Thursday, February 28, 2013

Constitutional Issues Concerning Senate Bill 1, Pt. B

The following excerpts are from an eight-page memorandum that “discusses the provisions of SB 0001 and the constitutional deficiencies in that bill that most directly concern members of the Illinois Retired Teachers Association. Accordingly, [the] memorandum is not intended to be an exhaustive analysis of every constitutional deficiency in SB 0001 or similar legislation, and [it is] not [an analysis of] constitutional challenges to SB 0001 or similar legislation that could be advanced by currently serving public employees” (Excerpts are from a Memorandum entitled “Constitutional Issues Concerning Legislative Pension Reform Proposals” by Gino L. DiVito, John M. Fitzgerald, and Katherine M. O’Brien of Tabet, DiVito & Rothstein LLC to Illinois Retired Teachers Association Executive Director James Bachman, February 26, 2013) (1)…

“SB 0001… constitutes a unilateral attempt to modify public employees’ employment agreements with the State, even with respect to those employees who have already retired… A unilateral reduction of pension rights is unconstitutional, even if coupled with an equally unilateral benefit that the [Illinois] General Assembly imagines retired and active public employees might theoretically find desirable. Accordingly, SB 0001 and other legislation that similarly seeks to unilaterally modify the pension rights of retired public employees would fail constitutional scrutiny (4)…

“Part B attempts to extract a pretense of agreement from individual public employees and retirees to the reduction of their vested pension rights. The consent envisioned in Part B, however, is just as fictitious and legally invalid as that envisioned in Part A.
“Because Part B forces a retiree to choose between pension rights and health care coverage, it rests upon an assumption that the State has an unlimited right to exclude a public employee or retiree from participation in a health insurance program. In many cases, however, retired teachers have a vested contractual right to participate in a health plan by virtue of collective bargaining agreements between their unions and their school districts. As the Illinois Appellate Court has recognized, if a collective bargaining agreement between a teacher’s union and a school district promises health benefits to teachers in retirement for a term that extends beyond the agreement’s duration, the teachers who retired under that agreement have a vested right to the promised health benefits. Haake v. Board of Education for Township High School Glenbard District 87, 399 Ill. App. 3d 121, 132-34, 137-39 (2010) (6)…
“Vested contractual rights to health benefits in retirement cannot be taken away as a penalty for refusing to surrender vested pension rights. Accordingly, retired teachers who have vested rights to health coverage under their collective bargaining agreements could raise particularly strong legal challenges to SB 0001 or other legislation that would eliminate their health coverage as a consequence of their refusal to surrender their vested pension rights.
“Moreover, an ‘agreement’ extracted from a retiree on the threat of losing his or her health coverage would hardly be the sort of voluntary undertaking that is necessary for a valid contractual modification. As the Illinois Appellate Court has explained, ‘[I]t is well settled that a contract, once made, must be performed according to its terms and that any modification of those terms must be made by mutual assent and for consideration’ (7)…
“More fundamentally, Part B of SB 0001 and similar legislation effectively are mechanisms for circumventing the Pension Protection Clause. As explained in Kraus v. Board of Trustees of Police Pension Fund of the Village of Niles, 72Ill. App. 3d 833, 849 (1979), legislation ‘which has an incidental effect on the pensions which employees would ultimately receive, is not prohibited’ if it is ‘directed toward another aim.’ Conversely, because Part B is directed specifically toward penalizing pension annuitants, it is an impermissible end-run around the Pension Protection Clause. Similar end-runs around the Pension Protection Clause are equally impermissible” (8).

Commentary on SB 1, Pt. B (Revised)

Senate President John Cullerton’s SB 0001, Pt. B is an attempt to circumvent the “Pension Clause” by giving retirees and public employees a “choice” (or new consideration) to impair their own contract for a precarious state guarantee. John Stevens, Legal Consultant for the “We Are One” Labor Coalition, stated “To take away the Cost-of-Living Adjustment [COLA] for [current and future] retirees is not a free and fair choice.”

Though perhaps most contracts have an element of duress, where one side has something the other has no legal right to, Illinois legislators will be breaching a contract by forcing public employees to make a choice to diminish their originally-vested and paid-for guarantee. Legislators will be attempting to break an enforceable contractual promise, one that is bilateral and emphasizes an agreement between the State of Illinois and its retired and current public employees as to their future rights and benefits.

The courts will likely find this “illusory promise [of health care]… grossly inadequate and accompanied by unfairness because the employer [the state] is using its superior bargaining position to take undue advantage of the employee and substantially impaired the employee’s exercise of free will” (250 Ill. App. 3d 423, 620 N.E.2d 1328, 1st Dist. 1993: footnote to Is Welching on Public Pension Promises an Option for Illinois? An Analysis of Article XIII, Section 5 of the Illinois Constitution by Eric M. Madiar, pg. 62).

It is a diminution of the public employees’ contract to receive less than what the original vested right and benefit guaranteed. A choice between the COLA and uncertain state-sponsored health care offers public employees and retirees no ethical and lawful alternatives except to consent to the General Assembly’s demands to make an illicit choice.

Consider that “A contract is a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty (Professor of Law, Emeritus, Claude D. Rohwer and Professor of Law, Emeritus, Anthony M. Skrocki, Contracts in a Nutshell). Based upon both past and current legislators’ dereliction of duty to pay for the public employees’ constitutionally-guaranteed pensions, a court of law could find that the Illinois General Assembly has been and will be currently in “violation of any standard of good faith and fair dealing.”

Any modification of the “Pension Clause” should be seen as “the result of a violation of fair dealing,” as an accommodation for “only” the General Assembly who have stolen money from the public pension systems for decades and are, thus, “avoiding a pre-existing duty rule” (Rohwer & Skrocki).

“The significance of any modification of the “Pension Clause” is “the extent to which [public employees] will be deprived of the benefit [they] reasonably expected; the extent to which [public employees] can be adequately compensated for the part of that benefit [COLA, for instance] of which [they] will be deprived; […and] the extent to which the behavior of the party [Illinois General Assembly] failing to perform or to offer to perform [or] comports with standards of good faith and fair dealing” (Rohwer & Skrocki).

The promise to honor commitments and pay for the public employees’ pension is of “sufficient importance” to all citizens of Illinois. To pass pension reform is “an unequivocal manifestation of intention not to perform… legal duties…under a contract… When there is a duty of immediate performance of a promise, failure to perform in full is a breach” (Rohwer & Skrocki).

Though many legislators would rather dispute one of the Bill of Rights contained in both the Illinois and U.S. Constitutions instead of addressing the “real causes” of the state's budget deficits (the pension ramp, the pension debt, and the state’s insufficient revenue), legislators should reexamine the concept of justice and what lawfulness demands: that people must keep their covenants with one another. In particular, no justice is accomplished when diminishing public employees' earned benefits and rights because of decades of legislators' irresponsibility, corruption and incompetence.

Let us not forget how the State of Illinois has arrived in this financial predicament. The state’s unfunded liability has increased to $96 billion (and it is increasing). Forty-six percent of that amount ($44.2 billion) is the result of legislators’ “diversion” of money (a polite euphemism for stealing) from the public pension systems to pay for other services without increasing taxes.

All citizens of the State of Illinois are vulnerable because of the fiscal morass caused primarily by past incompetent, unethical and negligent General Assemblies, but also because of today’s scheming Illinois legislators who are attempting to seize political opportunity via “pension reforms” that violate a contract.

There should not be any contract modification of the retirees’ and current public employees’ guaranteed, earned benefits. To respect a contractual promise as a legitimate right and moral concern is at stake for all retirees and public employees, as well as for every other citizen in Illinois. 

-Glen Brown

For more constitutional analyses, please also read:

“Defending and Protecting Public Employees’ Pensions against the Legislative Siege…” (excerpts from Eric M. Madiar) and “How Much Can States Change Existing Retirement Policy? In Defense of State Judicial Decisions Protecting Public Employees’ Pensions” by Douglas L. Greenfield and Susan G Lahne) (posted December 10, 2012)
Illinois Pension Clause’s Convention Debates, Text and Historical Background (excerpts from Eric M. Madiar) (posted February 4, 2013)
Illinois Pension Reform Is without Legal and Moral Justification (posted May 29, 2012)

Wednesday, February 27, 2013

Pension-Cutting Amendments in the Illinois House of Representatives

(A Call for Action from the We Are One Coalition of Illinois)

On Thursday, the House will be considering a series of pension amendments – all of which devastate the pensions that public workers paid and toiled for years to earn. The amendments are as follows:

House Bill 1154, Amendment 1: Completely eliminates cost-of-living adjustments (COLAs).

- This amendment leaves senior citizens defenseless against inflation.

House Bill 1154, Amendment 2: Eliminates COLAs unless an individual system is 80% funded.

- Thanks to the state’s fiscal irresponsibility in underfunding the pension systems, this amendment also effectively eliminates COLAs for a generation of retirees since the systems are not projected to reach 80% until the 2040s.

House Bill 1165, Amendment 1: Broadly and immediately raises retirement age to 67.

- There is no graduated phase-in for older workers, and no consideration of the hard labor performed by many public workers in physically strenuous jobs – for example, public safety officers, corrections officers, and nurses.

House Bill 1166, Amendment 1: Increase employee contributions by 5%.

- This is well over the 2% increase offered by the coalition that is strictly contingent on a balanced solution that includes an ironclad funding guarantee and revenue. A 5% increase would result in Illinois systems having the second-highest employee contribution rate in the nation, according to a Boston College survey.

Tell your state representatives not to devastate the pensions that public workers faithfully paid for out of every paycheck – even when the state did not.

Tell them not to devastate the pensions that retirees rely on as their most reliable source of retirement security – particularly the many public sector retirees who do not receive Social Security, such as teachers, state university personnel, and public safety workers, to name a few.

Tell them to get to work with the We Are One Illinois coalition of unions and to support a fair, constitutional solution backed by the coalition – like HB 3162 and SB 2404! (Read on for the details on these bills.)

Coalition-Supported Bills: HB 3162 and SB 2404

The We Are One Illinois union coalition is proud to announce its support for House Bill 3162 and Senate Bill 2404, identical bills that contain essential pieces of the coalition’s framework plan. Unlike many other proposals, HB 3162 and SB 2404 are fair and constitutional. The bills have three parts:

1. An Ironclad Funding Guarantee. For decades, Illinois politicians shorted payments to the pension systems, even as public workers faithfully and consistently paid their fair share. To ensure that today’s politicians cannot repeat the mistakes of their predecessors, HB 3162 and SB 2404 contain an ironclad funding guarantee. If the state fails to make its full payment, the retirement systems – or their members – can sue to ensure proper payment.

2. The Pension Stabilization Fund. HB 3162 and SB 2404 dedicate revenue to pay down the state’s pension debt. In short, revenue currently being used to pay off the state’s pension obligation bonds would be committed to the pension systems after the bonds are paid off.

3. Shared Sacrifice. Public employees are not to blame for Illinois’ pension problem, but they are willing to be part of the solution. With an ironclad funding guarantee to ensure pension shortfalls will never happen again, Tier 1 employees would be prepared to contribute an additional 2% of salary, phased in over the next two years, for their retirement.

HB 3162 features bipartisan support, led by Rep. Jay Hoffman (D-Belleville), Rep. Raymond Poe (R-Springfield), and Rep. Bill Mitchell (R-Decatur). A diverse set of six state senators are sponsors or co-sponsors of SB 2404 – Sen. Linda Holmes (D-Aurora), Sen. Pamela Althoff (R-McHenry), Sen. Melinda Bush (D-Grayslake), Sen. Toi Hutchinson (D-Olympia Fields), Sen. Kimberly Lightford (D-Maywood), and Sen. Mike Jacobs (D-Moline). Our coalition is working to add more co-sponsors to both bills. We also continue to work on additional framework solutions, such as closing corporate tax loopholes to generate $2 billion in new revenue…

HB 3411

HB 3411 98th General Assembly


House Sponsors:
Tom Cross - Elaine Nekritz - David Harris - Sara Feigenholtz - Darlene J. Senger; Michael J. Zalewski, Carol A. Sente, Robyn Gabel, William Davis, Greg Harris, Luis Arroyo, Elizabeth Hernandez, Kelly Burke, Deborah Mell, David McSweeney, Timothy L. Schmitz, Ed Sullivan, Jr., Ron Sandack, Sandra M. Pihos, Kay Hatcher, Joe Sosnowski, Thomas Morrison, Barbara Wheeler, JoAnn D. Osmond, Patricia R. Bellock, Jim Durkin, Renée Kosel, Jil Tracy, Pam Roth, David R. Leitch and Dwight Kay

Synopsis as Introduced
Amends the General Provisions, General Assembly, State Employee, State Universities, and Downstate Teacher Articles of the Illinois Pension Code. In the Downstate Teacher and State Universities Articles, creates a Tier 3 composite defined-benefit, defined-contribution retirement plan for employees hired on or after January 1, 2014 and certain others. Makes corresponding changes in other parts of those Articles and in the Retirement Systems Reciprocal Act. Increases the retirement age for certain Tier I members and participants. Changes the conditions of eligibility for, and the amount of, automatic annual increases for Tier I retirees. Increases required employee contributions for Tier I members and participants. Limits pensionable salary for Tier I and Tier 3 participants. Changes the required State contribution to each of the affected retirement systems so that those systems are 100% funded by 2043. Adds State funding guarantees. Makes other changes. Amends the Illinois Public Labor Relations Act to provide that this amendatory Act takes precedence. Amends the State Finance Act. To the list of standardized items of appropriation, adds "State retirement contribution for annual normal cost" and "State retirement contribution for unfunded accrued liability". Defines those terms. Amends the Governor's Office of Management and Budget Act. Adds those terms to a list of classifications to be used in statements and estimates of expenditures submitted to the Office in connection with the preparation of a State budget. Amends the State Mandates Act to require implementation without reimbursement. Includes an inseverability provision. Makes other changes. Effective immediately.

HB 3411

Reforms for Tier 1 Members (public employees hired before 2011)
·         Cost‐of‐living adjustments apply only to the first $25,000 of the employees’ pension
·         That limit is reduced to the first $20,000 for employees eligible for Social Security
·         COLAs are delayed until the employee turns 67 or five years after retirement, whichever comes first

This applies to all employees and retirees who are currently receiving COLAs.

Retirement age is increased by
·         No increase for employees age 45 and older
·         One year for employees age 40 to 44
·         Three years for employees age 35 to 39
·         Five years for employees age 34 and younger

Employees would be required to contribute more toward their pensions by
·         One percent starting July 1, 2013
·         Two percent starting July 1, 2014

Pensionable salary – the amount of salary that counts toward a pension – is limited to the higher of the Social Security wage base or the participant’s salary when the legislation becomes law.

Reforms for Tier 2 Members (public employees hired since 2011)

·        All new employees in the Teachers Retirement System and State University Retirement   System are placed in a stacked hybrid plan (combination defined-benefit and defined-contribution plans)
·         Employees are guaranteed a minimum defined benefit
·         Employers and employees contribute an additional amount in to a 401(k) style benefit
·         Local school districts can negotiate the generosity and cost of the 401(k) benefit with
·         TRS and SURS employees hired before the effective date can choose to remain in Tier 2 or join the stacked hybrid plan (Tier 3)

Creates Tier 3 (SURS and TRS employees who start after January 1, 2014) Hybrid Defined-Contribution/Defined-Benefit plan

Defined Benefit component:
·         Employee’s contribution is 4% of pay
·         Final Average Salary = Highest eight out of last 10 years
·         Unreduced retirement at 67 and five years of service
·         Reduced retirement at 62 and 10 years of service
·         1.1% annual accrual rate
·         COLA is lesser of 3% or ½ CPI, simple starting at age 67

Defined Contribution component:
·         Employee’s contribution is 5% of pay
·         Local employer can make optional matching contribution (pursuant to local contracts) between 3 and 10% of pay
·         Ability for the DC plan to be invested in existing investments in the system and managed by the system for employees
·         five years to vest in the employer contributions

Employer Contributions and Funding Guarantees:
Employer contributions will be on a 30‐year level‐funding plan to achieve 100 percent funding
State contributions will be enforced through court action or from other state funds
Revenue currently being used to repay pension obligation bonds will be used to pay down unfunded liability once the pension obligation bonds are paid

Please call your legislators today. Call the 1-888-412-6570 hotline if you don't know who your legislators are and then forward this to anyone you know who cares about justice.

If you haven’t already, please sign this petition:

Compensation and Pension Matters in the Case of Attracting the Best Teacher Candidates

by Alicia H. Munnell and Rebecca Cannon Fraenkel

“…Studies have shown that total compensation is roughly equal in the public and private sectors, so a reduction in pension benefits will make total compensation lower in the public sector than in the private sector… Virtually all analysts agree that wages in the state and local sector – when adjusted for the higher educational attainment of public sector workers – are lower than those in the private sector…

“To the extent that teachers start out at a pay disadvantage relative to pri­vate sector workers with similar levels of education, pension cuts for new hires could seriously reduce the attractiveness of a teaching career… Compensation includes both wages and pensions. The expectation is that the higher the compensation, the higher the SAT score at the teacher’s undergradu­ate institution…

“Ap­plicants for teaching positions value deferred com­pensation – the generosity of the public pension and Social Security – as well as the wage. This finding suggests that large cuts in pension benefits would indeed reduce the attractiveness of teaching to young applicants…

“The important finding is that compensation mat­ters in attracting people into the teaching profession. Somewhat surprisingly, benefits are as important as wages for younger teachers. Teachers may value benefits highly because they believe that they will retire in the same job, allowing them to collect the full amounts. In any event, cutting pensions will almost certainly have an adverse effect on the quality of people applying for teaching positions…

“Controlling for demands of the job and personal characteristics, state and local teacher plans that compensate teachers more generously are able to hire higher quality teachers – as measured by the SAT score at their undergraduate institution. These findings are important in a period when financial pressures are leading public sector employers to cut pension benefits.

“Since cuts for current employees are precluded under the laws of many states, most of the cuts fall on new hires. These people are not at the table; they do not have a voice. But cutting their com­pensation is not costless; it will almost certainly result in a lower quality of applicants for one of the nation’s most important jobs…

“Pensions are a part of a total compensation package, and total compensation for teachers – even before cuts – is either the same or lower than that for private sector workers with similar characteristics. So even if the pension changes are good policy, without compensating wage increases, they will diminish the total compensation that new teachers will receive, make teaching in public schools less attractive, and reduce the quality of applicants.”

from the Center for Retirement Research at Boston College


Sunday, February 24, 2013

Public Pension Investments/TRS Investments (for FY2012)

How Do Public Pensions Invest? A Primer by Ronnie G. Jung, CPA and Nari Rhee, PhD (National Institute on Retirement Security)

…Public defined-benefit (DB) pensions leverage the advantages of pooled funds, pooled risk, a long investment horizon, and professional money management to reduce the cost of providing retirement benefits to employees over the long term. Given recent economic shocks and their impact on the status of pension funds, there is increased attention on public sector pension investment management practices. Debate about these practices can be better informed with insights into how the public pension investment process works—a process that is not widely understood…

The following are key highlights:

1. Public pension funds have a clear division of labor for making investment-related decisions. Fiduciary standards apply to each key role in the investment process.

·         Nearly all public pension plans are overseen by trustees who bear primary fiduciary responsibility and are also subject to strict ethical standards. Trustees set investment policies with the advice and support of a number of different professionals… a Chief Investment Officer (CIO) who leads the investment unit within the pension fund… Investment consultants who have a deep background in finance and work with staff and the board to help develop and review investment policies. Investment managers who conduct the day-to-day business of managing each asset class portfolio (e.g., domestic stocks or corporate bonds)—buying and selling securities and reporting on investment performance... Actuaries who also play an important role in pension fund investment policy by predicting the cost of future pension benefits and working with consultants and staff to determine that the asset allocation adopted by the Board of Trustees over the long run, combined with adequate contributions, will generate sufficient income to meet pension obligations.

2. Public pension funds have rational and systematic processes for setting asset allocation in a diversified portfolio, estimating expected investment returns, and evaluating investment performance.

·         Investment policy begins with an analysis of pension liabilities—how much money will be needed to pay for promised benefits over the long term… Typically, pension trustees adopt an Investment Policy Statement (IPS) that establishes how much investment risk will be tolerated by the fund and sets asset allocation targets, i.e., the percentage shares of the fund total investments assigned to different asset classes, also called the target asset mix…

·         The IPS also sets expectations for investment performance in each asset-type portfolio and the fund as a whole. Investment performance targets are tied to benchmarks—usually market indexes, such as the S&P 500 for large company stocks—against which portfolio and fund returns are evaluated. The fund’s expected rate of return on its investments is determined from the target asset mix based on expert consensus on the long-term returns that can be expected in each asset class in light of historical data and current capital market assumptions.

·         All pension funds periodically conduct asset allocation studies and/or asset liability modeling to determine if their investment strategy as outlined in their IPS remains appropriate, or needs modification. [Moreover], portfolio performance in each asset class is regularly evaluated against internal benchmarks on a quarterly, annual, and multi-year basis

3. The Board of Trustees of each public DB pension fund determines the acceptable level of risk that is prudent for their plan given its particular circumstances. They then adopt an asset allocation that is designed to maximize returns within the established level of risk.

·         During the asset allocation process, pension trustees—with the assistance and advice of staff and consultants— carefully select asset allocations designed to minimize risk and maximize return.

·         Research based on asset allocation over time shows that public pensions are patient investors, much more so than individual investors. That is, they are not unduly swayed by the ups and downs of financial markets and do not take on more risk in order to compensate for market downturns.

·         Public pensions have reviewed asset allocations in light of adverse market conditions in the last decade and implemented measures intended to mitigate risk…This more diversified portfolio is aimed at smoothing out the effects of market volatility. Public pension fund exposure to alternative assets, while increasing for larger plans, remains relatively low compared to endowment funds.

4. The level of risk assumed by public pension funds, as indicated by the percentage of assets invested in equities, is consistent with other institutional investors and with many prudent individual investors.

·         The risk profile of public pension funds—currently about 60 percent in corporate equities on average—has remained fairly stable and is consistent with other institutional investors…The average equity position among pooled public pension funds entails no more risk than is considered prudent for an individual investing over a finite career using a commonly recommended lifecycle investment strategy…

5. Actual investment returns for the overall fund and for the individual portfolios are evaluated over multiple periods including the short term and long term, and evidence indicates that current rate of return assumptions are realistic.

·         Returns have met or exceeded expectations over the long term, i.e., 20-30 years. Public funds have the advantage of being able to smooth the effects of bubbles and downturns, though the sheer magnitude of the 2007-2008 financial crises and its aftermath has challenged all funds.

·         In response to the current economic climate, public pension funds are incrementally adjusting their rate of return assumptions downwards. Nonetheless, independent studies indicate that the average rate of return assumption of 7.8- 7.9 percent is not unrealistic, both in nominal terms, and in real (constant purchasing power) terms after controlling for inflation.

·         It is important to distinguish nominal and real return assumptions because inflation impacts pension liabilities. Shortfalls in investment income due to slow economic growth, for instance, can be accompanied by reductions in liabilities resulting from slow wage growth. Nominal return assumptions among public pensions cluster tightly around a median of 7.9 percent, and real return assumptions are spread more broadly around a median of 4.5 percent…

By leveraging the ability to pool risks and invest over a long time horizon, public pensions serve the public interest by delivering retirement benefits efficiently at the same time that they provide a secure and modest retirement income to public employees. The financial goal of pension funds is to have sufficient contributions and investment returns to match these liabilities over a long time frame… The overall risk-return profile of public pension funds is consistent with other institutional investors—corporate pensions and endowments—that invest over the long term. Studies indicate that public pensions are patient investors, adjusting asset allocation gradually and tending to decrease rather than increase risk in response to increasing contribution requirements following major asset value declines. Large public pension funds have responded to the challenging financial environment since 2008 by decreasing their overall position in stocks and fixed income assets and increasing their investment in alternative assets in an effort to improve portfolio diversification and reduce volatility…


SPRINGFIELD, IL – Teachers’ Retirement System investments earned a positive 13.92 percent for its 366,000 members during 2012, recording strong gains in all asset classes. Altogether, TRS investment assets at the end of December totaled $38.16 billion, an increase of $1.86 billion in the market value of the portfolio in the six months since the end of fiscal year 2012 on June 30. The System’s rate of return for calendar year 2012 is net of all investment fees.

“We’re very proud of these returns for our members. But the ups-and-downs we saw in our investment returns during 2012 are a perfect example of why TRS always places more emphasis on long-term investment results,” said TRS Executive Director Dick Ingram. “Our members are counting on us to deliver for them for decades and that is the true measure of our success.” The System’s 30-year investment return at the end of fiscal year 2012 was 9.6 percent against the 8.5 percent long-term rate-of-return target in place at the end of June. The TRS Board of Trustees re-set its long-term target at 8 percent in September, 2012.

TRS recorded strong returns in all seven of its major investment classes in the 12 months ending on December 31, 2012, led by a 17.02 percent return in international stocks. Investments in U. S. stocks posted a 16.3 percent return and private equity investments returned 16.22 percent. Investments in fixed income recorded a return of 13.67 percent while real return investments returned 9.92 percent; real estate investments saw an 8.4 percent return; and absolute return investments posted an 8.15 percent gain.

The volatility of the world economy and investment markets can be tracked through TRS investment returns. Investment income lagged during the last three months of fiscal year 2012, resulting in the 0.76 percent rate of return for the 12 months in that fiscal year. However, the portfolio demonstrated its ability to participate in a rebounding market during the second half of 2012. Here are the 12-month investment returns for calendar year 2012 by asset class:

Investment Category Assets Allocated 12-month Return Rate on 12/31/12:
International Equity $ 7.94 billion +17.02%, Domestic Equity $ 8.54 billion +16.34%, Private Equity $ 4.35 billion +16.22%, Fixed Income $ 6.42 billion +13.67%, Real Return $ 3.76 billion + 9.92%, Real Estate $ 4.66 billion + 8.40%, Absolute Return $ 2.02 billion + 8.15%, Short Term Investments $ 0.46 billion + 4.68%: TOTAL $38.16 billion +13.92%

NOTE: All returns are calculated net of investment fees. Total rate of return is based on the System’s asset allocation and performance of the underlying asset classes.