CHICAGO — The Illinois Teachers’ Retirement System’s adoption of a lower projected rate of return on investments, and other changes to its actuarial assumptions, will hike the state’s scheduled payment in the next fiscal year by $470 million.
The changes approved by the system’s board Friday take effect for fiscal 2014, affecting the state’s next budget that covers July 1, 2013, through June 30, 2014. Gov. Pat Quinn will release a budget proposal early next year.
The increased costs add to the state’s fiscal and liquidity struggles, which include unfunded pension obligations that have driven several rounds of rating downgrades.
Based on an 8.5% rate of return, Illinois’ contribution for the largest of five pension funds that make up the state retirement system was scheduled to be $2.89 billion. The payment after the change will rise to $3.37 billion, up from $2.7 billion in the current fiscal year.
The state’s total payment for all of its pension funds in the current budget is $5 billion, up by $1.1 billion from a year earlier. The changes are estimated to raise the state’s contributions to $204.1 billion from $173.2 billion through 2045.
The board’s 8.5% rate of return was adopted in 1997. The actual average rate of return between 1981 and 2011 has been 9.3%, but the 10-year rate has been lower at 6.8%.
If the system were to have applied the assumption changes to its most recent actuarial calculations for fiscal 2011, its funded ratio would drop to 54.8% from 57.6%. The system manages a $36 billion investment portfolio.
The state retirement system collectively carries $83.5 billion of unfunded liabilities for a funded ratio of 43%.
The TRS board’s decision follows a recommendation in August from the system’s actuaries, Buck Consultants of Chicago, which presented scenarios at a 7.75%, 8% and a 8.25% rate.
“The assumed rate of return greatly influences the financial future of TRS. Reducing the rate from 8.5% to 8% is a prudent move that balances reality with the needs of TRS members,” said the fund’s executive director, Dick Ingram.
“The board’s decision takes into consideration many things: the volatility of the world economy, the fiduciary duty we have to keep the system strong, the financial problems faced by Illinois and state government’s long-term responsibility to teacher pensions,” he said.
The other changes in actuarial assumptions include retirement age, length of retirements, salaries, and mortality.
TRS cited a report from the National Association of State Retirement Administrators that found of 126 major state and municipal pension systems across the country, 47 had set an assumed rate of 8%.
Quinn’s office used the board’s action to underscore its push for reforms.
“We anticipated this adjustment. TRS’ action underscores Gov. Quinn’s continued calls on state legislators to enact comprehensive pension reform,” said spokeswoman Kelly Kraft.
Illinois’ pension woes and lack of action during a special session last month were primary factors in a recent one-notch Standard & Poor’s downgrade of the state’s general obligation rating to A. The agency assigns a negative outlook.
Political bickering has stalled pension reforms. Democrats want both changes in cost-of-living increases and to begin shifting the burden of paying for downstate and suburban teachers to local districts, while Republicans oppose the teacher cost-shift.
No legislative action is expected before the November election and some elected officials have said a deal is more likely early next year during a lame-duck session before the new General Assembly is sworn in.
Moody’s Investors Service rates Illinois’ $27 billion of GOs A2 and Fitch Ratings assigns an equivalent A rating, both with stable outlooks.