Tuesday, November 13, 2012

Now What Do We Do? by Bob Lyons, TRS Trustee

In the days immediately following the election, there was speculation in the news media that Governor Quinn might use the Lame-Duck Session in early January as an opportunity to attempt to make the 2011 state income tax increase permanent.  There was also speculation that some legislators would try to immediately repeal the state income tax increase before 2015 when it is due to decline.  While it is likely that neither event will happen, it is safe to say that with approximately 35 legislators qualifying as “Lame Ducks” and who are able to vote however they want, what the legislature may do is even more unpredictable now.   The forced choice between keeping the current COLA or access to state health care is still on the table, and the Democrat leadership remains committed to shifting the cost of retirement for active teachers to the local school districts.

The State of Illinois will be hard-pressed to make its pension contributions next year.  The decision by the TRS Board to change the assumed rate of return going forward from 8.5% to 8% requires the State to increase its contribution for this current Fiscal Year of $2.7 billion to an amount greater than what would have been needed under the current funding law.   For FY 2014 the State, rather than contributing $3.07 billion, will need to pay TRS $3.4 billion.  

The System will also send to the State the amount that would be needed to fund TRS according to generally accepted actuarial standards.  Those standards would have the state contribute the employer’s normal cost plus what would be needed to pay off the unfunded liability over a thirty-year period.  That amount is $4.3 billion.   If the State of Illinois wanted to move TRS towards solvency in 2014, it would take an increase of more than $940 million: a purely symbolic act, for no one believes that Illinois would be able to pay that amount for next year.

TRS realized there would be criticism from some financial people that our new assumed rate of return at 8% was still too high for the current economic uncertainty.  The Board also realized there would be those who were unhappy knowing the decision to lower the assumed rate of return from the fund’s investments would increase long-term liability.   Thus, the System’s greater unfunded liability will require the State to make higher contributions in the years ahead.  

State Representative Tom Cross, Republican House Minority Leader, argued both that the fund’s new assumed rate of return was unrealistic because it was too high and that the System’s action in lowering the rate  would cost the State of Illinois billions of dollars more in contributions.

For TRS funding alone, the State will need to contribute over $204 billion from FY 2014 to FY 2045.  The System started the year with net assets of $36.5 billion, and the new total for accrued liability (pension benefit obligation for all current and retired teachers) is $90 billion.  That results in an unfunded liability of $53 billion and a funded ration of 40.6%. 

Of course, if the State had paid TRS what was due each year, the System could be nearly 80% funded today and the State would need to pay only enough to fund the pensions of current teachers. While Illinois saved over $15 billion over the years, the State now owes TRS over $50 billion.

The State borrowed the money to make its full pension payments for FY 2010 and FY 2011, but the State income tax and business tax increases passed in January 2011 generated enough new money for the State to make its contributions from general revenue for last year and this year.   The State’s contribution for this fiscal year for all five of the pension funds will be $5.1 billion, but added to that is the current debt service, some $1.1 billion, to pay for its most recent borrowing.

Considering the State of Illinois started this fiscal year with over $8 billion in unpaid bills left over from FY 2012 and its pension contribution will continue to increase, I find it incredible that any legislator could seriously argue that the State would be better off to reduce the State income and business taxes.  

Illinois has a debt problem, and the legislators cannot cut enough costs to end its difficulty.  The debt exists because of prior mismanagement and a constitution that mandates a flat tax.  Illinois, the Governor, legislators, and the people need to face reality: the only way to solve our debt problem is through increased revenue and that means a graduated income tax and a broader sales tax that covers services.

The opinions shared here are my own and do not reflect an official position of the Illinois Teachers’ Retirement System.

Robert Lyons
Elected Annuitant
TRS Board


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