 
are innovative models that could be emulated to ensure responsible and 
prudent pension funding and management of assets. We welcome the 
opportunity to work closely with the Committee and the GAO as you 
examine State and local government defined benefit plans, and hope you 
will consult with us as this study moves forward. Please feel free to 
call upon our legislative representatives:
                                  Gerri Madrid-Davis, NCSL,
                                          Ed Jayne, AFSCME,
                                       Dan De Simone, NAST,
                                      Bill Cunningham, AFT,
                                        Daria Daniel, NACo,
                                         Rosie Torres, CWA,
                                 Cornelia Chebinou, NASACT,
                                       Tim Richardson, FOP,
                                         Larry Jones, USCM,
                    Steve Lenkart, NAGE/IBPO/IBCO/IAEP/NAN,
                                          Alex Ponder, NLC,
                                      Barry Kasinitz, IAFF,
                                        Robert Carty, ICMA,
                                 Barrie Tabin Berger, GFOA,
                              Tina Ott Chiappetta, IPMA-HR,
                                      Dennis Slocumb, IUPA,
                                       Susan White, NAGDCA,
                                        Bill Johnson, NAPO,
                            Jeannine Markoe Raymond, NASRA,
                                          Hank Kim, NCPERS,
                                         Leigh Snell, NCTR,
                                        Alfred Campos, NEA,
                                   Hope Tackaberry, NPELRA,
                                     Allison Reardon, SEIU.
                                 ______
                                 
    [GRS letter submitted by Mr. Brainard follows:]
                                                       GRS,
                                                    March 15, 2006.
Mr. Michael H. Moskow,
President and CEO, Federal Reserve Board of Chicago, Chicago, IL
    Dear Mr. Moskow: We are writing because we share your concern about 
the future of public retirement plans. Together, the authors of this 
letter have over 35 years of experience conducting surveys and other 
research related to state and local government retirement plan 
administration, benefit design, investments, actuarial valuations, and 
plan funding. Paul Zorn is Director of Governmental Research for 
Gabriel, Roeder, Smith & Company, a consulting firm that specializes in 
state and local benefit plans and provides actuarial and other services 
to over 400 public sector clients. Keith Brainard is Director of 
Research for the National Association of State Retirement 
Administrators (NASRA), a non-profit organization for directors and 
administrators of statewide retirement systems currently covering 16 
million working and retired employees.
    We read with interest your remarks to the State and Local 
Government Pension Forum on February 28. We recognize your concerns 
about public pension funding and the potentially large liabilities 
related to retiree health care benefits. We also share your concerns 
about the future of retirement benefits for millions of public 
employees, including teachers, police officers, firefighters, judges, 
and other public officials. However, we respectfully disagree with 
several of your conclusions. Our comments below are intended 
constructively, in support of sound public policy relating to an 
important issue with far-reaching ramifications affecting millions of 
working and retired Americans.
Growth of Public Pension Unfunded Liabilities
    The speech characterizes the funding of state and local retirement 
plans as a problem that will grow rapidly and ultimately reduce the 
ability of governments to fund other public programs. With regard to 
public pension plans, we believe this characterization does not 
accurately reflect the current financial status of plans that cover the 
vast majority of public employees, nor does it accurately reflect the 
reasons for the recent decline in the plans' funding condition.
    For the most part, state and local retirement plans in the U.S. are 
in good financial shape. According to the Public Fund Survey, the 
average funded ratio of large public retirement plans in the U.S. was 
88 percent in 2004, with 7 out of 10 plans at least 80 percent 
funded.\1\ While a handful of large plans do have funded ratios below 
60 percent, the overall financial health of the retirement plans 
covering the vast majority of public employees is good. To characterize 
the current state of public pension plans as ``a mess'' is to misstate 
the problem.
    The dramatic decline in domestic equity markets that occurred from 
2000 through 2002 is the single largest factor influencing the recent 
growth in unfunded liabilities for public pension plans. Prior to 2000, 
the vast majority of public plans were well funded and there was no 
talk of a pension crisis. Then, from 2000 through 2002, domestic stocks 
lost about 40 percent of their value, the largest market decline since 
the Great Depression. As a result, public plan funded ratios fell, on 
average, from a little over 100 percent to about 88 percent now. Even 
at this level, because of the way the calculations are made, accrued 
benefits based upon salary and service to date are most likely to be 
fully funded. Moreover, public plans weren't the only ones affected: 
the declines in asset values created problems for all retirement plans 
alike--public and private, defined benefit and defined contribution.
Growth in Employer Contributions
    Increased unfunded actuarial liabilities are usually amortized 
through increases in employer contribution rates. Consequently, the 
declines in the equity markets caused employer contribution rates to 
rise. To dampen the immediate impact of large, short-term market 
fluctuations on employer contributions, most public plans use asset 
smoothing techniques to gradually recognize investment gains and losses 
over three to five years. Consequently, even after the investment 
markets improved in 2003, employer contributions continued to increase.
    The good news is that the investment gains from 2003 through 2005 
are also being smoothed into the value of assets, and will likely cause 
employer contributions to stabilize. This is echoed in the recent 
Standard & Poor's report which observes, if ``funds produce adequate 
investment returns in fiscal 2006, then we may see funded ratios begin 
to stabilize.'' \2\
    Moreover, when viewed in the context of total state and local 
government spending, governments (and thus taxpayers) spent less on 
public pension plans in 2004 than they did during the mid-1990s. From 
1995 through 1997, state and local government contributions to pension 
plans were about 3.0 percent of total state and local government 
spending annually. By 2002, this had fallen to 1.9 percent, due partly 
to the smoothing in of investment gains earned during the late 1990s. 
After 2002, government contributions increased and reached 2.2 percent 
in 2004, still lower than the 3.0 percent paid in the mid-1990s.\3\
Measuring the Unfunded Liability
    The speech uses Barclays Global Investors' $700 billion estimate of 
public pension plan unfunded liabilities. We believe this figure 
significantly overstates public pension unfunded liabilities and that 
the best measure of these liabilities is provided in the actuarial 
valuations done for the plans. Using this measure, we estimate total 
current unfunded liabilities for all state and local pension plans to 
be about $385 billion, roughly half of the Barclays' estimate.
    The Barclays' estimate is based on a present value discount rate 
reflecting fixed-income securities, whereas most pension portfolios are 
composed of a diversified mix of equity and fixed-income investments, 
including public and private equities. The problem is that the present 
value calculation is intended to reflect the amount needed today that, 
when invested, would be sufficient to pay future benefits. A discount 
rate based solely on fixed-income investments would systematically 
overstate the long-term cost of benefits. Moreover, under the 
Governmental Accounting Standards Board's rules, the discount rate 
should reflect the expected long-term rate of return on plan 
investments for determining the cost of pension benefits reported in 
governmental financial reports. As discussed in GASB Statement No. 25, 
the GASB considered but rejected using the long-term bond rate as the 
discount rate for governmental pension plans.\4\
    In addition, for an unfunded liability figure to truly have 
meaning, it must be measured in the context of available assets. For 
the fourth quarter of 2005, the Federal Reserve reported that public 
pension plans held assets of $2.72 trillion,\5\ a figure that has 
surely grown in the ensuing period and that far outweighs estimates of 
unfunded liabilities. Even if policymakers made no changes to public 
pension plan designs (including to contribution rates), most public 
pension plans still would have assets sufficient to continue paying 
their promised benefits, at a minimum, for decades into the future.
Applying ERISA Rules to Public Plans
    The speech suggests that a solution to public plan funding would be 
to make the plans subject to standards similar to those in the Employee 
Retirement Security Act of 1974 (ERISA), on the grounds that this would 
make it more difficult for governments to increase pension benefits 
without identifying adequate funding. While we agree on the importance 
of funding promised benefits, we disagree that federal legislation like 
ERISA would be a solution.
    First, the current problems with private-sector pension plans 
demonstrates the weaknesses of ERISA in ensuring plan funding. As the 
GAO has pointed out, the ``current funding rules do not provide 
adequate mechanisms for maintaining adequate funding of pension 
plans.'' \6\
    Second, the cost of satisfying ERISA's complicated rules is 
considered one of the reasons for the decline in private sector pension 
plans. In 1997, the Employee Benefits
    Research Institute published a report on the rise of defined 
contribution plans in the private sector. In its discussion of the 
impact of ERISA and other legislative changes, the authors observe: 
``Many argue that new laws and regulations have raised the DB 
administrative costs enough to make DC plans more attractive to plan 
sponsors.'' \7\
    It is true that a handful of large public plans are facing funding 
difficulties and that in several cases this is a result of employers' 
unwillingness to fully fund the plans. However, to remedy this, changes 
to state laws would be more appropriate than the imposition of a one-
size-fits-all set of federal regulations. Indeed, a strong argument can 
be made that state and local government pension plans have, for the 
most part, flourished in the absence of federal controls, operating 
instead under governance structures prescribed by state constitutions, 
statutes, and case law.
    A resolution approved by NASRA in 1996 states, in part, ``public 
employee retirement systems already have in place full disclosure, 
reporting, accounting, and fiduciary standards set by state and local 
governments and, further, these systems have significantly improved 
their funding, disclosure, administration and investment management 
over the past decade; * * * federal regulation that would mandate 
certain standardized reports, actuarial and accounting analyses, and 
disclosure * * * would needlessly duplicate what is already required of 
state and local government retirement systems.'' \8\
Moving to Defined Contribution Plans
    The speech also suggests that moving to defined contribution plans 
could be a way to reduce government costs while better meeting the 
needs of workers. While we agree that defined contribution plans can be 
a useful vehicle to supplement pension benefits by encouraging 
additional employee retirement savings, we disagree that replacing 
defined benefit plans with defined contribution plans is a way to 
reduce government costs or to better meet the needs of workers.
    First, as you point out, many state and local governments have 
strong legal protections on retirement benefits--often based in the 
state's constitution. Consequently, a defined benefit plan would still 
need to be maintained (and funded) for currently covered workers. The 
new defined contribution plan would be established for newly hired 
workers at an additional cost to the government. Moreover, because the 
defined benefit plan would be closed to new hires, stricter accounting 
standards would apply, effectively increasing the annual required 
contributions to the defined benefit plan. Any savings that would 
result from this change would take 10 to 15 years to be realized.\9\
    Second, defined contribution plans have not been particularly 
successful in providing adequate retirement benefits, for a number of 
reasons, including: (1) most DC plan participants don't contribute 
enough; (2) they tend to invest conservatively which results in lower 
long-term rates of return than professionally managed assets; (3) they 
take money out when they change jobs; and (4) they spend it too quickly 
in retirement. A recent Congressional Research Service study found that 
only half of older workers in 401(k) plans had saved enough to provide 
an annual benefit of at least $5,000 from their account.\10\ By 
comparison, public retirement plans paid an average annual benefit of 
about $19,800 in 2004.\11\
    Third, defined benefit plans can be flexibly designed to meet a 
broad array of objectives for all stakeholders, including public 
employers, taxpayers, and public employees. As indicated in a 2003 
NASRA resolution expressing support for state and local defined benefit 
plans, such plans can have ``progressive changes * * * that accommodate 
a changing workforce and better provide many of the features advanced 
by defined contribution advocates.'' \12\ Indeed, many public pension 
plans have and continue to incorporate flexible features into their 
benefit structures.
Other Postemployment Benefit (OPEB) Plans
    While we believe most public pension plans are well-funded, we 
recognize this is not the case for most public OPEB plans, including 
plans for retiree health care. However, we also believe that the issues 
related to public pension and OPEB benefits should be treated 
separately. The issues surrounding OPEB funding are substantially 
different than the issues surrounding pension funding. In most cases, 
retirees and beneficiaries share in the ongoing costs of retiree health 
care through deductibles and co-pays. Moreover, in many cases, 
employers reserve the right to change the retiree health care benefit, 
and have done so by changing eligibility provisions and by requiring 
retirees to pay a greater portion of the premiums.
    Consequently, retiree health care benefits are not guaranteed in 
the same way as the pension benefits for many governments. 
Unfortunately, this will likely mean that more of the health care costs 
will be shifted to retirees, at a time when they are least able to 
afford them. However, if health care costs continue increasing at 
current rates, it won't be long before no one will be able to afford 
them. Controlling the growth of health care costs is the key to 
affording these benefits. This is an issue that goes beyond state and 
local governments.
Broader Economic Implications
    The discrepancy in retirement benefits paid through defined benefit 
and defined contribution plans raises an even broader public policy 
question: What will happen to the U.S. economy as more people retire? 
Over the next 25 years, the U.S. population age 65 and older is 
expected to double, from 37 million in 2005 (12% of total population) 
to 70 million (20% of total population) by 2030.\13\ It is likely that, 
as a result of the movement to defined contribution plans, the income 
of many of these retirees will be significantly less than their pre-
retirement income. Consequently, demand for goods and services will 
likely be significantly lower or governmental intervention of some type 
may be needed. Lower incomes could mean less economic stimulus for the 
economy, possibly for many years.
    By providing sufficient and sustainable retirement income, state 
and local defined benefit plans help to support the U.S. economy over 
the long-term. Moreover, they act as financial engines by investing 
employer and employee contributions to generate investment earnings 
that provide income to retired public employees over their lifetimes. 
Since 1982, state and local retirement plans' investment earnings have 
amounted to over $2.0 trillion, compared with total employer 
contributions of about $825 billion and total member contributions of 
$400 billion. During this period, taxpayer dollars paid 25 percent of 
the cost of public retirement benefits, with the remaining 75 percent 
coming from investment returns and member contributions.
    A 2004 working paper prepared for the Pension Research Council at 
the Wharton School estimated that the higher investment returns 
generated by public pension funds, relative to defined contribution 
returns, creates an economic stimulus of 2.0 percent of GDP, or more 
than $200 billion, annually. This stimulus is continuous and steady, as 
the dollars produced by the higher returns are distributed to retired 
public employees and their beneficiaries in every city and town across 
the nation.\14\
Steps to Improve Public Plan Sustainability
    While we believe most public plans are in good financial condition, 
we also believe there are steps that plans can take to improve their 
sustainability, especially in light of a more volatile investment 
environment. First, to reduce downside investment risk, plans should 
review their asset allocations in light of likely investment returns 
and the duration of their liabilities. Second, governments should avoid 
providing benefit increases based on plan ``overfunding'' or ``excess 
assets.'' Third, governments should consistently contribute the amounts 
necessary to fund their pension plans and, if feasible, should 
establish reserves to help ensure contributions are made during 
cyclical economic declines.\15\ Finally, to the extent benefits cannot 
be sustained, new benefit tiers should be established to provide more 
sustainable pension benefits to new hires.
    Mr. Moskow, as President of the Federal Reserve Board of Chicago, 
you are in a unique position to support sound public policy with regard 
to retirement benefits. We hope the information offered in this letter 
will be useful to you. Please let us know if you have any questions or 
would like additional information.
            Respectfully,
                                            Keith Brainard,
    Director of Research, National Association of State Retirement 
                                                    Administrators.
                                                 Paul Zorn,
 Director of Governmental Research Gabriel, Roeder, Smith & Company
                                endnotes
    \1\ The Public Fund Survey is currently the broadest and most 
detailed survey of public plans. Sponsored by the National Association 
of State Retirement Administrators and the National Council on Teacher 
Retirement, it presents information on the benefits, funding levels, 
actuarial assumptions, and investments of 127 of the nation's largest 
public plans, covering approximately 88 percent of all public employees 
covered by state and local retirement plans.
    \2\ Standard & Poor's, ``Rising U.S. State Unfunded Pension 
Liabilities Are Causing Budgetary Stress,'' February 22, 2006, p. 5.
    \3\ U.S. Census Bureau, ``State and Local Government Retirement 
Systems,'' and ``State and Local Government Employment and Payroll.''
    \4\ Statement No. 25, Financial Reporting for Defined Benefit 
Pension Plans and Note Disclosures for Defined Contribution Plans, 
Governmental Accounting Standards Board, paragraphs 135--137.
    \5\ Board of Governors of the Federal Reserve System, ``Flow of 
Funds Accounts of the United States,'' Fourth Quarter 2005.
    \6\ U.S. General Accounting Office, ``Private Pensions: Changing 
Funding Rules and Enhancing Incentives Can Improve Plan Funding,'' 
October 29, 2003, Summary.
    \7\ Employee Benefit Research Institute, ``Defined Contribution 
Plan Dominance Grows Across Sectors and Employer Sizes, While Mega 
Defined Benefit Plans Remain Strong: Where We Are and Where We Are 
Going,'' 1997, p 30.
    \8\ National Association of State Retirement Administrators, 
Resolution 1996-04, available at: http://www.nasra.org/resolutions.htm
    \9\ Los Angeles County Employees Retirement Association, 
``Proposals to Close Public Defined Benefit Plans,'' March 16, 2006. 
The study estimated that the County's DB plan annual contribution rate 
would increase by 3.66% ($206 million) if employees hired after July 1, 
2007, were required to join a DC plan. While the contribution rate 
would gradually decline over time, the County would have to wait until 
2018 to see any savings in DB plan costs as a result of the change.
    \10\ Patrick J. Purcell, ``Retirement Savings and Household Wealth: 
A Summary of Recent Data,'' Congressional Research Service, December 
11, 2003.
    \11\ U.S. Census Bureau, ``State and Local Governments Public 
Employee Retirement System Survey,'' 2004. Average calculated by 
authors.
    \12\ National Association of State Retirement Administrators, 
Resolution 2003-08, available at: http://www.nasra.org/resolutions.htm
    \13\ Board of Trustees, Federal Old-Age and Survivors Insurance and 
Disability Insurance Trust Funds, 2005 Annual Report, p. 77.
    \14\ Gary Anderson and Keith Brainard, ``Profitable Prudence: The 
Case for Public Employer Defined Benefit Plans,'' PRC Working Paper 
2004-6, Pension Research Council, The Wharton School, 2004.
    \15\ For a concise summary of steps that state and local 
governments can take to help ensure their plans are properly funded, 
see the Government Finance Officers Association's recommended practice: 
``Funding of Public Employee Retirement Systems'' at: http://
www.gfoa.org/documents/persfundingrp.pdf
                                 ______
                                 
    [Key facts benefits information sheet submitted by Mr. 
Brainard follows:]

    Key Facts Regarding State and Local Government Defined Benefit 
                            Retirement Plans

    Public Pension Plans are in Good Financial Condition. As a group, 
state and local pension systems have nearly 90 cents for each dollar 
they owe in liabilities. These assets are professionally managed and 
invested on a long-term basis using sound investment policies. As shown 
on the chart below, the $2.6 trillion (in real assets, not IOU's) held 
by these plans are an important source of liquidity and stability for 
the nation's financial markets.


    The Bulk of Public Pension Benefit Funding is NOT Shouldered by 
Taxpayers. Employer (taxpayer) contributions to state and local pension 
systems over the last two decades have made up only one-fourth of total 
public pension revenue. Earnings from investments and employee 
contributions comprise the remainder. This ratio has improved over 
time. In 2004, investment earnings accounted for 77 percent of all 
public pension revenue; employer contributions were 15 percent. Unlike 
corporate workers, most public employees are required to contribute to 
their pension plans. The chart below summarizes the sources of public 
pension revenue from 1983 through 2004.


     Public Retirement Plans Attract and Retain the Workforce 
That Provides Essential Public Services. There are more than 20 million 
working and retired state and local government employees in the U.S. 
Retired public employees live in virtually every city and town in the 
nation (90 percent stay in the same jurisdiction where they worked). 
Active public employees comprise more than 10 percent of the nation's 
workforce, and two-thirds are employed in education, public safety, 
corrections, or the judiciary. Retention of experienced and trained 
personnel in these and other positions is critical to the continuous 
and reliable delivery of public services.
     State and Local Pension Plans are an Integral Component of 
National, State and Local Economies. Public plans distribute more than 
$130 billion annually (an amount greater than the total economic output 
of 22 states) in benefits to over 6 million retirees, disabilitants and 
beneficiaries, with an average annual pension benefit of roughly 
$19,500. These payments are steady and continuous and provide a strong 
economic stimulus to local economies throughout the nation. A 2004 
study for the Wharton School Pension Research Council found state and 
local government pension distributions contribute 2.0 percent more to 
GDP (over $200 billion) than if they had been invested in self-directed 
401(k)-type retirement accounts.
     State and Local Plans are Subject to Comprehensive 
Oversight. While private sector plans are subject solely to federal 
regulation, state and local government plans are creatures of state 
constitutional, statutory and case law and must comply with a vast 
landscape of state and local requirements, as well as industry 
accounting standards. These plans are accountable to the legislative 
and executive branches of the state; independent boards of trustees 
that include employee representatives and/or ex-officio publicly 
elected officials; and ultimately, the taxpaying public.
     State and Local Pension Funds Earn Competitive Investment 
Returns. For the 3- and 10-year periods ended 6/30/05, public pension 
funds generated strong investment returns of 9.67% and 9.15%, closely 
tracking returns generated by corporate pension plans.
                                 ______
                                 
    [NASRA response to Reason Foundation study submitted by Mr. 
Brainard follows:]

               NASRA Response to Reason Foundation Study,
                    ``The Gathering Pension Storm''

Abstract
    The Reason Foundation recommends terminating defined benefit plans 
for public employees because, Reason contends, it is inherent in DB 
plans that policymakers, operating solely in their own political 
interest, will approve higher pension benefits for their own selfish, 
short-term political gain while deferring the cost of those benefits to 
future generations. NASRA believes the Reason study makes its case by 
1) distorting the true financial condition of public pensions in 
general; 2) mistakenly extrapolating a handful of public pension 
problems onto the entire public pension community; 3) failing to 
consider the many negative consequences that would result from 
terminating DB plans; and 4) advancing arguments that reflect an 
incomplete understanding of public pension issues. Rather than 
terminating DB plans (which would have negative consequences for all 
stakeholders), solutions are available to the public pension problems 
Reason cites, chiefly by working through normal political processes at 
the state level.
Introduction
    In June 2005, the Reason Foundation published a study titled ``The 
Gathering Pension Storm: How Government Pension Plans Are Breaking the 
Bank and Strategies for Reform.'' The study is critical of defined 
benefit (DB) plans for employees of state and local government and 
calls for the replacement of DB plans with 401k-style defined 
contribution (DC) plans.
    A resolution approved in 2003 by the National Association of State 
Retirement Administrators (NASRA) states that NASRA ``supports * * * a 
defined benefit program to provide a guaranteed benefit and a voluntary 
defined contribution plan to serve as a means for employees to 
supplement their retirement savings * * * and NASRA supports 
progressive changes within this prevailing system of retirement 
benefits in the public sector, either within the defined benefit plan 
or through supplementary plans, that accommodate a changing workforce 
and better provide many of the features advanced by defined 
contribution advocates.'' \1\
    Flexibility of design is a central feature of DB plans. A DB plan 
can be designed to achieve myriad stakeholder objectives, while 
retaining core DB plan features--a benefit that cannot be outlived, 
investment risk that is borne entirely or partly by the employer, and a 
benefit that reflects the employee's salary and length of service. 
Working within existing legislative and political processes, this 
flexibility can be incorporated into the design and governance 
structure of any public pension plan to achieve desired objectives of 
all relevant stakeholders: public employers, employees, and recipients 
of public services and other taxpayers. Indeed, design features already 
in place in public pensions around the U.S. demonstrate this 
flexibility, providing ample illustration that DB plans can attain 
objectives advanced by advocates of DC plans, while continuing to 
advance the overarching public policy objective of promoting the 
nation's retirement security.
Summary of Reason's Argument
    Reason's overarching complaint regarding DB plans for public 
employees is that they are a ``moral hazard.'' According to Wikipedia:
    In law and economics, moral hazard is the name given to the risk 
that one party to a contract can change their behavior to the detriment 
of the other party once the contract has been concluded.\2\
    For public pensions, according to Reason, this moral hazard allows 
lawmakers to grant higher pensions for current workers while deferring 
the cost of those enhanced benefits to future generations of taxpayers.
    Reason insists that state legislators and other policymakers cannot 
be trusted to make decisions regarding pension benefits, because 
elected officials will operate in their own selfish political interest 
while ignoring the long-term effects of their decisions. Reason bases 
this view chiefly on two criteria: 1) the purported poor financial 
condition of public pensions, and 2) several examples of alleged 
abusive pension practices, including pension spiking, deferred 
retirement option plans, ``air time'' purchases, and ``public safety'' 
employees' benefits expansion.
    The Reason study specifies the following examples (accompanied by 
its title from the study) of alleged public pension abuses to 
illustrate what Reason contends is the hazard of public DB plans:
     San Diego: A ``Perfect Storm'' of Financial Mismanagement
     Illinois: Mired in Pension Debt
     California: The Politics of Increasing Benefits and 
Managing Portfolios
     West Virginia: Banking on Pension Obligation Bonds
     Los Angeles County: Suffering from Pension Obligation 
Bonds and ``Chief's Disease''
     Detroit: Rising Pension Costs and a Declining Revenue Base
     Orange County, California: Ignoring the Lessons of the 
1994 Bankruptcy
     Houston: Lavish Benefits and Bad Assumptions
     Contra Costa County, California: The Costs of Unreasonable 
Assumptions
NASRA Analysis and Response
    The issue of retirement benefits for employees of state and local 
government is no small matter: state and local governments in the U.S. 
employ 16 million workers--more than 10 percent of the nation's 
workforce.\3\ These employees perform a broad range of essential public 
services, such as teaching at and supporting public schools and 
universities, policing streets, fighting fires, guarding prisons and 
jails, and protecting public health. At the end of September 2005, 
state and local retirement funds held assets of $2.66 trillion,\4\ and 
they distribute more than $130 billion annually to over six million 
retired public workers and beneficiaries.\5\
    If Reason's chief recommendation--to supplant DB plans with DC 
plans--were implemented, NASRA believes the ability of public employers 
to attract and retain qualified workers would be impaired, as would the 
retirement security of millions of state and local government 
employees.
    NASRA believes the arguments Reason presents in favor of 
terminating DB plans are flawed in at least four ways:
    1. Reason distorts the true financial condition of public pensions 
in general and the ramifications of pension plan ``underfunding.''
    2. Reason mistakenly extrapolates a handful of public pension 
problems onto the entire public pension community.
    3. Reason fails to consider the many negative consequences that 
would result from terminating DB plans.
    4. Reason advances arguments that reflect an incomplete 
understanding of public pension issues.
    As elected officials operating within the framework of the U.S. and 
state constitutions, federal regulations, and case law, state 
policymakers are entrusted with responsibility for drafting and 
approving laws to establish, govern, and administer pension benefits 
for employees of state and local government. Reason's belief that 
elected officials cannot be trusted to make decisions regarding public 
pension benefits is an indictment of our nation's entire governance 
structure, one that is based on representative democracy. If, as Reason 
alleges, our own elected officials are so beholden to narrow special 
interests that they cannot be trusted to make decisions for the greater 
good, then our system of government is imperiled.
    State legislators and governors are elected to make decisions that 
have long-term consequences. Such decisions include those regarding 
development of roads and highways, establishment of educational 
institutions, taxation and spending, the purchase and sale of real 
property, protection of natural resources, hiring public employees, and 
others.
    The nation's founders provided processes, within the legal and 
political framework, to correct problems such as some of those in the 
public pension community identified by Reason; and for use when 
citizens believe their elected officials are not making prudent 
decisions. These processes include:
     amending state constitutions and laws affecting retirement 
benefits and governance;
     elections, to vote out elected officials perceived to be 
making decisions not in the public interest, and to vote in others; 
and, in some states,
     initiative and referendum, whereby citizens and lawmakers 
can change state constitutions and laws.
    One desirable attribute of a pension benefit is that its cost, as 
much as possible, should be paid by the current generation of 
taxpayers, a concept known as ``intergenerational equity.'' 
Acknowledging Reason's concern regarding the potential conflict between 
the long-term nature of pension liabilities and the shorter time 
horizon of elected officials, Michael Peskin argues that pension costs 
can be made transparent and borne by the current generation of 
taxpayers:

          The solution to this political imbalance is to adopt a 
        rigorous and disciplined framework within which to calculate 
        liabilities and assets, and to establish policies. Such a 
        framework must make the price of options and transfer of costs 
        or risks to future generations transparent. It thus includes a 
        comprehensive stochastic model of the plan going forward many 
        years with explicit modeling of investment, funding and benefit 
        policies. The core economic cost is the present value of 
        contributions to fund the appropriate level of benefits. It is 
        possible to reduce the present value of contributions with 
        appropriate investment and funding policy and tightening of 
        benefit policy to avoid the provision of expensive options.\6\

    An arrangement such as one described by Peskin exists in the State 
of Georgia, whose constitution requires that public retirement plans 
remain actuarially sound:

          It shall be the duty of the General Assembly to enact 
        legislation to define funding standards which will assure the 
        actuarial soundness of any retirement or pension system 
        supported wholly or partially from public funds and to control 
        legislative procedures so that no bill or resolution creating 
        or amending any such retirement or pension system shall be 
        passed by the General Assembly without concurrent provisions 
        for funding in accordance with the defined funding 
        standards.\7\

    Pursuant to this clause, Georgia statute requires that:
     Pension legislation with a fiscal effect may be introduced 
only in the regular session of the first year of the term of office in 
the General Assembly, and passed only during the regular legislative 
session of the second year of the term of office of General Assembly 
members.\8\
     Retirement legislation with a fiscal effect may not leave 
its committee or be considered by the House or Senate unless its 
actuarial cost has been determined.\9\
     First-year funding for retirement bills with a fiscal 
effect must be appropriated in that year, or the bill becomes null and 
void.\10\
     The state must maintain minimum funding standards for its 
pension plans and each year must contribute the pension plan's normal 
cost plus the amount needed to amortize the unfunded liability.\11\
    The Employees' Retirement System and Teachers' Retirement System of 
Georgia are among the best-funded public pension plans in the nation, 
with costs and benefits near the national median.\12\
I. Reason Distorts the Financial Health of Public Pension Plans
    The Reason study points to public pension funds' combined unfunded 
liabilities--currently around $340 billion--as evidence of an ``ominous 
storm cloud'' of public pension costs. Yet Reason never places this 
figure into context. As another form of government debt, the absolute 
dollar value of an unfunded liability, by itself, does not reveal much. 
To have real meaning, an unfunded liability must be compared with the 
resources--current and future--available to retire the obligations. 
These resources usually take the form of assets and future revenue 
streams of state and local governments that sponsor pension benefits.
    Based on these measures, as a group, public pension funds are in 
reasonably good condition:
     According to the most recent available information, public 
pension plans in the U.S. have combined actuarial assets of 
approximately $2.48 trillion and actuarial liabilities of $2.82 
trillion, for an aggregate funding level of around 88 percent. Although 
this funding level is lower than it was several years ago, it is higher 
than it was for most of the last 25 years of the 20th century.\13\
     70 percent of public pension plans are funded at 80 
percent or higher.\14\
    Funding a pension benefit takes place over a long period of time, 
and by itself, an unfunded liability is not necessarily a sign of 
fiscal distress: Not every public employee will retire tomorrow or next 
year, and pension liabilities usually extend years into the future. 
This extended time frame gives pension plans time to amortize their 
unfunded liabilities, through a combination of investment earnings and 
employer and employee contributions.
    In ``The Gathering Pension Storm,'' Reason refers to sharply rising 
costs of pension plans. But as shown in Figure A, state and local 
governments spent approximately the same in FY 04 (the latest year for 
which data is available) on public pensions than they spent in the mid-
1990's, measured both as a percentage of employee payroll and as a 
percentage of total state and local government spending.
    Pension costs for some employers have risen sharply in recent 
years. In many cases, a root cause of these sharply rising contribution 
rates is the plan's design, and can be remedied with one or more design 
changes. But the idea that state and local government pension costs for 
the entire nation are spiraling out of control is not accurate.


    Although the majority of public pensions are in fairly good 
financial condition, some plans do face serious unfunded liabilities 
that will require corrective action. Unfortunately, by painting the 
entire public pension community as awash in crippling unfunded 
liabilities that are the product of self-serving legislators, Reason 
ignores the reality of the current public pension funding picture. In 
so doing, Reason's recommendation to terminate DB plans for public 
employees is based on a distorted picture of the public pension funding 
situation.
    Of those public pension plans that face serious funding problems, 
most result from legislative failure over extended periods to remit 
required contributions. States that chronically failed to remit 
required contributions enjoyed the savings that were generated by 
diverting pension contributions to other priorities. Contribution rates 
in some states declined in recent years to unprecedented levels, 
including as low as
    zero. Combined with the decline in equity values, very low or 
nonexistent contribution rates contributed to the decline. It would be 
disingenuous to call for the elimination of DB plans because they are 
expensive, in cases when a major factor contributing to their cost is 
the diversion of contributions over a period of years, or sharp 
reductions in contributions due to favorable investment gains.
II. Reason Mistakenly Extrapolates a Handful of Public Pension Problems 
        Onto the Entire Public Pension Community
    The Reason study purports to illustrate the flaws inherent in DB 
plans, in part on the basis of nine examples of alleged abuse or 
excess. According to the U.S. Census Bureau, there are more than 2,000 
public pension plans in the U.S., that provide pension and other 
benefits for more than 14 million active and 6 million retired public 
employees. Any community this large is likely to have its share of 
abuse and excess, and Reason's use of nine examples (of which five are 
in one state) to demonstrate the fundamentally flawed nature of DB 
plans, seems to lack proportionality. Every state sponsors at least one 
statewide retirement system; most states sponsor two or more. Hundreds 
of cities and towns and counties sponsor public retirement systems.
    Reason does not mention the hundreds of public pension plans that 
are working well on behalf of millions of working and retired public 
employees, public employers, and recipients of public services and 
other taxpayers. The highly diffuse and diverse regulatory structure 
overseeing the public pension community creates an environment in which 
states and cities can experiment with, design and maintain cost-
effective pension plans that meet the multiple objectives of public 
employers. For every case of public pension abuse and excess cited by 
Reason, there are many more cases of pension plans assisting, in a 
cost-effective and responsible way, public employers in providing 
essential public services. In cases of actual pension abuse and excess, 
the answer is not to get rid of the plan, but to change the plan's 
governance structure and benefit design. If necessary, this can be 
achieved through changes to the constitution, statutes, and elected 
officials.
    Reason makes sweeping conclusions about the entire public pension 
community on the basis of a rather small subset of that community, a 
subset that is quite limited geographically and politically.
III. Reason Ignores Many Likely Effects of Its Recommendation to 
        Terminate DB Plans
    Like other employers, public employers must compete in the labor 
market for a limited pool of talent, and a DB plan has long been a 
central component of the compensation package for most public 
employees. Removing the DB plan from public workers' compensation would 
have consequences for all stakeholders: employers, employees, and 
taxpayers. Yet Reason pays little heed to these consequences, making 
its recommendations in a vacuum, as if switching from one plan type to 
another would be seamless and without consequence. In fact, switching 
plan types would involve costs and have consequences.
    A majority of public sector positions are best served when those 
who occupy them are career-oriented or lat least remain in them for ten 
years or longer. Two-thirds of public employees are classified by the 
U.S. Census Bureau as judicial, firefighters, police officers and 
support, corrections, or educational.\15\ The taxpaying public is well-
served when individuals remain in these positions for an extended 
period--long enough to enable the employer and taxpayers to realize the 
investment made to train the employee and to serve the public through 
their knowledge and experience. Moreover, taxpayers are well-served 
when public sector positions are filled with skilled and qualified 
personnel, rather than inexperienced workers who are learning on the 
job. Retention of qualified workers is a primary reason that public 
sector employers continue to offer a DB plan--it creates an incentive 
for career-oriented workers to remain in their position.
    Unfortunately, Reason's study does not acknowledge the role DB 
plans play in attracting and retaining public employees; nor does the 
study consider the effects on public employers of implementing Reason's 
main recommendation: the replacement of DB plans with DC plans.
    Reason also does not contemplate the effects on public employers--
school districts, police departments, fire departments, etc.--of losing 
what may be the strongest incentive for public workers to stay on the 
job. In the absence of a DB plan, public employers will be required to 
make adjustments in their compensation package. Such adjustments might 
include improved working conditions, better benefits, or higher pay. It 
is unrealistic to think that the behavior of current and future public 
employees will not change in the wake of a change to their compensation 
package. All else held equal, if the DB plan is taken away, other 
compensation costs would need to rise.
    The Reason study does not acknowledge the improved financial 
security enjoyed by millions of working and retired public employees 
from having a DB plan. Studies have documented the crisis the nation 
faces as millions of workers approach retirement with savings far short 
of required levels. Many Americans face the real prospect of outliving 
their retirement assets. Some indigent elderly will turn to the state, 
as the provider of last resort, to meet their basic needs. Yet the 
Reason study is silent on this scenario, which is a real possibility 
were Reason's recommendation to be implemented.
    A 2004 Pension Research Council paper identified the economic 
effects of public pension funds. These effects include the investment 
of pension fund assets in venture capital projects; the added liquidity 
and stability added by public pension assets to financial markets; and 
the stimulus provided to the nation's economy as a result of the 
additional assets produced by higher investment returns generated by 
public pension funds.\16\ If public DB plans were terminated, the 
economic stimulus they provide to every city and town in the nation 
would diminish, slowly but surely, as the effects of higher investment 
returns from professionally-invested DB assets fades away. A generation 
of public employees relying on self-directed retirement accounts would 
result in fewer assets available for retirement and declining salutary 
effect on local economies.
    In an analysis of public employers exploring switching to DC plans, 
bond rating agency Standard & Poor's recognized the potential risks of 
closing off DB plans in favor of DC plans:

          The decision on pension plan design for a governmental entity 
        should include a very long-term view of the welfare of 
        employees: They must be given the tools to build sufficient 
        resources to live during retirement, including the combined 
        resources of pensions, Social Security (if applicable), and 
        personal savings. If this strategy fails to meet expectations, 
        the result could be that government retirees will require some 
        form of public assistance at a point in the future. These 
        unanticipated increased employer costs to make up for below-
        average retiree wealth could offset, partially or totally, the 
        earlier direct benefits from lower, more predictable 
        contribution rates gained through a DC conversion.\17\

    S&P concluded its analysis by warning that converting to a DC plan 
is no silver bullet for challenges facing state and local governments:

          From a credit perspective, a DC conversion plan cannot be 
        automatically considered a positive factor in that the effects 
        must be weighed over a very long time period. The benefits of a 
        conversion to a government's cost structure in the early years 
        could be undone in the later years if retiree income 
        expectations are not realized and unexpected costs show up 
        elsewhere. While the private sector has had some success with 
        the DC model, the historical experience in the public sector is 
        really too new to prove that it will be effective. When 
        employers are considering the DC option, overall public 
        policies concerning the well being of employee citizens and 
        fiscal policies must be integrated into a monolithic policy for 
        long-term retirement income stability.\18\
IV. Reason Advances Arguments That Reflect an Incomplete Understanding 
        of Public Pension Issues
    Many arguments advanced in the Reason study indicate an incomplete 
understanding of public DB plans. Following are some statements made by 
Reason in its study, followed by a NASRA clarification or correction.

    Reason on employer contributions to public pension plans: 
``Ballooning pension obligations necessarily draw resources away from 
other quality-of-life priorities like transportation, education, and 
public safety. In California, for instance, the state's obligations to 
its government-employee pension system have skyrocketed from $160 
million to $2.6 billion annually just since 2000.''


    NASRA: Reason's reference to ``ballooning'' pension obligations is 
based on a highly selective use of statistics which does more to 
confuse than clarify the issue of employer contributions. Figure B 
(above) depicts a longer and more comprehensive data set of the 
employer contribution rate for the largest group of California state 
employees. This rate is representative of employer contribution rates 
for other large groups of CalPERS participants.
    As the chart shows, due chiefly to robust investment earnings, the 
contribution rate fell sharply in fiscal year 1999, remaining well 
below historic averages through fiscal year 2003, when the effects of 
the decline in equity markets and the cost of recent benefit 
improvements were more fully recognized actuarially. Yet to make its 
argument that pension obligations are ``ballooning,'' Reason pointed 
only to the low and what is likely to be the high points of California 
state contributions to CalPERS. Reason excluded other information that 
would have presented the issue in a more complete and accurate context.
    Presenting this issue in a fuller and more fair context would 
mentioned the savings enjoyed by plan sponsors--the state and many of 
its political subdivisions--when contribution rates were low. 
Unfortunately, to make its point that benefit obligations are 
``ballooning,'' the Reason study focuses exclusively on two narrowly-
captured data points, while ignoring other relevant data.
    A defining attribute of DB plans is that their design can be 
modified to reach any of multiple objectives. To reduce volatility in 
its contribution rates, the CalPERS Board of Administration in 2005 
changed its method for calculating the actuarial value of assets, by:
     increasing the period over which investment gains and 
losses are recognized (a recommendation made by Reason in its study) 
and,
     widening the permissible corridor of the actuarial value 
of assets to market value of assets.
    Criticism of CalPERS contribution rates should be tempered by the 
fact that for several years, California taxpayers contributed 
relatively little, on a historic basis, to the pension plan for state 
employees and for many employees of local governments in the states. 
The reforms implemented by CalPERS are intended to smooth future year-
to-year changes in the contribution rate.
    Other changes public pensions have effected in recent years to 
moderate contribution rates include:
     Modifying the plan design to reduce pension ``spiking,'' 
which occurs when an employee's salary rises sharply in the period 
immediately preceding retirement, resulting in a higher pension 
benefit? Several states in recent years have implemented anti-spiking 
provisions.
     Establishing a minimum contribution rate. This prevents 
contribution rates from declining to extremely low levels, including 
zero, which occurred at a number of plans around the nation in the wake 
of investment market gains during the late 1990's.
     Placing a limit on the annual increase in contribution 
rates, such as to one percent, a policy in effect for pension plans in 
Iowa and Kansas.
     Establishing floating amortization periods. This moderates 
the funding level by extending the amortization period during times of 
underfunding and shortening it as the funding situation improves.
     Linking cost-of-living adjustments to investment returns. 
Establishing a relationship between COLA's and investment earnings 
allows all participants--employers, actives, and annuitants--to benefit 
when investment returns exceed assumptions and to bear some of the 
burden of lower-than-expected market returns, either through higher 
contribution rates or by a smaller COLA.

    Reason on participant access to retirement funds: ``Under defined-
benefit plans, employees have limited ability to access their money if 
they terminate employment before the regular retirement age. Also, 
benefits cannot be ``rolled over'' if the employee switches jobs, and 
usually cease upon the retiree's death.''

    NASRA: Reason is correct in saying that DB plans restrict 
employees' access to their retirement savings. The purpose for 
providing a retirement plan is not to serve as a source of ready cash, 
but to save money for retirement. A retirement plan that allows 
participants to spend retirement savings before retirement is falling 
short of its purpose, and Reason's criticism of DB plans in this way 
seems bizarre.
    One of the chief shortcomings of DC plans is the amount of assets 
that leave the system prior to retirement. Studies consistently show 
that many DC participants borrow against their retirement savings; or 
``cash out'' when switching jobs, leaving the employee financially 
unprepared for retirement. Although Reason cites the limited access 
employees have to their retirement savings as a problem, NASRA believes 
this restriction is actually one of many advantages DB plans have over 
DC plans.

    Reason on the ability of public workers to ``roll over'' their 
retirement funds: ``(DB plan) benefits cannot be ``rolled over'' if the 
employee switches jobs, and usually cease upon the retiree's death.''

    NASRA: Reason's statement about the ability to roll over DB plan 
benefits, is simply incorrect. Most public DB plan participants are 
required to contribute to their pension benefit, and terminating 
employees are entitled to their contributions, usually with interest. 
Some public plans also allow entitle participants to some or all 
employer contributions made on the worker's behalf.
    Moreover, many public DB plans allow workers to purchase service 
accrued with another public employer and to transfer their assets and 
service credit from other plans. Those states and cities that do not 
allow service purchase may do so if they wish; contrary to Reason's 
assertion, there is nothing systemic in a DB plan that prevents DB plan 
sponsors from allowing the purchase or transfer of service accrued at 
another plan.
    Reason's contention that benefits usually cease upon the retiree's 
death is at best misleading and in the case of most plans, simply 
wrong. Public pension plans allow retirees to designate a beneficiary, 
such as a spouse, who continues to receive a benefit, should they be 
preceded in death by the retiree. In fact, it is not uncommon among 
public pension plans to require married pension participants to secure 
the written consent of their spouse to request an annuity benefit that 
does not include a benefit for the surviving spouse.

    Reason on the cause of the recent decline in public pension funding 
levels: ``(T)he central causes of the (pension) crisis are poor 
planning and decisionmaking. At the heart of the pension crisis is a 
set of incentives which create a ``moral hazard.''

    NASRA: What ``poor planning and decisionmaking'' represent to 
Reason is not clear, but it may be safe to infer that Reason is saying 
is that benefit enhancements approved by self-serving legislators are 
the primary cause of the decline in pension funding levels after they 
reached their peak in 2000.
    An analysis by consultant Gabriel, Roeder, Smith \19\ strongly 
suggested that the chief cause of the decline in public pension funding 
levels after 2000 was the decline in equity values. The combined value 
of state and local government pension funds declined from 12/31/00 to 
12/31/02 by more than $360 billion, or nearly 16 percent.\20\ Although 
benefit enhancements for public employees were approved during the past 
decade, there is no evidence that these enhancements are the primary 
factor contributing to these declines. (Public pension fund values rose 
to $2.66 trillion in September 2005, an increase of nearly 38 percent 
above their low point at the end of 2000.) \21\
    In addition, benefit enhancements for many public employees often 
are approved in lieu of salary increases. Had salary increases been 
approved instead of pension benefit enhancements, pension funding 
levels might have been marginally higher, but current salary 
obligations for public employers would be greater, possibly leaving 
public employers worse off than they otherwise would have been.

    Reason on compensation levels in the public and private sectors: 
``Supporters of pension benefit increases routinely argue that they are 
needed to attract a high-quality workforce that is paid less than their 
private-sector counterparts. Unfortunately, this claim is simply not 
true. According to the Bureau of Labor Statistics, the average wage for 
state and local government employees is $23.52 per hour, compared with 
$16.71 per hour for private-sector employees. When benefits (including 
pensions) are included in the calculation, state and local government 
employee compensation jumps to $34.13, compared to total private-sector 
compensation of $23.41. In other words, even when private employees' 
benefits are included, they still make less than the raw wage of state 
and local government employees.''

    NASRA: Some public sector workers earn salaries that are higher 
than their private sector counterparts; many earn salaries that are 
lower. Broad comparisons of private and public sector salaries and 
benefits often overlook the fact that most public employees work in 
professional positions that require higher levels of education or 
physical risk than those in the private sector workforce. For example, 
more than one-half of all state and local government employees work in 
education. These are school teachers and administrators, librarians, 
college professors and higher education staff. Many other public 
employees work as firefighters, police officers, and correctional 
officers, whose responsibilities entail significant physical risk and 
have few comparable positions in the private sector.
    When possible, most positions in the public sector--education and 
public safety in particular--should be filled with career-oriented 
workers. It makes good public policy to encourage professionals such as 
these to remain in their positions long enough not only to realize a 
return on the investment public employers have made in their training, 
but also to enjoy the benefits of their experience and qualifications. 
Allowing qualified public employees to leave their position due to 
compensation shortfalls is disruptive to the orderly and effective 
delivery of public services and results in added costs to train new 
workers.
    Finally, the BLS study cited by Reason does not acknowledge that 
most public employees are required to contribute to their pension 
benefit; the median contribution rate for Social Security-eligible 
public employees is five percent. State and local government employee 
contributions account for approximately 12 percent of all public 
pension revenue.

    Reason on the effects of changing corporate pension policy: ``The 
enactment of ERISA and the 1978 Revenue Act would prove to be a pivotal 
change in pension history. Since their passage, the private sector has 
seen a steady trend toward ``401(k)'' and similar ``defined 
contribution'' plans * * * and away from defined-benefit plans. Now 
even government pension systems are re-evaluating defined-benefit plans 
in favor of defined contribution plans.''

    NASRA: Despite good intentions to strengthen corporate DB plans, 
the passage by Congress of ERISA in 1974 and subsequent changes to the 
tax code, has contributed to the steady decline in the percentage of 
American workers with a DB plan. Many of these DB plans have been 
abandoned in lieu of DC plans. Unfortunately, as workers' reliance has 
shifted from DB to DC plans, the nation's overall retirement security 
has declined.
    Yet advocates of supplanting DB plans with DC (like Reason) justify 
their view partly on the basis that relatively few DB plans remain in 
the private sector.
    Although many corporate DB plans have been frozen or terminated, a 
majority of the Fortune 1000 continue to provide a DB plan to their 
workers.\22\
    More importantly, the relevant issue is not whether the public 
sector should abandon DB plans because many in the private sector have 
done so, but rather, whether it is prudent for state and local 
governments to pursue a policy that is known to diminish the retirement 
security of its employees and the nation as a whole. A DC plan, by 
itself, is a poor vehicle for delivering retirement assets and 
promoting retirement security. In fact, the primary DC plan type in the 
U.S., the 401(k) plan, was created not as a retirement savings tool, 
but as a tax shelter that was subsequently adopted by private sector 
employers (and a few in the public sector).\23\ The mere fact that many 
employers in the private sector have embraced a DC plan does not mean 
that switching public sector workers to a DC plan is a good idea.
    Reason's statement that, ``even government pension systems are re-
evaluating defined benefit plans in favor of defined contribution 
plans,'' paints a distorted picture of reality. Although some states 
have given some groups of public employees the opportunity to choose a 
DC plan, and two states (Alaska and Michigan) limit retirement coverage 
to large groups of their public workers to DC plans, far more 
legislative activity in recent years has surrounded modifications to 
existing DB plans, rather than incorporating DC plans.
    Indeed, states and other sponsors of public pension plans are 
taking advantage constantly of the remarkable flexibility offered by DB 
plans to achieve key employer objectives.\24\ This flexibility takes 
the form of hybrid pension plans, service purchase options, increased 
portability features, return-to-work provisions, and others. Despite 
extensive consideration given to which type of retirement plan they 
should use, most public employers have recognized that they are better 
off continuing to work within the prevailing framework of DB plans than 
to switch to a retirement benefit structure that is unreliable in terms 
of delivering retirement benefits and retaining qualified workers.

    Reason on investment return assumptions: ``Pension systems have 
become underfunded, in part, because investment returns are not meeting 
expectations and thus contributions are not covering costs. Moreover, 
over-optimistic expectations are not confined to just a few state and 
local governments. According to the Public Fund Survey, a survey of 
government pension plans conducted by the National Association of State 
Retired Administrators and the National Council on Teacher Retirement, 
the median investment return assumption for fiscal year 2003 was 8 
percent. Unfortunately, nationwide, the median government pension has 
only grown an average of 4.1 percent over the past five years.''


    NASRA: Reason's use of a five-year period, to the exclusion of 
other data, is selective and exclusive and borders on the disingenuous. 
According to investment consultant Callan Associates, as shown in 
Figure C, for the 10-year period ended June 30, 2005, the median public 
pension fund investment return was 9.15 percent,\25\ well above the 
public pension community's standard investment return assumption of 8.0 
percent.
    For the 20-year period ended June 30, 2005, the median public fund 
return was 10.01 percent.\26\ Pension plans are long-term operations, 
and investment returns over longer time periods, like 10 and 20 years, 
are more representative of public funds' actual results than the single 
5-year period cited by Reason (which happens to incorporate the first 
time stocks have declined 3 consecutive years since the Great 
Depression).

    Reason on pension obligation bonds: ``The idea of issuing one debt 
to pay another, particularly when issuing bonds to pay an annual 
operating expense, is poor fiscal policy. Pension obligation bonds are 
a short-term solution to a long-term problem--this is effectively the 
same as a family using a credit card to pay utilities because they 
don't have enough money at the end of the month and, in the process, 
run up credit debt with increasing minimum payments. Not only has the 
credit bailout not addressed the underlying mismatch in revenues and 
expenditures, it has also contributed to higher minimum payments (in 
the case of pension bonds, this is new debt service). At the end of the 
day, the family that follows this strategy is actually worse off. 
Elected officials must abandon the idea of pension obligation bonds and 
learn to make difficult decisions to meet their pension obligations.''

    NASRA: Reason's characterization of pension bonds as issuing one 
debt to pay another, is misleading and misrepresents the benefit of 
using pension bonds. An unfunded pension liability is a form of public 
debt. Issuing pension bonds to reduce or eliminate an unfunded pension 
liability can be a responsible course of fiscal action, as it can 
enable a pension plan sponsor to take advantage of low borrowing rates 
to reduce long-term pension liabilities.
    Issuing a pension bond is analogous to a homeowner who takes 
advantage of lower interest rates by refinancing her mortgage. A family 
that refinances their mortgage with a lower rate of interest is 
normally better off, not worse. With interest rates in recent years at 
historic lows, reducing or eliminating an unfunded pension liability 
through the use of pension bonds may well be a prudent course of 
action. Reason's characterization of pension bonds as using a credit 
card to pay utilities falsely represents the way they have been used in 
most cases. In an analysis of pension bonds, credit rating agency 
Standard & Poor's said:

          While no panacea, POBs (pension obligation bonds) are 
        basically an arbitrage play based on the premise that, as a 
        result of the bond proceeds being invested at an expected yield 
        above the cost of the bonds, net savings will be achieved by 
        the sponsor over the life of the bonds. In other words, after 
        the issuance of the POB, combined debt service plus pension 
        contribution costs will be lower than they would have been 
        without a POB. The success of this formula depends on the 
        realization of a certain investment return, which is in no way 
        guaranteed. Whether a POB succeeds or fails cannot fully be 
        evaluated until the final maturity of the bond, and it is a 
        given that some years will be winners and others losers. The 
        bad years may add short-term fiscal stress to the POB issuer 
        (pension sponsor), which could be significant based on the 
        amount of leverage the POB exerts. With most POBs having been 
        issued over the past 10 years or so, it would be premature to 
        pronounce them an unqualified success (or failure). The best 
        that can be said to date is that POB results have been mixed, 
        with some having met or exceeded expectations while others have 
        come up short based largely on the vicissitudes of market 
        timing.'' \27\

    Reason on public employee preferences for pension plan types: 
Referring to Nebraska's shift from a DC plan to a cash balance plan, 
Reason says: ``Tellingly, however, there has not been an exodus from 
the defined-contribution plan. In fact, approximately 70 percent of the 
members of the defined-contribution plan chose to remain under that 
plan when the cash-balance plan went into effect. If the defined-
contribution plan was so disastrous, as critics claimed, many more 
people would have switched out of the plan. Apparently, people value 
the freedom to make their own retirement investment decisions.'' Also, 
referring to choice in the Florida Retirement System, Reason says, 
``(N)ew employee participation in the defined contribution plan has 
increased from 8 percent in mid-2003 to 19 percent for the first half 
of 2004.''

    NASRA: Just as there was no exodus from Nebraska's DC plan, neither 
was there an exodus from DB plans in any of the five states Reason does 
not identify that have extended to some of its workers the opportunity 
to switch from a DB to a DC plan. Once again, Reason selects its 
comparative examples carefully, to the exclusion of other relevant 
examples.
    Two common themes have emerged in each state where employees have 
been given a choice of retirement plans: 1) Most employees do not 
actually make a choice of retirement plan unless required to do so; and 
2) of those who do express a preference, the vast majority elect the DB 
plan. Contrary to Reason's reasoning, Nebraska's experience of most 
workers not making a decision does not indicate employee preference to 
``make their own retirement investment decisions.'' Rather, this result 
is consistent with results in other states, which suggest employees--
for whatever reason(s)--do not make a decision regarding their 
retirement benefit.
    In Michigan in 1996-97, during a period of rising stock markets, 
fewer than six percent of state employees elected to switch to the DC 
plan. Similarly, in Florida in 2001-02, when given a choice, 
approximately five percent elected to participate in the DC plan. New 
workers in Ohio, like those in Florida, are permitted to choose their 
retirement benefit. Since the inception of choice in 2001, around five 
percent have elected the DC plan. South Carolina and Montana 
experienced similar results. No empirical evidence exists to support 
Reason's contention that a meaningful percentage of workers prefer a DC 
plan over a DB plan; in fact, just the opposite appears to be the case.
What Are the Real Issues?
    The issue of retirement benefits for public employees is not 
whether there are excesses or problems with DB plans. Any community 
this large, with this much money involved, is bound to have some 
problems. The real issue is how best to resolve these problems, how to 
avoid them in the future, and what retirement plan design best meets 
the multiple and sometimes conflicting objectives of public employees, 
public employers, and recipients of public services. Reason's 
solution--to terminate DB plans and replace them DC plans, is not only 
simplistic but also is likely to create more problems than it solves, 
problems that the Reason study largely ignores.
    NASRA's response to the Reason study has attempted to clarify some 
of the issues raised by Reason's paper and to identify solutions that 
will yield better results than if Reason's recommendation--to supplant 
DB plans with DC plans public employees--were implemented. Our nation's 
legislative and political structure, complete with mechanisms to change 
and correct existing policies, enables those who wish to do so to 
address Reason's concerns, without threatening the retirement security 
of the nation's public employees or the ability of public employers to 
attract and retain qualified workers.
    Rather than eliminating DB plans for public employees, the focus of 
the retirement plan debate should center on such issues as:
     What type of pension plan can best meet the objectives of 
key stakeholders--public employers, recipients of public services, 
taxpayers, and public employees?
     How can policymakers increase public pension 
intergenerational equity and increase transparency of public pension 
plan costs?
     How can the many positive attributes of defined benefit 
plans be extended to workers outside the public sector?
    NASRA believes that a fair and factual analysis of these questions 
will lead to some form of a DB plan.
                                endnotes
    \1\ National Association of State Retirement Administrators, 
``NASRA Standing Resolutions No. 2003-08.''
    \2\ Wikipedia, www.wikipedia.com
    \3\ U.S. Bureau of Labor Statistics, ``The Employment Situation,'' 
December 2005
    \4\ U.S. Federal Reserve Board, ``Flow of Funds,'' Third Quarter 
2005
    \5\ U.S. Census Bureau, ``2004 State and Local Government Employee 
Retirement Systems.''
    \6\ Michael Peskin, ``Asset/Liability Management in the Public 
Sector.'' In Pensions in the Public Sector, (1999) ed. Mitchell and 
Hustead, Pension Research Council, Philadelphia, University of 
Pennsylvania Press
    \7\ Georgia State Constitution, Article III, Sec. X, Paragraph V
    \8\ Unannotated Georgia Code, Sec. 47-20-34
    \9\ ibid.
    \10\ ibid., Sec. 47-20-50
    \11\ ibid., Sec. 47-20-10
    \12\ Public Fund Survey, www.publicfundsurvey.org, National 
Association of State Retirement Administrators and National Council on 
Teacher Retirement
    \13\ Public Fund Survey, www.publicfundsurvey.org, National 
Association of State Retirement Administrators and National Council on 
Teacher Retirement
    \14\ ``Summary of Findings for FY 04,'' Public Fund Survey, NASRA 
and NCTR
    \15\ U.S. Census Bureau, 2004 Public Employment Data, State and 
Local Governments
    \16\ Anderson and Brainard, ``Profitable Prudence: The Case for 
Public Employer DB Plans,'' In Reinventing the Retirement Paradigm, 
(2005) Pension Research Council, Philadelphia, Oxford University Press
    \17\ Parry Young, Standard & Poor's, ``Public Employers Are 
Considering a Switch to Defined Contribution Pension Plans,'' November 
2005
    \18\ Parry Young, Standard & Poor's, ``Public Employers Are 
Considering a Switch to Defined Contribution Pension Plans,'' November 
2005
    \19\ Paul Zorn and Norm Jones, Gabriel, Roeder, Smith and Co., 
``Questions About the Future of Public Pension Plans: Short-term 
Problems or Structural Failures?,'' in Public Sector Pensions: Current 
Challenges and Future Directions, Harvard Law School, October 2005, 
http://www.law.harvard.edu/programs/lwp/Zorn-
Jones%20(POWER%20POINT).pdf
    \20\ U.S. Federal Reserve Board, ``Flow of Funds,'' Third Quarter 
2005
    \21\ ibid.
    \22\ ``Recent Funding and Sponsorship Trends Among the Fortune 
1000,'' Insider, by Watson Wyatt, June 2005
    \23\ Employee Benefits Research Institute, ``History of 401(k) 
Plans: An Update,'' February 2005
    \24\ National Conference on State Legislatures, ``Pensions and 
Retirement Plan Enactments in 2005 State Legislatures,'' and preceding 
years, http://www.ncsl.org/programs/fiscal/pensun05.htm
    \25\ Callan Associates, ``Returns for Periods Ended 6/30/05''
    \26\ ibid.
    \27\ Parry Young, Standard & Poor's, ``Managing State Pension 
Liabilities: A Growing Credit Concern,'' January 2005
                                 ______
                                 
    [Slides presented during Mr. Filan's statement follow:]
    
    
    
                                 
