Stock market returns can’t solve the state’s pension problem.


Crain’s Greg Hinz buries the lede.

The headline this weekend was that Illinois Makes No Progress on Pensions Despite Rising Stock Market.

And then Greg adds: A new report from the Legislatures fiscal-research unit paints a sad picture of ever-rising pension debt.

Leading with the issue of a rising stock market and returns on investments for TRS is pretty bogus since the returns on investment was never going to solve the problem of the state’s pension liability.

You have to read all the way down a bunch of paragraphs until Greg gets to the heart of the matter.

The report attributes most of the lack of progress to the state’s failure to annually contribute the amount actuaries say is needed to bring the systems to a 90 percent funded ratio by 2045. The state and its taxpayers are contributing more than ever to the funds, more than $9 billion, but because that’s less than what’s required, any gains on investments are immediately applied to filling the hole rather than raising the funded ratio.

As a matter of practice, the legislature in the best of times will pay only the statutory minimum of what is owed to the pension systems and not the actuarial amount. The actuarial amount is what is need to chip away at the liability.

They pay the minimum owed on their credit card. You know how that works. The balance just grows.

As far as returns on investments go, I gave retired teacher and former member of the TRS board of trustees, Bob Lyons, a call this morning.

“Investment returns have been pretty good. Even three months ago when the market crashed, TRS wasn’t hurt as bad as some funds. But investment returns were never intended to fund the system.”

Some try to blame TRS’s management of our funds rather than the failure of the legislature to pay what is actuarially owed.

But I think the board is a good trustees of our money.  Bob wrote last June:

The investment philosophy that TRS, and really every other pension fund, follows is to protect the assets and keep investment risk as low as possible.

Excellent diversity and smart (read active) investing is what TRS does to achieve that policy.  In the world of investing you have to pay for those qualities.  While it varies from year to year, TRS fees run about .07% per annum.  The TRS 40-year return at the end of calendar year 2019 was 9.1%, after fees. Interestingly the 40-year return for S&P index was 8.4%, after fees  Think about it. In the world of investing there is no “free lunch,” everything has a price. Based on return the TRS portfolio was ranked in the top 25% of public pension funds.

Realistically the state is not going to make its actuarial payments during the pandemic and who knows how long that will last?

Even after the pandemic, why should we believe that they will stop shorting the system? Past behavior is the best predictor of future performance.

Monthly payments to retirees will continue to be made.

Meanwhile the liability grows, now exceeding $136 billion.

3 thoughts on “Stock market returns can’t solve the state’s pension problem.

  1. Fred, thanks for posting this and keeping us informed. I, like most of us pensioners, have grown so tired of the excuses and the attacks on the pensions we worked so hard to attain. Both from inside the legislature and from outside sources (especially those in the ever-declining media), they never fully explain why funding pensions has become such a problem (opting to cherry-pick facts, opinions, and propaganda). They need to stop making excuses and come up with reasonable solutions. Like you stated, you can’t keep paying the minimum on the state credit card. That’s just common sense. But sadly, in today’s political arenas that’s sadly lacking. What worries me most is what’s the next dumb thing they’re going to to our pensions. At this stage of our lives it’s something we shouldn’t have to worry about. We were promised it. We earned it.

  2. .07 is unacceptable fee. But seeing they have to have hedge funds, private equity, and a bunch of other garbage because it is considered an institutional fund is ridiculous. A plain vanilla three fund total stock, total int., total bond can generate better returns and fees that are just a few basis points. But of course they have to have a board of people that have no clue about investing. The other city pension funds have the same set up. Have to take care of Wall street and big banks I suppose.

  3. What happen to the Millionaire Tax (really $250k) that would effective only 3% that JB got elected on 20 months?

    Have not seen it – but debt is far higher –

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