TRS reduces estimated investment return. What does it matter to retirees and active teachers?


As expected, the Illinois Retirement System board of trustees did as the actuaries suggested and this afternoon reduced the estimated return on investments from 7.5% to 7.0%.

Nothing about this is a reflection on the actual return on investments. It has been lower than even the 7% that the TRS board will recommend to the legislature.

The reduction in the estimation will increase the unfunded liability

But if you read what I just wrote you will immediately identify the problem here. With the state of Illinois owning an unfunded public pension liability of over $111 billion, this is all just so much a tempest in a teapot.

The TRS board is not playing politics. They are recommending what is actuarially responsible.

But the same cannot be said for the Governor.

Facing political troubles in November and an inevitable deal with the Democrats, Rauner is not happy about sitting down with Madigan on a tax increase with a larger pension hole.

Those knowledgable about Springfield (No. I haven’t even read any other internet reporters or Springfield observers. This is all from conversations and email exchanges with people I know) have told me they don’t agree with the Rauner people who have suggested Madigan’s fingerprints can be found on the TRS board action today.

Quoting one Illinois pension expert, “I haven’t detected the Madigan fingerprints on it, though some folks are saying that. Rauner is not necessarily trying to kill it, but he wants to see the numbers and a bill to “smooth” the impact of the rate change over five years like we do now with variations in annual investment returns. As a practical matter, returns below the assumption add to the liability and above it reduce the liability. Changing the assumption moves the “hurdle” if you will, for how much the liability moves in future years and discounts the present value of the fund assets at a lower rate, causing a one-time increase in the unfunded liability and, in turn, the required State contributions.”

In the short run, state contributions will go up.

That’s a good thing, unless Rauner tries to “reform” or stiff us out of some contributions.

In the long run, the state pays slightly more.

Rauner’s appointees all voted for the change except the two new ones who abstained. 

Rauner’s big blunder was an attempt to fill the third seat with someone ineligible because of a Chicago residence.

For active teachers in TRS and for retirees nothing much changes. Our system remains underfunded and only a revenue fix can change that.

5 Replies to “TRS reduces estimated investment return. What does it matter to retirees and active teachers?”

  1. The assumed earnings rate is supposed to be a conservative actuarial decision. Politicians should have no role in setting this rate. I worked in an insurance company pension department during the 70’s when mortgage interest rates were 15%. The assumed earnings rate that the actuaries used to determine employer pension contributions was under 3%. It astounds me that in an era of extremely low interest rates, the earnings assumption used to determine the required government contribution is so high.

    1. We’re the last of the last. I am truly ashamed of how the state of Illinois treats its “common” people. We need those legislatures who really know how to add & subtract.

  2. 2015-16 T.R.S. “pension costs” (Normal contribution and debt service)

    Normal cost of T.R.S. pensions for 2016: about $800 Million dollars.
    Required payment (Edgar Ramp): about $3.8 Billion dollars

    That 3 Billion dollar difference would not exist if the state had paid
    workers what they had earned into the pension system WHEN THEY HAD EARNED IT.

    The entire “unfunded liability” is money workers earned but were never paid, as well as the interest that money would have earned had it been in the pension system. Pay what you owe on time and there is NO unfunded liability.

    Other Illinois public pension plans have similar histories. This has been going on for 7 decades. NO retirement plan is sustainable if the money owed never gets paid in. What type of plan it is doesn’t really matter. Every retirement plan (Defined benefit or not) needs funds to invest or it will fail.

    Some self identified “taxpayers” who want public employees alone to pay for this mess claim they have already paid for pensions, and shouldn’t have to pay more.

    It simply isn’t true. They haven’t paid. The unfunded liability proves it. If the pension contributions had been paid, there would be no “unfunded liability”.
    The whole definition of “unfunded Liability is ” Nobody has paid this bill!

    Point out to these individuals why what they claim cannot possibly be true, and you get a blank stare. Meanwhile, the payment has never been made, and the interest owed on the debt just keeps getting bigger.

    The only real solution is to pay the bill, not to continue to try to skip out on it. (Even the Illinois Supreme Court says to “pay now or you will pay more later.”) What will the General Assembly do?

    Instead of making payment, Illinois politicians will probably attempt another plan to stiff employees out of this already earned compensation. Since retirees have been declared off limits by the courts, the new attacks will be directed at active employees.

    These new plans to “reform” (cut) pensions of active workers can never really be done. It is just more kicking the can further down the road. Meanwhile the debt continues to grow.

    You would think that someone in Springfield would have learned the lesson of negative effects of compounding debt. It has been happening with public pensions for seven decades now. If you thought that, you would be wrong.

    1. You are correct Hugh with the exception of impact on actives. The court made it clear that actives were covered by the pension protection clause from the time they were hired. Only a change in the contract through the offer of consideration can change the contractual relationship. No such consideration has been offered.

      Future teachers are another matter. No doubt they will be the targets.

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