Thursday, April 28, 2011

Pensions: An Argument Regarding Sustainability

·         Legislators’ decision to change the teachers’ pension is based upon Novy-Marx and Joshua Rauh’s analysis, among others, that uses the Financial Accounting Standards Board’s (FASB) fiscal guidelines (for private sector plans) rather than the Government Accounting Standards Board’s (GASB) financial criteria used for public pensions (Manhattan Institute for Policy Research).

·         Unfunded liabilities are “the gap between existing plan assets and the present value of benefits accrued by plan participants.”  FASB calculates unfunded liabilities using a “riskless discount rate” tied to Treasury obligations rather than a diversification of investments used by GASB.

·         A “riskless rate” yields less than 4%; a diversified approach, using private securities, would yield 8-9% over the long-term. Using a private-sector ‘discount rate’ adds billions of dollars to the unfunded liabilities total (Manhattan Institute for Policy Research, April 2010).

·         The size of unfunded liabilities “does not give a full view” of the State’s pension fund. Unfunded liabilities are amortized over 40 years in Illinois; using a “riskless rate” to calculate fund liabilities does not reflect the amount that the State and local governments need to deposit in their pension funds (Center on Budget and Policy Priorities).

·         Pension funds should be “based on a blend of expected rate of return on a fund’s existing and expected assets and the rate of return on high-quality municipal bonds” (Center on Budget and Policy Priorities).

·         As markets and economy improve, so do the assets in the pension funds.  “Since June 30, 2009, a date in which many recent studies on the financial condition of State pension trusts are based, investment returns have rebounded sharply – nearly 25% higher since then” (National Association of State Retirement Administrators, NASRA).  

·         Note: “State and local government pensions are not paid from general operating revenues but, rather, from trusts to which retirees and their employers contributed” (NASRA).

·         “State and local retirement trusts accumulate and pay out assets over decades, and as such, have an extended investment horizon” (NASRA).

·         Legislators who claim that the pension system is “unsustainable” most likely have used outdated information, “particularly at the low-point of the market recovery [June 2009]” (NASRA).

·         Legislators need to examine and analyze the long-term investment strategies of public pensions using GASB standards and not the short-term FASB guidelines that are tied to Treasury Bonds; they also need to use current available data for their policy decisions!

The TRS Pension Is Sustainable
  • The numbers to focus on are the amounts TRS pays out in pensions and benefits in a year. During the last fiscal year, TRS paid out $3.9 billion in benefits, but collected $6.8 billion in revenue, more than enough to meet current obligations (Will Lovett, Illinois Education Association). 
  • The total value of TRS assets continues to improve. At the end of FY 2009, the TRS fund held $28.5 billion. At the end of FY 2010, the TRS fund held $31.3 billion. It currently holds $37.3 billion. That’s a 23.6 percent increase in less than two years (IEA).
·         “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…

·         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 75 percent of TRS is funded through TRS investments and membership contributions; the state contributes approximately 25 percent] (Bob Lyons, TRS Trustee).

·         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…

·         Why is the unfunded liability a concern for the State? [Because no matter what financial guidelines are used, 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]” (NASRA).

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