An advisor to Illinois Gov. Bruce Rauner warned that a lowering of the assumed investment return rate of the teachers’ pension fund would drive up future state payments.

CHICAGO – Illinois' largest retirement fund will review its assumed investment rate Friday amid a warning from Gov. Bruce Rauner's administration that lowering it from 7.5% could have a "devastating" impact on funding for social services and education.

The Teachers Retirement System board is set to hear a presentation by the consulting firm Segal on the fund's 7.5% investment return rate, which the board lowered from 8% in 2014. The board will discuss the report and could "vote on the status of the current assumed rate of return," said TRS spokesman Dave Urbanek.

While a lower assumed rate of return could spur higher payments to the woefully underfunded pension fund, it would come at a cost for the state, which is struggling under a mounting backlog of unpaid bills and a budget deficit amid a political stalemate that has left Illinois without a full budget since June 2015.

Rauner's senior advisor for revenue and pensions, Michael Mahoney, warned in a memorandum to Rauner chief of staff Richard Goldberg that a lowering of the assumed rate would drive up future state payments.

The fund will receive $3.9 billion, up 6.5% from a year earlier, of the state's roughly $8 billion fiscal 2017 contribution to the five state employee retirement funds.

TRS consultants have estimated that an actuarially based payment would top $6 billion for its fund alone.

The lowering of the rate to 7.5% in 2014 resulted in a $200 million jump in contributions the following fiscal year.

"While many times assumption changes have moved the state closer to actuarial reality and painted a truer picture of the costs of defined benefit pension plans, the lack of information available on the impact of this change is troubling," Maloney wrote. "If the board were to approve a lower assumed rate of return taxpayers will be automatically and immediately on the hook for potentially hundreds of millions of dollars in higher taxes or reduced services.

"Unforeseen and unknown automatic cost increases will have a devastating impact on the state's ability to provide adequate resources to social service programs and education," Mahoney wrote.

The fund smooths its annual results over five years.

Rauner has proposed extending that smoothing to any changes in assumed investment return rates over the same five-year period, but the proposal stalled along with his budget proposal.

TRS' unfunded liabilities increased last year to $62.7 billion from $61.5 billion, though its funded ratio rose to 42% from 40.6% in fiscal 2015, based on the actuarial five-year smoothing.

The state's collective unfunded obligations stand at $112.9 billion for a 40.9% funded ratio and have ballooned by $86 billion since fiscal 2001, according to the Illinois Commission on Government Forecasting and Accountability.

"The main factors for this increase in unfunded liabilities were actuarially insufficient employer contributions, changes in actuarial assumptions and lower-than-assumed investment returns over five years, along with other miscellaneous actuarial factors," a commission report this year said.

The spiraling liability illustrates the flaws in the payment plan Illinois adopted in 1995, which is supposed to get the retirement system to a 90% funded ratio in 2045.

The contributions, though they are affected by the plans' assumed investment returns, are not tied a formula that would achieve an actuarially required level payment.

Moody's Investors Service warned in a recent report that lackluster investment returns reported by some of the nation's largest public pension funds signal intensifying fiscal pressure on U.S. state and local governments.

Illinois is grappling with a bill backlog that could soon hit $10 billion and a deficit of at least $5 billion.

The Republican governor and the legislature's Democratic majorities passed a stopgap funding plan to get the state through December after failing to on a fiscal 2016 or fiscal 2017 budgets.

The Illinois Supreme Court last year tossed state pension reforms finding benefit cuts unconstitutional. Lawmakers could take up new reforms they believe won't run afoul of the constitution early next year.

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