Oct. 29, 2012

By Jayette Bolinski

SPRINGFIELD – Illinois’ teacher pension system could go broke if the state does not figure out a way to fully fund the system soon, the leader of the retirement system and others have warned again.

Illinois’ Teachers’ Retirement System is seeking $3.4 billion from the state for its portion of the pension costs for fiscal year 2014. That’s about $500 million more than the system sought from the state for the previous fiscal year.

“TRS faces the real risk of future insolvency because of insufficient state funding over the last 30 years,” said Dick Ingram, executive director of the Teachers’ Retirement System, who  previously has made the same dire prediction.

“TRS absolutely will be able to meet its obligations to retired teachers in the near future, but we cannot guarantee retirement security for future generations of teachers unless the state meets its total obligations.”

TRS calculates the state’s annual funding contribution based on a formula designed by the state in 1995, and the system reports the required funding amount to the state every year in October.

The latest funding increase comes on the heels of dismal investment returns during the last fiscal year. TRS announced last week that it earned a mere .76-percent return on its investments, primarily because of a negative 11.71-percent rate of return on international stocks. Other investments, including real estate, bonds, private equity and hedge funds, had positive investment returns.

A year ago TRS reported a 23.6 percent return on its investments. TRS officials say long-term returns are what matters most, not year-to-year returns. They noted that TRS’ 20-year return on investment is 7.73 percent — a figure that is not nearly sufficient to make a dent in the debt, critics say.

During the summer, TRS revised downward its expected rate of return from 8.5 percent to 8 percent, under pressure from government accountability groups that say anticipated rates of return were unrealistic and too exaggerated. Other pension systems also revised their rates.

“There’s nothing to do about rates of return, but what we have to do is find a system that is fair for everybody — one in which teacher retirements are funded, but also one in which the taxpayers aren’t always called upon to make up the differences,” said Ted Dabrowski, vice president of policy at the Illinois Policy Institute, a Chicago-based think tank that studies the state’s pension crisis.

Also factoring into the increased contribution amount is the state’s “ramp”-style funding system that predicts Illinois can fund 90 percent of its pension system by 2045. However, underfunding of the system and payment holidays have muddied the water.

TRS says the state’s funding system is flawed because it is artificially set and is not based on actuarial calculations. It requires pension costs to be calculated on 50 years instead of the commonly accepted 30 years.  And it is designed around a 90-percent funding target instead of a 100-percent goal.

In fact, TRS says, the state’s latest calculated contribution falls nearly $942 million short of what it would take to fund the pension system under standard actuarial calculations.

“Over the years, state government has taken its responsibilities to TRS very seriously, has paid its legal obligation in full and should be congratulated for that,” Ingram said. “However, the legal state contribution for FY 2014, and for the last several years, has not been enough to improve the system’s long-term finances.”

Bob Williams, president of State Budget Solutions, a nonprofit organization that studies state budgets all over the country, said Illinois is dangerously close to a breaking point on funding its pension systems. He, like others, paints a bleak picture, noting that during the past 10 years not only did Illinois underfund its public pension systems by $5.4 billion, it also racked up $17.2 billion in unfunded pension bonds.

“That means Illinois taxpayers have to make up the $5.4 billion that wasn’t invested into pensions, plus the principal and interest on the $17.2 billion in pension obligation bonds, plus the lost assumed rate of return on the $5.4 billion,” he said. “In addition, taxpayers need to make up any increase in pension benefits or pension spiking that was never factored into the original pension calculations.”

Williams said Illinois needs to switch from a defined-benefit system to a defined-contribution system, which is similar to a 401-k retirement plan common in the private sector. He also recommends having all local school districts pick up their own employee pension costs instead of transferring that burden to the state of Illinois.

“We’re going off a cliff, and in some places employees aren’t paying into their own pensions? It’s crazy,” Williams said. “Employees have to pay more, and they have to go to a defined-contribution system. That’s the only way out. There’s only so much you can get out of the taxpayers.”

A heated debate over shifting pension costs to local school districts is ongoing among state lawmakers and Gov. Pat Quinn. Quinn, House Speaker Michael Madigan and others are in favor of the cost shift. Others, including state Senate Republican Leader Christine Radogno, are against the idea.

Radogno on Monday said it “should scare the daylights out of suburban property taxpayers” because it will shift millions of dollars in pension costs to local schools and could force massive cuts to education or property tax increases for suburban and downstate homeowners. Chicago property owners already pay for Chicago teachers’ pensions.

“It makes sense for schools to have ‘skin in the game,’ but pension benefits are set by the Illinois General Assembly. To allow politicians in Springfield to set the benefits but send the bill to suburban property taxpayers is a recipe for disaster,” Radogno, of suburban Lemont, said Monday.

“Illinois desperately needs public employee pension reform, but we cannot allow decades of mismanagement to be shoved onto the suburban and downstate property taxpayers and call it ‘reform’,” she said.

Abdon Pallasch, assistant budget director for Quinn, said TRS’s need for more money from the stateunderscores the need for the comprehensive pension reform “as the increased costs associated with pensions continue to squeeze all areas of state government, including education, services for our most vulnerable and public safety.”

Pallasch said money for the state’s portion of the pension contribution to TRS will come from the general revenue fund.

“Increasing pension payments, due to the back-loaded structure of the 1995 pension ramp, as well as skipped pension payments by prior administrations, continue to be the biggest threat to state resources,” he said.