Thursday, July 5, 2012

Data from the Teachers’ Retirement System of Illinois

·         During Fiscal Year 2011, members contributed 9.4 percent of gross creditable earnings: 7.5 percent for retirement annuity, 0.5 percent for post-retirement increases, 0.4 percent for the Early Retirement Option, and 1 percent for death benefits.

·         Active members do not contribute to Social Security for TRS-covered employment; however, members hired after March 31, 1986 are required to contribute to Medicare. In addition, virtually all members pay a contribution to the Teachers’ Health Insurance Security Fund, a separate fund in the State Treasury that is not a part of this retirement plan. For FY11, the member contribution was 0.88 percent of pay. (Only six states have a higher teacher pension contribution rate than the 9.4 percent TRS members pay: Kentucky, Missouri, Nevada, Ohio, Rhode Island, and Vermont).

·         Pensions paid to Teachers’ Retirement System members recirculate throughout the Illinois economy, creating more than 30,000 jobs in the state with a total payroll of more than $1.1 billion. TRS pensions enable thousands of men and women to lead fulfilling and secure lives in retirement.

·         The Teachers’ Retirement System of the State of Illinois had a statewide economic impact of $4.3 billion in fiscal year 2011.

·         The actuarial value of assets at year end was $37.8 billion, and the actuarial accrued liability was $81.3 billion. The decline in the funded ratio was due to an increase in the liability and the continued phase-in of 2009 investment losses in the calculation of the actuarial value of assets. Due to the five-year “smoothing” methodology required by Public Act 96-0043, the actuarial value of assets now recognizes 60 percent of the 2009 losses, 40 percent of the 2010 gains, and 20 percent of the 2011 gains.

• Contributions from members, employers, and the state were $3,236 million, an increase of $84 million or 2.7 percent for the fiscal year.

• Total investment gain was $7,235 million, compared to investment gain of $3,680 million in FY10, for an increase of $3,555 million.

• Benefits and refunds paid to members and annuitants were $4,305 million, an increase of $317 million or 7.9 percent compared to FY10.

• The unfunded actuarial accrued liability increased from $39.9 billion on June 30, 2010 to $43.5 billion on June 30, 2011. The funded ratio decreased from 48.4 percent on June 30, 2010 to 46.5 percent on June 30, 2011. The unfunded liability and funded ratio for both years are calculated using a smoothed value of assets, as required under Public Act 96-0043.

·         TRS was created to provide retirement, survivor, and disability benefits to qualified members. Increases or decreases in plan net assets serve as useful indicators of TRS’s financial position. Net assets available to pay benefits were $37.5 billion and $31.3 billion at June 30, 2011 and 2010, respectively. Net assets increased $6.1 billion and $2.8 billion during FY11 and FY10, respectively.

·         Retirement, survivor, and disability benefit payments increased $300 million and $274 million during FY11 and FY10, respectively. During FY11, benefit payments increased from $3,928 million with 97,754 recipients (in FY10) to $4,228 million with 101,288 recipients.

·         The overall increase in benefit payments is due to an increase in retirement benefits and number of retirees. Retirement benefits were higher as a result of annual increases in retirement benefits and an increase in the number of retirees from 87,654 as of June 30, 2010 to 90,967 as of June 30, 2011.

·         The average monthly benefit was $3,871; the average age was 70; the average years of service was 28; the average pension paid by the Teachers’ Retirement System of Illinois: $46,452.

·         Refunds of contributions increased $17 million and $6 million in FY11 and FY10, respectively. The increase dur­ing FY11 is the result of a greater number of member, survivor benefit, and retirement refunds.

·         The annual actuarial valuation measures the total liability for all benefits earned to date. The accrued liability is a present value estimate of all the benefits that have been earned to date but not yet paid. The actuarial accrued liability increased $4.0 billion and $4.3 billion during FY11 and FY10, respectively, to $81.3 billion on June 30, 2011 and $77.3 billion on June 30, 2010.

·         The unfunded liability is the present value of future benefits payable that are not covered by the actuarial value of assets as of the valuation date. The unfunded liability increased $3.6 billion during FY11 to $43.5 billion on June 30, 2011 compared to an increase of $4.9 billion during FY10 to $39.9 billion on June 30, 2010. The funded ratio reflects the percentage of the accrued liability covered by the actuarial value of assets. The funded ratio decreased to 46.5 percent on June 30, 2011 from 48.4 percent on June 30, 2010.  

·         In 2011 and 2010, the unfunded liability and funded ratio are based on a smoothed value of assets. Public Act 96-0043 required the five state retirement systems to begin smoothing actuarial gains and losses on investments over a five-year period, beginning with the valuation for the year ended June 30, 2009. When the funded ratio was based on the market value of assets, the reported funded ratio was impacted immediately by changes in market conditions. State funding requirements based on market value assets were also immediately impacted and, therefore, more volatile. Using the smoothed value of assets will result in more stable reported funded ratios and state funding requirements over time.

TRS Investment Return Rates:

Over the last 30 years (ending FY2010): 9.3 percent; over the last 25 years (ending FY2010): 8.6 percent; over the last 10 years (ending FY2011): 6.9 percent; using “smoothing” or averaging over the last five years: 5.5 percent.

Rate of Return for Last 10 Years:
2002    (-3.2) percent
2003    4.9
2004    16.5
2005    10.8
2006    11.8
2007    19.2
2008    (-5.0)
2009    (-22.7)
2010    12.9
2011    23.6

It is my opinion that before changing the expected rate of return for TRS, why not wait until after FY2014 to obtain a more realistic assessment of the TRS’ investment returns? Since actuaries use “smoothing” or the averaging procedure that includes both gains and losses over a five-year period, to determine funding data, why not wait a few more years before drawing further conclusions about expected returns?  In other words, allow the State’s revenue to recover from the Great Recession of 2008-09.  After all, the State of Illinois does not face an urgent liquidity crisis (because pension fund liabilities are long-term).   Why not re-evaluate three or four years from now to see whether the economy and Market have fully recovered?     
Statistics are from TRS:

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