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TRS warns of insolvency and there’s blame all around

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Illinois

The Teachers’ Retirement System Board of Trustees this week reduced the State of Illinois’ annual funding contribution to the System for fiscal year 2018 by $530.8 million; reluctantly adhering to a new law that changes the statutory pension funding formula.

The revised state contribution for TRS is now $4.034 billion. The previous FY 2018 contribution, certified by the TRS Board last October, was $4.564 billion.

“The changes enacted this year in the pension funding formula move TRS further away from financial stability and continue to kick the can down the road. Period,” said Dick Ingram, executive director of TRS. “Cutting the state’s contribution only increases our concern that TRS will eventually become insolvent.”

Ingram added that the System’s $71 billion unfunded liability – one of the largest in the country – is a direct result of decades of underfunding by state government. In FY 2018, the state’s contribution will fall $2.839 billion short of what the System’s actuaries say is “full funding” for the year, or $6.873 billion.

“For every dollar that the state cuts from the TRS contribution now, they will have to spend $3 down the road to replace that revenue because of the interest costs,” he said. “A $530 million funding cut today just puts off the inevitable and will create a payment of $1.6 billion in the future.”

A new state law approved in July by the General Assembly changed the pension funding formula in two significant ways that reduce the state’s allocation to the System:

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 any assumption changes from 2012 on.

Local school districts will pay more of the cost of a member’s pension if that member’s salary is equal to or greater than the governor’s statutory salary of $177,412. The district will be responsible for paying the actuarial cost of the benefits earned on the portion of the member’s salary that exceeds $177,412.

The new state contribution does not include any potential cost savings from the creation in July of the Tier III “hybrid” retirement plan because Tier III is still being developed. When Tier III will be implemented will be decided by the Board at a future meeting.

The TRS Board is required each year to certify the state’s annual contribution to the System for the next fiscal year. That contribution is reviewed by the State Actuary before it is included in the state budget for the upcoming year.

* Greg Hinz provides some background…

For lawmakers, that means they had an additional $500 million to spread around on school spending and other popular items. But for TRS, as Ingram summaries, “For every dollar that the state cuts from the TRS contribution now, they will have to spend $3 down the road to replace that revenue because of the interest costs,” he said. “A $530 million funding cut today just puts off the inevitable.”

Now, some of you may be inclined to blame those no-good union-loving Democrats, since the measure involved was enacted after a heavily-Democratic supermajority overrode Rauner’s veto of the bill involved. Blame away.

But if you check a little further, you’ll discover, as multiple GOP sources confirm, that Rauner proposed just such a stunt himself in his budget. I guess ducking tough decisions so you can eat your dessert not is a bipartisan endeavor.

And beyond that, guess who else proposed doing such a thing in its plan to curb state spending? Answer: the Illinois Policy Institute, the libertarian outfit that by some accounts has taken control of much of Rauner’s administration. In its 2018 plan (see Section B, last bullet of the second series), IPI says its plan “phases in the costs of any pension funds’ actuarial changes over a five-year period. This will reduce the required $800 million increase in state contributions (for TRS and other pension funds) by nearly $650 million in 2018.”

Clunk. Listen closely and you’ll hear the sweet sound of providing taxpayers relief today by kicking that ol’ can down the road to deal with tomorrow.

posted by Rich Miller
Thursday, Aug 24, 17 @ 3:00 pm

Comments

Another gimmick in the “balanced budget” passed by our great General Assembly

Comment by Lucky Pierre Thursday, Aug 24, 17 @ 3:05 pm
New reason but same old budgeting tricks kicking the can. Won’t end until the payments are legislatively required to be actuarially sound … and I’ll bet on 3 Cubs World Series winners back to back first.

Comment by RNUG Thursday, Aug 24, 17 @ 3:06 pm
This is why all of them must go.

Comment by NeverPoliticallyCorrect Thursday, Aug 24, 17 @ 3:14 pm
They what their voters want. How many times do we see polls that show voters don’t want to cut services nor do they want to pay higher taxes. This is the result.

Comment by My button is broke... Thursday, Aug 24, 17 @ 3:18 pm
Time to get rid of defined benefits for state workers and the constitutional protection.

Comment by Ron Thursday, Aug 24, 17 @ 3:19 pm
Services obviously have to be cut. Please start cutting.

Comment by Ron Thursday, Aug 24, 17 @ 3:19 pm
Listen closely and you’ll hear the sweet sound of… time will tell.

Comment by Robert the 1st Thursday, Aug 24, 17 @ 3:21 pm
A bit early in the day, isn’t it, Ron?

Comment by Nick Name Thursday, Aug 24, 17 @ 3:21 pm
Insolvency for TRS is inevitable, and will actually be part of a bigger funding solution that will eventually eliminate DB plans for state/local employees.

Comment by Texas Red Thursday, Aug 24, 17 @ 3:22 pm
+++ - Ron - Thursday, Aug 24, 17 @ 3:19 pm:
Time to get rid of defined benefits for state workers and the constitutional protection. +++

Ron, you have to know by now (you’ve been told enough times) that can’t be done retroactively to the current and past employees (even with a constitutional amendment). It can only be done going forward - like with Tier II and Tier III.

Comment by titan Thursday, Aug 24, 17 @ 3:22 pm
No, it’s very late. It should have been done ages ago.

Comment by Ron Thursday, Aug 24, 17 @ 3:24 pm
The Democrats and the 10 Republicans own this, they voted for it, that is where the blame belongs. Another budget with the fuzzy math to show it is balanced but once again truly isn’t if you truly make don’t cover your pension payments.

“They what their voters want. How many times do we see polls that show voters don’t want to cut services nor do they want to pay higher taxes. This is the result.” If you don’t have the guts to raise taxes then don’t spend beyond what you know your revenue is going to be. And taxes and fees have continued to go up year after year when you include all levels of government.

Comment by Arock Thursday, Aug 24, 17 @ 3:25 pm
Who says Illinois can’t do anything in a bi-partisan manner?

Comment by 47th Ward Thursday, Aug 24, 17 @ 3:26 pm
LP and Arock; Rauner asked for the same thing in his budget. Rauner IS the status quo. So please come on over and help get rid of him.

Comment by don the legend Thursday, Aug 24, 17 @ 3:29 pm
Illinois needs austerity budgets for at least 5 years, probably longer.

Comment by Ron Thursday, Aug 24, 17 @ 3:30 pm
At $4.034 billion, that’s one expensive can.

Comment by City Zen Thursday, Aug 24, 17 @ 3:31 pm
Did I say three years before the next income tax increase. I meant to say 2.

Comment by blue dog dem Thursday, Aug 24, 17 @ 3:33 pm
-Time to get rid of defined benefits for state workers and the constitutional protection-

Ron´s playing from his greatest hits album

Comment by Morty Thursday, Aug 24, 17 @ 3:34 pm
Hope TRS June 30 number this year is better then for last year. Dick- if you started to dump hedge funds like most of your brethren funds maybe you would need a little less State money. Those hedges have been hammering your returns for years?

Comment by Sue Thursday, Aug 24, 17 @ 3:36 pm
$71 billion underfunded. Must be Rauner’s fault.

Comment by Piece of Work Thursday, Aug 24, 17 @ 3:52 pm
–“Cutting the state’s contribution only increases our concern that TRS will eventually become insolvent.”–

Eventually we’re all dead. Please project the “insolvency” date if current statutory payments are made.

LP, you’re advocating now for larger state contribution to pension funds. You’re good with that cognitive dissonance thing.

Comment by wordslinger Thursday, Aug 24, 17 @ 3:52 pm
–Insolvency for TRS is inevitable, –

You say that like you know what you’re talking about. What’s the projected date of the inevitable insolvency, under statutory contributions?

Or are you just saying words that you like, not really knowing what they mean?

Comment by wordslinger Thursday, Aug 24, 17 @ 4:04 pm
“It should have been done ages ago.” Yes, it should have. And if it had, we wouldn’t be in this mess. But unless you have a time machine, it means nothing.
“Austerity Budget” Ok, fine. Tell us exactly what you’d cut. And if you say “waste, fraud and abuse” you’re immediately disqualified.

Comment by Skeptic Thursday, Aug 24, 17 @ 4:04 pm
Hopefully we will be long gone from this financially challenged and poorly run cesspool before the taxes are doubled or tripled to fund this.

Comment by Really Thursday, Aug 24, 17 @ 4:19 pm
Spending cut across the board of at least 5%. No pay raises along with job elmination are great ways to start with austerity budgets. The pain must be equally spread.

Comment by Ron Thursday, Aug 24, 17 @ 4:20 pm
Ron: It’s clear to me all you have is hand-waving. Get back to us when you have some ideas.

Comment by Skeptic Thursday, Aug 24, 17 @ 4:35 pm
12.3% return, gross. Is that good enough for you, Sue?

I do agree with you that it’s time to end the hedge fund science project. So does apparently a portion of the TRS Board. On a 7-4 vote, they voted to restructure the “diversifying strategies” asset class, which includes hedge funds.

I’ve also said it here before, and I find the talk of “insolvency” to be both factually misleading and irresponsible. With $48.5Billion in assets, $5 Billion (plus) in State/teacher contributions plus investment income, the numbers don’t support the assertion. TRS also reported a healthy 8.1% 30-year annual return.

Comment by Arthur Andersen Thursday, Aug 24, 17 @ 5:52 pm
–I’ve also said it here before, and I find the talk of “insolvency” to be both factually misleading and irresponsible. With $48.5Billion in assets, $5 Billion (plus) in State/teacher contributions plus investment income, the numbers don’t support the assertion. TRS also reported a healthy 8.1% 30-year annual return.–

Yeah, but irresponsible, misleading talk is the most fun. Gets people all riled up.

Who wants to be responsible and deal in facts? Leave that to killjoys like Warren Buffett.

Comment by wordslinger Thursday, Aug 24, 17 @ 5:58 pm
AA - the raw return is meaningless absent the comparison to other large funds. What percentile does that reflect. Tell me the top quartile and I will say great. It hardly makes up for last years point 1. The returns have really been impacted by the oversized commitment to hedge funds and it has taken way too long to end the investment relationships

Comment by Sue Thursday, Aug 24, 17 @ 6:49 pm
Ingrahms statement is irresponsible and apt to exorcise the beneficiaries. Given the statutory funding schedule along with investment returns TRS is not at risk of insolvency and Ingram is well aware that the constitution protects the future obligation. What possible benefit is there to make the statement hd made is anyone’s guess.

Comment by Sue Thursday, Aug 24, 17 @ 6:53 pm
==TRS also reported a healthy 8.1% 30-year annual return.==

Who says gambling never pays off?

Comment by City Zen Thursday, Aug 24, 17 @ 7:00 pm
– What possible benefit is there to make the statement hd made is anyone’s guess.–

He wants more money to play with.

Comment by wordslinger Thursday, Aug 24, 17 @ 7:15 pm
Scare all those teachers into taking buy outs must be the strategy,

Comment by Liberty Thursday, Aug 24, 17 @ 7:33 pm
Scare all those teachers into taking buy outs?

How’s about scaring young people away from the profession? Teacher Education numbers are down. And rightly so. If you’re a parent and your child wants to pursue Education, you need to prohibit that idea. Nothing but a life of attacks, cuts, animosity. I certainly hope numbers crash because thats exactly what taxpayers deserve.

Comment by Anonymous Thursday, Aug 24, 17 @ 7:54 pm
==If you’re a parent and your child wants to pursue Education, you need to prohibit that idea.==

The 18 year old adult that can be prohibited from following whatever career path they want should not be allowed anywhere near a classroom anyway.

Yet another teacher shortage prediction that will be proven wrong because all the other teacher shortage predictions from decades past have been wrong. This country employs more teachers now ever in its history.

Comment by City Zen Thursday, Aug 24, 17 @ 8:31 pm
I “prohibited” (not literally but get a clue——-if you’re a decent parent who actually speaks to your child and has a good relationship with them) my kids by saying I wouldn’t provide any financial help in any way if they chose teaching. Believe it or not, City, things like this can be done. Don’t you talk with your kids?

They saw first hand how we lived, as teachers compared to their friends and how their parents lived. They wanted not to struggle so much.

They pursued degrees that provided lucrative, satisfying careers and won’t have to worry about their retirement or read hateful things about their profession –and them– every day. They chose well with the guidance we provided.

Comment by Anonymous Thursday, Aug 24, 17 @ 8:57 pm
There won’t be a teacher ’shortage,’ rather, a decline in the quality of candidates (one could argue we’re already there). My son intimated he was interested in teaching, but… that’s a difficult path to send him down these days.
The ‘buyout’ suggestion above intrigues me as I’ve been speculating for the past few years that higher paid, Tier I teachers will get an offer of early retirement to clear them from the rolls. However, a cash buyout that’d permit a Tier I teacher to finance the retirement they were promised would have to be in the range of $1-2 million apiece.

Comment by Modem Thursday, Aug 24, 17 @ 11:20 pm
== However, a cash buyout that’d permit a Tier I teacher to finance the retirement they were promised would have to be in the range of $1-2 million apiece. ==

Why take a buyout and have to invest / manage it when you already have a constitutionally guaranteed annuity with built in inflation protection (pension with AAI)?

Comment by RNUG Thursday, Aug 24, 17 @ 11:58 pm
And if the constitution gets rewritten?

Comment by Modem Friday, Aug 25, 17 @ 7:29 am
–”This country employs more teachers now than ever in its history.”

Perhaps that’s because this country has more people than ever in its history.

Comment by ajjacksson Friday, Aug 25, 17 @ 7:44 am
==And if the constitution gets rewritten? ==

Only applies to future hires. Can’t change protections for anyone already in the system.

Comment by HangingOn Friday, Aug 25, 17 @ 7:46 am
==Perhaps that’s because this country has more people than ever in its history.==

Such in depth analysis. Professor at Chicago State?

The teacher population is nearly triple than it was just a few generations ago. Student population hasn’t even doubled. So, yes, more teachers than ever.

Now, are some teaching positions harder to fill due to skill set or location? Of course, but that’s no different than any profession. But I will call the teacher shortage bluff all day.

Comment by City Zen Friday, Aug 25, 17 @ 8:47 am
@City Zen

A few generations ago there weren’t as many teachers needed. There wasn’t a need for English as a 2nd language. Kids were lucky if they went to a preschool as it wasn’t required. I had 1 teacher who taught every subject up until 7th grade, where as now my child started having multiple teachers in 5th grade because education has become more than just readin’, writin’, and ‘rithmetic. Actually, a few generations ago my daughter would not have gotten an education. There weren’t special needs classes when I went to school. Kids with emotional or learning problems just weren’t taught. Now there are teachers just for them. Same with children with physical disabilities. So yes, there are more teachers than ever, but there are also more subjects and more specialized classes.

Comment by HangingOn Friday, Aug 25, 17 @ 9:44 am
Sue-Northern Trust universe median was 12.7%. So, 3rd quartile, slightly below median.

Comment by Arthur Andersen Friday, Aug 25, 17 @ 10:20 am
City Zen–your unnecessary snark is noted.

You can’t make an unsupported comment like that and expect not to be challenged. If it’s analysis you want, why don’t you find some numbers to support your statement?

Comment by Ajjacksson Friday, Aug 25, 17 @ 12:13 pm