Contributed by Larry Smith
Earlier this month, the Teachers’ Retirement System (TRS) in the State of Illinois advised its members that TRS could be facing a substantial shortfall relatively soon. It suggested that the Illinois legislature needed to come up with ways to fund the pension obligations. Preventing insolvency to the system contains two components that are not new to anyone: finding new revenues and paying less in the way of benefits.
The Illinois Teachers’ Retirement System is only 47% funded. This 47% estimate assumes an actuarial rate of return of 8.5% per year. Only two states in the country assume as high as an 8.5% rate of return. To achieve that kind of rate of return, Pensions & Investments Magazine suggests that Illinois has the fourth riskiest pension investment portfolio in the United States. In 2011, having achieved a 23.8% return on investment on investment portfolio assets, the Teachers’ Pension Fund was only able to cut the $48 billion unfunded liability by $2 billion. Selling pension obligation bonds was used as a means to either cut the deficit or mask the deficit. Proceeds from the bond sales were used to fund pension obligations. Borrowing money with a 5% yield on a bond only helps if the State Teachers’ Retirement Fund can earn more than 5% on its investment portfolio. Only $7.3 billion of the $10 billion bond proceeds went into the pension fund. Because of the way the other $2.7 billion was allocated, at the end of the day, the combination of the bond obligations and the pension fund obligations grew rather than diminished, even though state income tax rates increased from 3% to 5%.
Even with Rod Blagojevich “on the farm,” his former fellow democrats continue to wrestle with an appropriate solution to the pension shortfall problem. Good luck!