Monday, September 5, 2016

The Teachers Retirement System of Illinois: Data and Information for Fiscal Year 2016


TRS Summary:
      Fiscal Year 2016 Assets - $44.8 billion (down 3.6%)
      Benefits Paid in FY 2016 - $5.9 billion (up 7.3%)
      Investment Return in FY 2016 – 0.8%
      Benefit Recipients – 116,582 (up 1.4%)

TRS Investment Results Long-Range Target was 7.5% in FY 2016
               Time Period June 30, 2015      June 30, 2016
                             Fiscal Year           Fiscal Year
          1 Year             +  4.6%             +  0.8%
          3 Years           + 11.9%             +   7.6%
          5 Years           + 12.04%           +   7.4%
          10 Years         +  7.15%            +   6.0%
          30 Years         +  9.1%              +   8.8%

Total Portfolio: $44.8 billion, +0.8% Return

Global Fixed Income: $8.4 billion, 18.8% of total, +3.42% Return 
Domestic Equity: $7.9 billion, 17.7% of total, -1.26% Return 
International Equity: $8.4 billion, 18.9% of total, -9.13% Return 
Private Equity: $5.4 billion, 12.1% of total, +2.5% Return 
Real Return: $3.5 billion, 7.8% of total, -0.7% Return 
Real Estate: $6.9 billion, 15.5% of total, +14.2% Return 
Absolute Return: $3.2 billion, 7.3% of total, +0.4% Return 
Cash: $812.4 million, 1.8% of total.

TRS always focuses on long-term results more than on any one year because the System must be financially secure for all members, whether they’re 85, 65, 45 or 25.

The Board of Trustees reduced its long-range assumed rate of investment return to 7 percent from 7.5 percent on August 26, a move that reflects changes in the world economy that are expected to dampen investment results. The Board vote was 10-0, with 2 abstentions.
The reduction in the assumed rate of return does not affect most TRS pensions.
It's the third time in the last four years that TRS has reduced its assumed rate:

      2012: 8.5 percent to 8 percent
      2014: 8 percent to 7.5 percent

The assumed investment rate is a 30-year estimate of what, on average, TRS will earn from its investments. Currently, the actual TRS investment rate for the last 30 years is 8.8 percent, which beats the new assumed rate of 7 percent, as well as the old assumed rate of 7.5 percent and the rate in 2012, which was 8.5 percent.
The reduction in the TRS assumed rate of return will increase the amount of money state government will be required to contribute to TRS in fiscal year 2018 by $400 million to $500 million.

The State contribution in FY 2017 is $3.986 billion

The assumed rate is one of the factors plugged into the TRS funding formula, along with active member contributions, school district contributions and the contribution from state government.

The contributions from members and school districts are fixed by law.

The rate and the state contribution “float” and move in opposite directions.

The rate is tied to the economy and the productivity of the investment markets, so when it declines, the state must pay more in order to meet the pre-determined annual cost of benefits. When the rate increases, the state has to pay less.

Many economists explain that bonds are carrying interest rates at near-record lows and the stock market has been and will continue to be volatile, so the return expectations will be low.

Two measures in the House: House Bill 5625, sponsored by State Rep. Mike Fortner, R-West Chicago, and House Bill 4427, sponsored by State Rep. Mark Batinick, R-Plainfield:

Each bill allows TRS members to opt out of a lifetime pension for a one-time lump sum cash payment. Both bills will likely remain in the committee for study this year.
TRS Executive Director Dick Ingram told legislators in March that a “buyout” is a benefit cut that would “do little or nothing” to improve the financial health of TRS:

“…[I]t must be stated that any buyout – whether it be full or partial, at retirement or before, rolled over into an IRA or used to purchase an annuity – is a reduction in the guaranteed benefit that the member may have earned up to the point of the buyout. You won’t see any significant relief for the unfunded burden we already have created. In fact, the buyouts may actually serve to accelerate the state’s pension obligations.”
Both “buyout” plans are designed to reduce the state’s total pension liability and still provide retiring members with money for their retirements.

A reduction in the total pension liability, in theory, would reduce state government’s annual contribution and free up money for other spending priorities.

Largest unanswered question: The source of funding for the buyouts
TRS currently has less than 42 cents for every $1 owed to all 400,000 members, so TRS would be unable to fund any buyouts and pay the benefits of members that keep their pensions.

Gov. Bruce Rauner says he supports a proposal by Senate President John Cullerton that they argue would legally bypass the Illinois Constitution and reduce pension benefits for active Tier I members.

Option 1: Trade the current 3% compounded Tier I COLA for the Tier II COLA, which is half the rate of inflation. In return, all future salary increases will be “pensionable.”

Option 2: Keep the 3% COLA, but all future salary increases will be “non-pensionable.”

Supporters of the plan say it supersedes the Pension Protection Clause because active members will have a “choice.”

The attorneys that successfully challenged Senate Bill 1 disagree: “…[T]he Cullerton proposal would force upon pension system members a choice between two diminishments of their constitutionally protected pension rights. The fact that a 'choice' is offered does not matter. Either 'choice' would be a pension diminishment…”

The above information was from a power-point presentation at IEA Retired, Lombard, Sept. 1, 2016.

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