* Joe Cahill explains this pension funding gimmick well…
State contributions to pension plans will decline $1.5 billion in fiscal 2018, by far the largest single spending cut in the budget. And some $900 million of that reduction reflects wishful thinking about future investment returns at state employee pension funds.
Last year, overseers of the Teacher’s Retirement System and other large state employee retirement funds joined counterparts at public pension systems around the country in reducing assumed investment returns to around 7 percent from unrealistically high levels that prevailed for several years. It was a prudent step, based on actual long-term investment performance and current economic trends.
But it had the unpleasant effect of revealing that Illinois’ pension gap was even larger than previous estimates. A lower assumed rate of return means the pensions need more money now to generate enough investment earnings to cover future pension payments. And that, in turn, means legislators must allocate more current funds to pension contributions, not less.
Less is what the pension funds will get under the new budget, which delays implementation of the more-realistic investment return assumptions. Rather than impose the new rates of return immediately, as they should, lawmakers are phasing them in over five years. This allows them to contribute less while claiming to meet pension funding obligations.
Ironically, this is a rare area of agreement between arch-foes Madigan and Rauner. The governor excoriated Madigan’s 32 percent income tax hike, but uttered not a peep about his pension legerdemain. Perhaps that’s because he proposed “smoothing” in reduced rate-of-return assumptions in his own budget blueprint earlier this year.
Yep. He did. Remember how the governor railed against TRS for lowering their estimated rate of return?