State Treasurer Dan Rutherford held a press conference on his first 100 days in office. He talks about borrowing to pay off the state’s old bills and the state of the state’s pension systems.
VIDEO: Rutherford on borrowing, pensions
April 19, 2011
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The Source of the Problem in Illinois
Illinois has not paid its annual pension bill in full for decades but has used reverse compounding: “A pension plan’s obligations are determined in part by the expected investment return on its assets. In the case of Illinois, that is 8.5%. So for every dollar not added to assets in time, the state is effectively borrowing from the [TRS] pension plan at 8.5% interest” (Business Week).
“For this current fiscal year, $700 million of the State’s payment to TRS represents “normal cost,” the amount determined by the actuaries necessary to fund the pensions of current teachers. [In addition,] over $1.4 billion was required to make up for what Illinois did not put into the fund in the past”
(Bob Lyons, TRS Board Trustee).
TRS has depended mostly upon income from its own responsible investments and its contributions from its membership throughout these years: “The majority of these trust fund monies – 72 percent for the period from 1982 to 2008 – are made up of employees’ contributions and investment earnings”
(US Bureau of the Census, “State and Local Government Employee Retirement Systems”).
“Indeed, at the time of the 1970 Illinois Constitutional Convention, the State pension systems were no better funded than they are today”
(from the Abstract for “IS WELCHING ON PUBLIC PENSION PROMISES…”).
“The State’s failure to make its required employer contributions to the five pension systems can be traced to one, simple cause: a state fiscal system that is so poorly designed for decades failed to generate enough revenue growth to both maintain service levels from one year to the next and cover the state’s actuarially-required employer contribution to its five pension systems” (Charles N. Wheeler III, Director of the Public Affairs Reporting program at the U of I, Springfield).
Conclusion: “If the Teachers’ Retirement System and the other four pension funds had received the required funds from the State of Illinois, then the systems could have invested the funds and grown the assets, so that today’s total unfunded liability of over $85 billion would instead be a small fraction of that amount. Then pension funding would be a non-issue in Illinois” (Bob Lyons, TRS Trustee).
Why is the TRS Pension Sustainable!
• “First six months of the fiscal year (July 1, 2010), the rate of return on TRS investments was 15.8 percent… Since 1982, however, the average rate of return is 9.83 percent…
• TRS assets increased by $3.2 billion dollars [in the last 10 months]…
• It’s important to note that TRS and its investments and contributions from its membership will continue to accrue principal and interest over the remainder of a teacher’s life as long as unused equity exists…
• [Nearly 80 percent of TRS is funded through TRS investments and membership contributions; the state contributes approximately 20 percent]
• In March, TRS received its full statutory contribution from Illinois for fiscal year 2011…
• Any dialogue about TRS and other public pension systems being ‘underfunded’ is misleading because it refers only to the retirement system’s long-term ‘unfunded liability’…
• TRS has always carried an unfunded liability: an unfunded liability is the payments that will be made to both retired and active teachers in the future, subtracted from TRS’s total assets…
• TRS currently has total liabilities of $77 billion and an unfunded liability of $39.8 billion. While the media frets about the unfunded liability, the total amount is never due all at once…
• The unfunded liability is a concern for the State because the higher that number gets, the higher the State’s annual contribution to TRS and the other pension funds must be” (Topics & Report, TRS, Spring 2011).
Other factors indicative of TRS pension plan’s health:
• “The length of the funding amortization period
• Required current and future contribution rates
• [TRS’s] demographics and actuarial assumptions
• The sustainability of [TRS’s] design and governance structure
• The fiscal health of [TRS] and its commitment to continue to fund its [pension along with the State’s commitment to fully fund the pension in the future]” (National Association of State Retirement Administrators).
So what is the real reason for the General Assembly changing the retirement age of the state employees? Is it because our legislators know they can no longer “borrow” to pay the employer contributions from the pension system and now they plan on stealing the employees contributions also and they need to make them work for 50 years so there will be more funds to steal?