“One of the elements of
the addition of a Tier III in the new law for latest hires in Illinois is a
change in how state government calculates the amount of money TRS and other
programs will receive from the state government in Illinois for the years going
forward…
“According to one
economist, smoothing is an ‘actuarial
camouflage, a method to dampen on-book asset volatility.’ The practice is meant to protect the payer
from the shocks of sudden changes in market returns (or volatility) in gains
and losses during a single year. So, why
not spread the damages or gains over five, or ten, or twenty years to
artificially reduce asset volatility?
“…According
to TRS, the original state contribution for TRS expected in fiscal year 2018 –
$4.65 billion – will be recalculated. TRS must retroactively ‘smooth’ the
fiscal effect of any changes made in the TRS assumed rate of investment return
over a period of five years. The ‘smoothing’
applies to assumption changes from 2012 on.
“Up
until now, the fiscal impact change in the assumed was totally absorbed at one
time. For example, in 2016 TRS reduced
its rate of investment return from 7.5% and the result was a $402 million
increase in the fiscal year 2018 state contribution to TRS. Under this new law, that $402 million
increase would be phased in over a five-year period.
“The
only way it could get any more slippery or worse is if Illinois found a way to
short the funding even more. They did. According to Mr.
Richard Ingram, the executive director of TRS of Illinois: ‘Over the last several years state
government has taken its responsibilities to TRS very seriously and has paid
its legal obligation in full. Still, the legal state contribution for the last
several years has been insufficient to improve the System’s long–term finances.
State government’s annual contribution is set artificially by law. It is not an
actuarial calculation.’
“‘As
it does every year, for FY 2017 the TRS Board asked its actuaries to calculate
two state contributions — the payment calculated under state law and the
payment calculated under actuarial practices. Under standard actuarial
practices, the state’s annual contribution for FY 2017 should be $6.07 billion.
“‘The
calculations set in state law artificially lower the state’s annual funding
level. For instance, state law: Requires pension costs
to be calculated on a 50–year timetable instead of the standard 30 years;
establishes
a 90 percent funding target instead of the standard 100 percent goal;
requires
the debt payments on state pension bonds to be deducted from the total
contribution.
“‘Illinois
teachers have always paid their required share and are counting on their
pensions to sustain them in retirement. The state has never paid its full
share.
The
annual contribution is the amount of money required by state law to fund TRS
pensions during the coming year, as well as a payment on the System’s unfunded
liability, which currently stands at $71.4 billion.’
“The
inclusion of another Tier by the General Assembly as a laurel to Republicans
and Rauner does not fix the hole nearly 80 years of underfunding has
excavated. It provides some relief (like
SB 7 did) to borrow to pay off debts, once again on the backs of those who paid
into their pensions as demanded each and every paycheck…”
from
Pension Vocabulary: What Does Smoothing Mean by John Dillon
Illinois adopted asset smoothing (Senate Bill 1292 in 2011) to determine the actuarial value of its plan assets. The asset smoothing method uses expected returns on the asset mix and averages both past and anticipated asset values, generally over a period of five years.
ReplyDeleteConsider the State of Illinois’ consistent underfunding of its annually-required contributions to the pension plans, the transferring of the state’s “normal costs” to the public pensions, the inadequate revenue growth for the long-term costs of public pension benefits, the unfunded pension liabilities and funded ratios, the historical rates of return, amortization periods, discount rates and inflation rates, and the state’s current flat-rate tax system and budget practices, to name just a few. They still need to be addressed.
ReplyDeleteConsider that the long-term consequences of legislative policy decisions are also based upon preferred and changeable data, that public pensions carry liabilities into perpetuity, and that the immediate effects of any legislation passed will affect primarily middle-class citizens who are victims of an imperfect fact-finding and decision-making processes.
We would agree that claims are considered effective when supported by sufficient, accurate, and relevant evidence; however, will Illinois legislators and the governor agree about evidence and solutions for the state’s public pensions’ unfunded and future liabilities? The answer is NO. The governor and legislators of the State of Illinois will not focus upon solving the state’s revenue and debt problems so that they can decisively commit to a responsible funding for all of the state’s debts.
From the Teachers Retirement System of Illinois, October 2016:
ReplyDelete“‘By any measure, $4.56 billion is a lot of money, but that amount is a direct product of the perpetual underfunding of TRS by state government over the last 76 years,’ said TRS Executive Director Dick Ingram. ‘Illinois is reaping what it sowed. Decades of inadequate contributions for TRS mean that now – when investment returns are not robust – big contributions must be made to secure the retirement promises made to generations of teachers.’
“Of the $4.56 billion state contribution for FY 2018, only $974 million is needed to pay the anticipated annual cost of TRS pensions during the year. The remaining $3.59 billion in the contribution is dedicated to help pay off the System’s $71.4 billion unfunded liability.
“‘Most of the FY 2018 contribution is a self-inflicted wound,’ Ingram added. ‘That money could be spent on other priorities today if the State of Illinois had fully met its obligations in the past.’”