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* Dave McKinney reports that unfunded liabilities for state-funded public pension systems grew by almost 17 percent to a record $129.8 billion…
During fiscal 2016, the largest state pension fund, the Teachers’ Retirement System, and the State Employees’ Retirement System lowered their assumed rates of return to 7 percent from 7.5 percent and 7.25 percent, respectively.
The Judges’ Retirement System and General Assembly Retirement System reduced their assumed rates of return to 6.75 percent from 7 percent. The State Universities Retirement System did not alter its long-range investment return estimation.
Combined, those moves led to an increase of more than $9.6 billion in overall accrued liabilities for all five pension systems, accounting for nearly three-quarters of the overall increase in unfunded liabilities from $111 billion in fiscal 2015, CGFA reported.
The other driving force was poor investment returns during fiscal 2016, ranging from a 1 percent drop for the General Assembly Retirement System to a 0.2 percent increase for the State Universities Retirement System, which was the best-performing state fund, CGFA said.
The full COGFA analysis is here.
posted by Rich Miller
Thursday, Nov 17, 16 @ 9:28 am
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Perhaps not running up another 49 billion might be somewhat helpful
Comment by illinois manufacturer Thursday, Nov 17, 16 @ 9:33 am
Pretty much what people who have been watching know. A combination of changing assumptions the past 6 years or so (lower rate of return, increased longevity) plus mostly poor investment returns over the same period. Last of it can be blamed on the poor national economy but part of the increase is by design (insufficient payments) through the Edgar Ramp and subsequent modifications to it.
If you study the charts at the end of the report, you can see the increasing shortfall doesn’t top out until FY27 … so we’ll still be talking about this for another 10 years or so.
Even though it is nothing really new, I expect the report will be used as a basis for another attempt to reduce pension benefits instead of being used as a call to switch to actuarial funding.
Comment by RNUG Thursday, Nov 17, 16 @ 9:54 am
Glad I picked the self-managed plan through SURS.
Comment by Ryan Thursday, Nov 17, 16 @ 10:17 am
“an increase of more than $9.6 billion in overall accrued liabilities”
While this is directly from the COGFA report, there’s a missing word, right? Should be “accrued UNFUNDED liabilities”.
Changing the return assumption shouldn’t affect the total liabilities (that is, actuarial-calculated total future benefits) at all.
Comment by Chris Thursday, Nov 17, 16 @ 10:17 am
RNUG, from a strictly financial point of view, wouldn’t it be better to bond out the pension debt at a much lower rate of interest than is being accrued given the 7% ROR on the outstanding pension debt now?
Comment by PublicServant Thursday, Nov 17, 16 @ 10:20 am
Chris, with the change in the return assumptions, you also lower the discount rate that is used by the system, which increases the accrued liabilities, so the wording in the CGFA report is correct.
PublicServant, it would depend on the funding schedule for the debt. If it were over a typical 30 years, the debt service payments would be far higher than current contributions, even though over the life of the funding schedule, the State would likely contribute fewer dollars.
Comment by Juice Thursday, Nov 17, 16 @ 10:36 am
=Glad I picked the self-managed plan through SURS=
I would bet you will be seeing a different tune when you get closer to retirement age.
Comment by Davos Seaworth Thursday, Nov 17, 16 @ 10:38 am
Juice, thanks for the response. Since the state exists in perpetuity, we wouldn’t need to fund to a 100% level. 75% would be more than sufficient. A 30 year schedule is also unnecessarily restrictive given the timeline for benefit payments. I’d like to see the numbers crunched at any rate.
Comment by PublicServant Thursday, Nov 17, 16 @ 10:45 am
Quick explanation of Liabilities
Actuarial Liability is a calculation of all future benefits payable to the current membership of a system in current 2016 dollar values (see Juice’s explanation above).
Unfunded Liability is simply = Liability - Assets
Ideally if a system is 100% funded, they have assets on hand to match liability and unfunded liability is zero.
Comment by Name/Nickname/Anon Thursday, Nov 17, 16 @ 10:52 am
==Since the state exists in perpetuity, we wouldn’t need to fund to a 100% level. 75% would be more than sufficient.==
So we’re only paying out 75% of pensions now? It’s this type of thinking that got us in this mess and forces debt on generations that never consumed those services.
Strange how pension advocates don’t ever push for 100% funding but instead prefer masking the true cost of the benefit. It’s not a matter of permanence of a govt entity. It’s a matter of inter-generational equity.
Comment by City Zen Thursday, Nov 17, 16 @ 10:57 am
All of the ways to help this deficit are being largely ignored. Appears to be willful neglect, like many other things under this governor. And then the blame game can begin again with every new release of figures. Tiresome, frustrating and demonic.
Comment by Anonymous Thursday, Nov 17, 16 @ 11:05 am
Remember the assumed rate of return is just an assumption, it doesn’t change investment returns, or what is owed to participants.
Paradoxical, a lowering the assumption will tend to reduce total contributions and a aggressive assumption will increase total contributions.
If the assumption is lower, the required contributions will be higher in the early years, and the more money will be invested longer, and investment returns will cover more of the plan costs.
Unfortunately, we are on the wrong side of the paradox.
Borrowing to fund the pensions is akin to mortgaging the house to invest in the stock market. It might work out, but the risks are very, very, real. If it doesn’t work out, you’ve got no place to live.
Comment by Ebenezer Thursday, Nov 17, 16 @ 11:19 am
Davos: doubt it, it’s performing quite well, I’m not worried at all. I predict the pension as we know it today, will not be here when I retire (15-20 years) even for those already in it. Regardless of what the constitution says, if the money isn’t there, they’re not getting it. Plain and simple. The day or reckoning is fast approaching…
Comment by Ryan Thursday, Nov 17, 16 @ 11:33 am
===If it were over a typical 30 years, the debt service payments would be far higher than current contributions===
My strategy would be to schedule the payments so they adjust roughly with inflation. I did the math back in 2014 with a $97B bond at 5% and $5.9B initial payment increasing at 2% inflation, we could be fully funded and bonds paid off in 40 years. Considering we are paying $7.9B this year, my plan would have saved us $2B/yr at this point.
Comment by thechampaignlife Thursday, Nov 17, 16 @ 11:33 am
Good grief people, this is not a funding or finance problem. It is a problem of too much in benefits promised by politicians to too many people who as a group hold sway over those politicians.
Time to restructure the obligations in a rational way. Literally, the rest of the world (Europe, Puerto Rico)understand these concepts and take constructive action.
But not in Illinois. No way, there is this ill considered state constitutional provision that annuitants think will somehow save them from the large and growing problem described in the article.
Comment by In a Minute Thursday, Nov 17, 16 @ 11:50 am
Based on Rauners 2014 and 2015 income- GTCR must have recorded stellar returns. Toooo bad TRS didn’t give him more money years back instead of going all in with the Hedgies
Comment by Sue Thursday, Nov 17, 16 @ 11:53 am
@Ebenezer 11:19===Borrowing to fund the pensions is akin to mortgaging the house to invest in the stock market. It might work out, but the risks are very, very, real. If it doesn’t work out, you’ve got no place to live.===
It is more akin to refinancing a 7 percent mortgage to a lower interest rate.
Comment by DuPage Thursday, Nov 17, 16 @ 11:55 am
Bring back Jimmy Carter. Nothing here that 3 years of really high inflation can’t fix.
Seriously, we seem to be in a period of low returns to capital world-wide. Aging populations in Europe, U.S., China, and Japan need good investment opportunities.
Comment by Last Bull Moose Thursday, Nov 17, 16 @ 12:05 pm
== Good grief people, this is not a funding or finance problem. ==
Actually, it is. Use the Google; you will find lots of studies on it and they cite the underfunding and pension funding holidays as the major cause.
Comment by RNUG Thursday, Nov 17, 16 @ 12:49 pm
1) 100% (or even 90%) funding is a nice but unnecessary goal because even now under Rauner every single employee is not
going to retire all at once.
2) As long as funding isn’t completely gutted Tier 2 will save the pension system.
3) Yes, it is largely a funding issue. If the multiple governors had not constantly shorted the pension system the annual payments would be billions lower and the unfunded liability would be nowhere as bad. That in turn means those billions could be used on operations and our backlog could be almost nonexistent. This is what happens when the pension system is used to keep revenues artificially low for decades.
Comment by MyTwoCents Thursday, Nov 17, 16 @ 12:53 pm
Good points all around but I would still like to see a buyout offer to all pensioners and even current employees. I would be willing to consider a present value discount or maybe more just to be rid of this. I bet others feel the same. Maybe even a present value for health, too. Could be funded with low interest rates and the point is that each taker represents an obligation completely off the books.
Comment by No Raise Thursday, Nov 17, 16 @ 1:11 pm
- No Raise - Thursday, Nov 17, 16 @ 1:11 pm: “Good points all around but I would still like to see a buyout offer to all pensioners and even current employees.” Why would you want that?
Public servants and teachers would be crazy to agree to a pension buy out.
Comment by Anonymous Thursday, Nov 17, 16 @ 1:28 pm
- Anonymous - Thursday, Nov 17, 16 @ 1:28 pm: - is me. My nickname keeps disappearing.
Comment by Mama Thursday, Nov 17, 16 @ 1:29 pm
Let’s offer a five year buy out in exchange for a reduced cola . I’m in where do I sign up
Comment by Frank Thursday, Nov 17, 16 @ 1:40 pm
@ Dupage
==It is more akin to refinancing a 7 percent mortgage to a lower interest rate.==
I’d be interested in RNUG’s take, but the 7% on a mortage is was you are paying the bank for the use of their money.
If we borrow money to invest, it the return is the difference between interest on the bond and the actual future investment returns.
There are good reasons to expect that investment returns might exceed borrowing costs, but there are no guarantees.
The 7% assumed return affects the current year required contribution, but any shortfalls in investment return ultimately must be made good with cash money.
Comment by Ebenezer Thursday, Nov 17, 16 @ 1:42 pm
In a Minute
Glad RNUG set you straight. Try “deferring” payment to your credit card repeatedly and see how your debt mounts up. Nothing wrong with pension benefits—use the Google to look up average benefit. What went wrong is taking, taking, taking money away from the contribution to the funds repeatedly and VOILA! Terrible amount owed. This is not difficult to understand if you look at facts.
Comment by Anonymous Thursday, Nov 17, 16 @ 1:49 pm
==underfunding and pension funding holidays as the major cause.==
In my pension research, I found multiple instances over 30 years ago when Gov Thompson would short the TRS pension contributions (and the other pension systems) to balance the budget rather than cut education funding. But the teachers pension is technically part of education funding. If Thompson instead cut education funding as he should and made the full pension contribution, that would have meant school districts would’ve had to freeze teacher salaries. I would suspect wealthier districts (with higher salaries) would have felt the brunt of these cuts. It’s naive to think this would’ve been made up only with property tax hikes. Salaries would have been impacted and pensions would have been smaller as a result.
It’s easy to write off underfunding as a “holiday” but its the employees that benefited from that “holiday”.
Comment by City Zen Thursday, Nov 17, 16 @ 3:09 pm
No Raise 1:11pm:
The state offered a pension buyout in 2006 to the first 500 takers (offering twice the vested amount plus interest as a cash buyout)and it was not very successful. Maybe a few hundred took the deal. Not enough to put a meaningful dent in future obligations.
Comment by Six Degrees of Separation Thursday, Nov 17, 16 @ 4:50 pm
Ryan said:
“The day or reckoning is fast approaching…”
Maybe or maybe not. Check out the funded ratio when the pension protection clause was added to the Illinois Constitution over 4 decades ago compared to today. Not much difference.
I’m with Davos and guess that you will come to believe that you picked wrong before it is over.
Comment by Ole' Nelson Thursday, Nov 17, 16 @ 5:25 pm
I have said this before in different posts but the reality of DB plans in a low interest rate environment is incredibly risky to the plan sponsor. “Only” 41% of the unfunded liability is due to employer underfunding. That’s not insignificant obviously but it tells you all the other factors that weigh in to the calculation are huge and the State controls very few of those. A budget process desires consistency or at least few variables and DB plans have too many variables that affect the necessary contributions. Even if the state had reasonably funded contributions timely we would still see today a need for increasing contributions. That’s the other 59% of our shortfall.
Comment by A Watcher Thursday, Nov 17, 16 @ 5:34 pm
=If Thompson instead cut education funding as he should and made the full pension contribution, that would have meant school districts would’ve had to freeze teacher salaries. I would suspect wealthier districts (with higher salaries) would have felt the brunt of these cuts. It’s naive to think this would’ve been made up only with property tax hikes. Salaries would have been impacted and pensions would have been smaller as a result.
It’s easy to write off underfunding as a “holiday” but its the employees that benefited from that “holiday”.=
Welp, in a word, no.
The money that was supposed to go into pensions was used to pay for things like roads and bridges and other projects. Some worth, some pork.
By not paying the full pension payment decades of governments have kept the state taxes artificially low.
The wealthy districts are not feeling the funding reductions now, they would not have felt them before. You can cut their funding, many would hardly notice the decrease.
All along teachers paid their share, we had no choice.
Employees did not benefit from the “holidays”, people like you are persecuting them for it now.
It is a debt that will be paid. No choices.
Comment by JS Mill Thursday, Nov 17, 16 @ 5:41 pm
Also, the intergeneratial conflict is total bull. Debt, to be paid in the future has existed for time immemorial. Quit trying to kick grandma and grandpa to the curb. Say hi to Johnson Tillman for me.
Comment by PublicServant Thursday, Nov 17, 16 @ 6:34 pm
Ebenezer@11:13, your paradox is not, if you will. Your statement of fact is totally backwards. The higher the assumed rate, the lower the required employer contribution and vice versa. Higher assumed rates equal more money made on investments and a smaller present value of accrued liabilities at a given point in time.
JSM, to add a point to your response to City Zen, it’s hard to say Thompson cut pensions to pay for teacher salaries or anything else when there was no funding plan or required funding levels whatsoever during his tenure in office.
Comment by Arthur Andersen Thursday, Nov 17, 16 @ 8:50 pm
Because of the artificially high estimated rate of return on investments (around 7%), the unfunded pension liability is greater than these statistics suggest.
Comment by ultra Thursday, Nov 17, 16 @ 10:18 pm
Ultra 10:18
The actual average return on investment for all public pensions is 8.3% over the last 25 years, ending on 12/31/15. Around 7% seems OK for the long term, or maybe even a little low.
Figure 1, http://www.nasra.org/files/Issue%20Briefs/NASRAInvReturnAssumptBrief.pdf
Comment by Six Degrees of Separation Thursday, Nov 17, 16 @ 11:21 pm
hasn’t the market been booming since trump was elected?
Comment by foster brooks Friday, Nov 18, 16 @ 6:22 am
The common element to all well funded pension funds, is that the employer makes an actuarially correct pension payment on time. The state of Illinois has not done that. Instead of doing so, they have consistently used pension payments for other services to cover up a structural deficit. The flat relatively low income tax rate that Illinois uses has not captured increased revenue in the economy. There is nothing inherently wrong with the pension system if the state makes the payments. The key issue now is the debt and not the current system. The debt needs to be amortized and taxes need raised. There are things that can be cut and they should be, but most of the low hanging fruit has already been picked. There are some things on workers comp that could be done and I think on property taxes. Term limits and reforming how you draw the lines every 10 years make sense but politically you have to understand the math.
Comment by facts are stubborn things Friday, Nov 18, 16 @ 8:34 am