SPRINGFIELD — A possible change to one of the state’s public pension systems could cast a shadow on any reform Illinois lawmakers enact this summer.

By Andrew Thomason

SPRINGFIELD — A possible change to one of the state’s public pension systems could cast a shadow on any reform Illinois lawmakers enact this summer.

The Teachers Retirement System, the largest state-run public pension system, is reviewing the numbers to calculate how much it will make on its investments. If the figure is lower than the current expected rate of return — 8.5 percent — the system’s unfunded liability would increase.

In fact, if the adopted rate of return figure is less than 7.75 percent, the unfunded liability would continue to grow yearly, said Hans Zigmund, associate director at the Governor’s Office of Management and Budget.

TRS has an unfunded liability of $44 billion, or 55 percent unfunded, meaning it only has enough assets on hand to cover 45 percent of the cost of current and future pensions.

A recommendation for a change to the expected rate of return for TRS investments, which happens every five years, could come as early as its June 21-22 board meeting.

State Sen. Jeffrey Schoenberg, D-Evanston, said the rate of return could be lowered because of pressure from the bond-rating agencies, which determine a state’s credit worthiness.

“The rating agencies like Moody’s and their counterparts have been more insistent in recent years that the return on investments be re-calibrated to be more accurate,” Schoenberg said. “This is not only happening in Illinois, but across the nation as well.”

TRS spokesman Dave Urbanek said no decision has been made and options for adjusting the expected rate of return have not been presented to TRS board members.

Lowering the expected rate of return would be a move in the right direction, but it would not affect the retirement system’s finances, said Jeffrey Brown, director for the University of Illinois’ Center for Business and Public Policy and an expert on public pension policy.

“It just means we’re going to come closer to accurately reporting what the unfunded liability is,” Brown said.

“Often what happens in public pensions is those rates are set too high. They tend to be set on someone’s expectations on what a risky portfolio allocation would return over time … but that’s highly problematic … because those expected returns are not guaranteed,” Brown explained.

The rate of return on investments for the past decade has been 6.2 percent, rather than the expected return of 8.5 percent. But Urbanek said TRS investments, during the past 30 years, have averaged a return of 9.3 percent.

“The rate of return is a 30-year number, that’s our long-range expectation of what we’re going to return” on investments, Urbanek said.

Changes to the TRS expected rate of return and unfunded liability would affect the number being associated with savings from public pension reforms, which the General Assembly is pushing. At their heart, the reforms would change cost-of-living increases some retirees receive, as well as move to fund the public pension systems fully in 30 years.

Zigmund said during a committee hearing on public pension reform last week that a lower rate of return for TRS could affect pension savings to the tune of $20 billion over 30 years.

The possibility of an increase in the unfunded liability for TRS is, in part, responsible for the lack of Republican support for a comprehensive pension reform package.

Senate Republican Leader Christine Radogno, R-Lemont, questioned a section in the package that would place responsibility for any future increase in TRS’ unfunded liability, including an increase caused by the adjustment of the expected rate of return, on local school districts.

“It’s a risk that we’re just saying, ‘We don’t want any part of that even though the state created that risk,'” Radogno said.

The four legislative leaders — Radogno; House Speaker Michael Madigan, D-Chicago; House Leader Tom Cross, R-Oswego; and Senate President John Cullerton, D- Chicago — and Gov. Pat Quinn met Wednesday in Chicago to hash out more far-reaching legislation that could include TRS.

Quinn said Wednesday another such meeting will happen later this month.

Lawmakers and Quinn have said pension reform must be done sooner rather than later, but no special session dates have been set.

Reporter Andrew Thomason can be reached at

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  1. State of Illinois – VERY misleading

    The debate surrounding the assumed rate of return for the Teachers Retirement System (TRS) is extremely important to understand.

    The comments from Dave Urbanek, while true, are VERY misleading. Mr. Urbanek states that over the last 30 years, TRS has generated a 9.3% compounded rate of return. True, BUT… what he doesn't tell you is that 30 years ago the 10 year bond peaked at over 15% and today it is about 1.6%.

    Why is this important? Over the last 30 years the TRS pension fund has benefited from one of the biggest bull markets in bonds in history, and that's one of the major reasons why the fund generated a 9.3% annual rate of return. It's like running downhill with the wind at your back – it's much easier to do. It's easy to generate 9.3% when your bond yields 15%. One may ask, why didn't they generate even higher returns over the last 30 years?

    However, looking into the future for the next 30 years, it is mathematically impossible to generate similar rates of return from bonds as TRS did over the last 30 years – we're now starting with bond yields at 1.6%. Maybe they stay at this rate for a while or trend modestly lower, but at some point in time it's likely that bond yields trend UP and TRS may then LOSE MONEY in bonds.

    So for Mr. Urbanek to suggest, and implicitly that's what he's doing, that TRS can generate a return close to 9.3% because the rate of return is a 30 year number and that's what they expect to earn over a long range is HIGHLY misleading. Of course he won't be in his job in 30 years nor will any of the legislators or members of the board of trustees to be accountable for the rate of return that is generated. People making the decision today will be long gone and taxpayers will be left holding the bag.

    For context, Illinois' 8.5% return assumption is one of the highest in the ENTIRE country. For comparison, the State of California's Teachers Pension Fund, (CalSters) assumed return on February 2, 2012 was lowered from 7.75% to 7.5%. Their actuary recommended a return of 7.0%.

    There are 3 primary reasons the return assumption is critical.

    First, the return assumption is used to discount the size of the future liability. Therefore a higher discount rate means a SMALLER liability. A smaller discount rate means a BIGGER liability. When the TRS return is lowered that means that the current reported $44 Billion unfunded liability will INCREASE. At 7.75%, this could become a $50 Billion unfunded liability. At 7.0%, it will be more than $50 Billion and the Board of Trustees should provide the public with a sensitivity analysis to show how this liability changes at different return assumptions, holding all other variables constant. Taxpayers are on the hook for this liability and we need to understand this issue.

    Second, the return assumption impacts how much the State of Illinois (or local school districts) must contribute each year into the pension fund in order to pay off the future liabilities. Again, a higher assumed rate of return suggests that a lesser amount of money needs to be contributed out of our taxes. A lower assumed return means MORE money needs to be contributed. When more money is contributed into the pension fund, that means LESS tax dollars are available to pay for other State projects like roads, parks, etc.

    Third, the true costs of providing the current defined benefit pension plan are understated. Compensation costs include salary, pension, healthcare, and other benefits provided to employees. But by using aggressive assumptions, the actual cost is not fully recognized or understood. Today, it is very expensive to provide a defined benefit pension. Just go ask an Insurance company or annuity provider to give you a quote for a $75,00 annuity which grows at 3% compounded per year. You will be surprised how much this policy will cost. The true cost and awareness of pensions are also muddied by our current funding system – Boards of Education and School Administrators don't fully account for their compensation costs since they're not fully paying for it (another topic for another day)

    So you can see the pension dynamics and the incentives for the politicians. Use overly optimistic assumptions like 8.5% and report a lower unfunded liability and contribute less into the pension fund each year, and use more tax dollars for projects your constituents want and increase your chance of re-election. It's a virtuous cycle.

    However, over time, reality sets in and people realize the game that has been played. That time is now.

    The most unfortunate part of this charade is that the debt burden that has been created will be passed on to our children and grandchildren. Many of the people who manipulated the system are now retired and out of office, except for people like Mike Madigan. So it's the new legislators who now must deal with this problem.

    This problem must be dealt with sooner or later. The sooner the better.

    There are no easy or magical solutions that can get us out of this problem.

    We need to start with realistic assumptions and understand the true costs of promises we're giving.

    There is no free lunch.

    But please stop misleading and lying to the public.




  2. Pensions

    Mr. Young

    Thanks for bringing some sanity to the "financial experts" in the Peoples Republic of Evanston, where all solutions have the same mantra: "raise taxes and fees"….

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