When I appeared on the radio show Stocks and Jocks with Tom “The Chief” Hough, our only major difference was on the issue of investment returns. Tom considered this one of the main reasons for the TRS system being only 40% funded.
I claimed the underfunding was primarily the result of over 50 years of the state failing to meet its payment obligations, a practice that would be illegal in the private sector.
Tom said that over the past decade the investment return was more like 2%.
Not being well versed in stock investment returns, I didn’t challenge Tom’s assertion.
But over lunch today, my friend Glen Brown said Tom was in error.
Here is Glen’s data:
Rate of Return for Last 10 Years:2002 (-3.2) percent2003 4.92004 16.52005 10.82006 11.82007 19.22008 (-5.0)2009 (-22.7)2010 12.92011 23.6It is my opinion that before changing the expected rate of return for TRS, why not wait until after FY2014 to obtain a more realistic assessment of the TRS’ investment returns? Since actuaries use “smoothing” or the averaging procedure that includes both gains and losses over a five-year period, to determine funding data, why not wait a few more years before drawing further conclusions about expected returns? In other words, allow the State’s revenue to recover from the Great Recession of 2008-09. After all, the State of Illinois does not face an urgent liquidity crisis (because pension fund liabilities are long-term). Why not re-evaluate three or four years from now to see whether the economy and Market have fully recovered?
Statistics are from TRS:
Fred Klonsky 
So Tom, what is your response?
I have heard the 2% meme somewhere before but I can’t place it. There is very likely a conservative newsletter of some kind promoting it. By the way, remember back in the day when TRS’s excellent Dave Urbanek would write excellent responses to these kinds of assertions in local newspapers? He would also regularly clarify the mortgage-vs.-payment confusion that clouds so many brains. I haven’t seen any of his letters in the Illinois press in a long time— either I’m missing them or he’s been muzzled.
The CTPF has similar investment numbers. Overall, these pension funds do a good job making money on their investments. But you can only make so much depending on what you have to invest. Since these funds have so little to invest because funding ratios are so low (non-payment of monies due from state and local governments for decades), they can only do so much. A 24% return on $2-3B is much less than a 24% return on $6-8B. It’ simple math.
What you say is true, but not quite on point. The issue here was whether the teacher retirement system was underfunded due to investment returns that did not meet expectations. The answer is no. Even though the Illinois teacher retirement system is only 40% funded, the returns on investment plus the contributions from active teachers has covered the payout to retirees because the teachers have met their payment obligations. The state has not.