By Bob Lyons
Let me say again at the outset, that this is my report and is not any way official. The start of the 2018 fiscal year lends itself to the Good News/Bad News format. My last year on the board was financially a good year, actually a very good year. With the credit going to Stan Rupnik and our professional investment staff, TRS made 13.1% gross of fees and more significantly 12.3% net of fees. Our preliminary report on our assets at the end of FY 2017 had us at $49.1 billion up from $45.3 billion at the start of the year, and is safe to say the final figure should be a little higher as we still have money from last year coming in from real estates sales and private equity returns. With equity markets up since July 1, unofficially the TRS pension fund today in early September is somewhere north of $50 billion. That, of course, is the good news.
But we live in Illinois, and there is, of course, some bad news. As part of the law that this summer gave Illinois a much-needed increase in our state income tax, there also was included a “smoothing” of the effect of TRS lowering its anticipated rate of return. Even though our investments were positive and enjoyed double digit gains this past year, the long- range estimate is that the past returns are not predictive of future income. Over the past five years TRS has brought its expectations down in three steps from 8.5% to 7% annual returns, which would have required the state of Illinois to increase its contributions to make up the difference in smaller expected future earnings. The new law says that for each of three decreases in expected returns that it will now take five years for the full effect to take place. It is easier to understand when you look at the real numbers.
First, what we thought we were going to get before the new law was a state required contribution for fiscal year 2018 of $4,564,952,674. It is important that you understand that that number has nothing to do with what an actuary would have determined is needed for the sound financing of a pension. Instead the number was established by the goal of the 1995 state law that sets what the state of Illinois needs to pay each year to bring the fund to 90% funded in 2045. Plus that funding formula is heavily back-funded with a majority of the money to be contributed during the last five years. If the necessary state contribution would be based on actuarial math with a industry standard goal of 100% funding based on twenty years of even annual funding, the required number would have been $6,876,283,032, or $2,311,330,358 higher, which would be a significant difference, but would actually mean a smaller total contribution in the end. The effect of the new law means that instead for FY 2018 that Illinois will only need contribute $4.034 billion. In other words, the state of Illinois is once again “kicking the can down the road.” It is not so much that the state of Illinois would be characterized as a slow learner, but as a reluctant learner. They know what the result will be, but they prefer to ignore the reality. What they want to see as a savings of over $530 million, according to TRS Director Dick Ingram, “puts off the inevitable and will create a payment of $1.6 billion in the future.” Of the now just over $4 billion state contribution, only $974 million is needed to pay the anticipated cost of TRS pensions this year, and that is all the state would need to pay if our pension fund was fully funded. If you hear a legislator or a neighbor complain about the percentage of state revenue going into pensions, tell them over 75% of the money is for what Illinois owes us. In Illinois, reality bites.