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Illinois Pension Plan Blames Low State Contributions for Serious Underfunding

The Teachers’ Retirement System of the State of Illinois recorded a drop in funded ratio to 40.6% and an increase in unfunded liability to $55 billion this year.

(October 31, 2013) — The Teachers’ Retirement System (TRS) of the State of Illinois recorded further underfunding despite a higher rate of return on investments during the 2013 fiscal year.

According to its latest report, TRS’s unfunded liability rose to $55.73 billion from $52.08 billion at the end of fiscal year 2012. The increase also dragged down its funded ratio—to 40.6% as calculated under state law and 42.5% using market value of its assets.

A silver lining was found in its investment returns, as the plan gained a 12.8% rate of return this year. It also recorded an 8.7% rise in total assets to $39.5 billion from $36.3 billion last year.

TRS Executive Director Dick Ingram stressed the importance of long-term investment performance in their financials, as the plan maintains relationships with current teachers and retirees for decades. 

“It’s important to note that the TRS 30-year rate-of-return at the end of fiscal year 2013 was 9% per year on average,” Ingram said in the report. “Our assumed return rate of 8% also is a 30-year expectation. TRS investments over time are more than right on target.”

However, Ingram said positive returns did little to mask the pension plan’s serious underfunding issues. “Despite these strong returns, TRS cannot invest its way out of the funding hole we are in,” he said.

The problem—and the solution—lies in the Illinois government, Ingram said: “This increase in the system’s unfunded liability, even with good investment results, is another wake-up call to state officials and our members that TRS long-term finances continue to head in the wrong direction.”

The report said the formula with which state contributions are calculated does not meet the requirements of standard actuarial practices commonly used in other states. Contributions, according to actuarial standards, should be $4 billion, rather than the $3.4 billion currently being paid.  

“The contribution from the state that is required by the law continues to be far short of the amount required to ensure our long-term sustainability,” Ingram said. “Without changes to the pension code to ensure sustained and adequate funding, TRS faces the very real possibility that in a few decades the system will not have enough money to pay benefits to retirees. We cannot guarantee that TRS will have enough money to pay the pensions promised to every member.”

Ingram went on to say that not only has TRS never received a full actuarial contribution from the state of Illinois since its inception in 1939, but it is owed a total of $16.9 billion since 1970. “This consistent underfunding is the primary reason that TRS carries an underfunded liability,” he said.

TRS’s underfunding issues are only the tip of the iceberg. Illinois’ public pensions are currently facing a $145 billion pension problem as well as a credit ratings downgrade from Fitch.

Moody’s Investors Service also identified Illinois as the state with the highest pension burden according to its new liability measurement. Using a market-based discount rate Illinois' liabilities totaled 241% of the state government’s annual revenue.

The State Employees’ Retirement System of Illinois also recorded a decline in funded ratio—as of June 30, 2012, it was 34.7% funded, compared to 35.6% in 2011.

Related content: Another Day, Another Cut Lifeline for Illinois’ Public Pensions, Fitch Downgrades Illinois over Pensions Mess, Liabilities Sink 2012 US Public Pension Gains, Testing Public Pensions’ Sensitivity to Investment Returns  

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