Illinois Pension Fund Faces Insolvency, Needs Funds, Reform

Experts are predicting that unless a course correction is implemented immediately, Illinois’ teacher pension system could be in danger of insolvency, according to IllinoisWatchdog.org. The head of the Teachers’ Retirement System is calling on the state to add $3.4 billion to the fund for 2014 – nearly $500 million more than was requested last year [...]

Experts are predicting that unless a course correction is implemented immediately, Illinois’ teacher pension system could be in danger of insolvency, according to IllinoisWatchdog.org. The head of the Teachers’ Retirement System is calling on the state to add $3.4 billion to the fund for 2014 – nearly $500 million more than was requested last year – to prevent the fund’s future insolvency.

Dick Ingram, charged with overseeing the Illinois’ TRS, says that the shortfall is the result of the state shirking its funding responsibility over more than three decades. He says that while the fund can continue to meet its obligations to retired teachers in the short term, its long term health continues to be in grave danger. He added that the only way that the fund’s future could be assured would be for the state to start meeting its obligations soon, and in full.

The state’s contribution to the fund is determined by a formula set in 1995. Every year, the fund’s administrators calculate the amount the state must kick in for the next 12 months and submit the number to the government in October. The fund’s recent request for a higher amount is due to the lower-than-anticipated returns on investment of TRS capital over the past year, mainly due to a 11.71% drop in the value of international stocks held by the fund. Although the losses were offset somewhat by positive returns on local investments, including “real estate, bonds and private equity and hedge funds,” they weren’t enough to overcome losses elsewhere.

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.

Ted Dabrowski, vice president of Chicago-based pension think tank the Illinois Policy Center, says that while the government can’t do anything to increase the rate of return, the system that funnels tax revenues into pension funds needs to be rethought in order to alleviate the burden on Illinois taxpayers.

The formula developed in 1995 rests on the assumption that if the state keeps up its contributions, the fund will be able to meet 95% of its obligations by 2045. Recent funding shortfalls have made the estimate unreliable.

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.

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