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Friday, August 26, 2016
The Teachers Retirement System Board voted today 9-0 to lower the expected rate of return on investments from 7.5 percent to 7 percent
“The Governor appointed three new members to the board this morning to fill previous vacancies. However, one of those members withdrew his nomination because of residency issues and the other two newly appointed members abstained from the vote. This alteration will mean the state of Illinois will have to pay TRS and additional $421 million in the coming fiscal year.
“When the board last altered the assumption from 8 percent to 7.5 percent in 2014, the state ended up on the hook for an additional $200 million in pension payments. We expect there will be a question over the legality of this vote because prior to today’s meeting the issue was not posted correctly on the agenda 48 hours prior to the meeting as is required by the state of Illinois Open Meetings Act. If further action is taken the IRTA will send out additional updates” (Illinois Retired Teachers Association).
“…TRS Director Dick Ingram responded to [the anticipated] criticism [from Bruce Rauner], reading from a statement before the start of the meeting that pointed out the decades-long role of politics in creating the massive unfunded liabilities facing the fund.
“‘Political science has always trumped actuarial science in Illinois,’ Ingram said. ‘More contributions now means lower required contributions later. Putting off the pain does not change the reality of what it costs to fund the benefits.’
“…Before the vote, Ingram conceded the impact of lowering the rate would be painful but said the move was necessary because the state had failed to make necessary contributions and adjustments many times before. ‘No one should think we’re being insensitive,’ Ingram said. “But what’s been devastating is 70 years of underfunding…’” (Chicago Sun-Times).
Many Illinois citizens are aware that state legislators have not fully funded the public pension systems throughout the years; that instead of paying into the pension systems, they have used that money to pay for other services. Thus, without having to pay for services, state legislators have created an enormous pension debt (or unfunded liability) for the public pension systems in Illinois. The pension debt is exorbitant. Depending upon the discount rate and data from a given source, the debt is $113 billion+.
A decrease in the chosen discount rate increases the unfunded liability. Approximately one-third of the total pension payment each year is for “normal costs” to the system; the other two-thirds of the payment is the interest owed on the debt the state incurred for not fully funding the pension systems.
“The greatest cause of the state’s unfunded liability has been borrowing against the pension systems. This borrowing meant that the state’s contributions were not sufficient to pay for both benefits earned by current employees and interest on the pre-existing unfunded liability. Without sufficient contributions, an unfunded liability annually grows by a retirement system’s investment rate assumption (which ranges from seven percent to eight percent among Illinois’ five state systems).
“The state’s annual contribution to the retirement systems for debt service can be thought of as having two components: one part goes to pay down principal and the other is for interest on the principal. This is similar to paying down a credit card bill or home/car loan.
“The significant debt owed to the pension systems is the core cause of the systems’ cumulative unfunded liability—a situation that did not arise overnight. In fact, Illinois lawmakers essentially borrowed against the pension systems for several decades by underfunding what was owed, and instead diverted the revenue that should have gone towards pensions to fund the delivery of current services—like Healthcare, Education, and Public Safety” (Center for Tax and Budget Accountability).
The public pension systems were not and are still not the cause of the state’s budget deficits. The state’s budget deficits were triggered by past policymakers’ corruption, arrogance and irresponsibility (and currently by Bruce Rauner, et al.). The state's pension debt and revenue problems should be the focus. Any attempt to break a constitutionally-guarantee
contract with the state’s public servants is a flagrant
disregard of the State and U.S. Constitutions and will not address the State’s unfunded
liability or its revenue problems.