Largest Illinois pension fund adds $2 billion to its unfunded tab

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CHICAGO – Illinois’ largest state pension fund saw a $2 billion jump in its unfunded pension obligations in fiscal 2017 although the funded ratio slightly improved.

The Teachers' Retirement System’s fiscal 2017 actuarial reports are not yet available but the fund’s administrators provided a first glimpse Thursday at the data that is typically released later in the year, as all five state funds must submit a preliminary contribution request for the new fiscal year in November.

TRS’ funded ratio improved slightly to 40.2% in fiscal 2017 from 39.8% in fiscal 2016 while its unfunded liabilities rose to $73.4 billion compared to $71.4 billion for fiscal 2016.

The fund reported a 12.6% rate of return after paying fees, beating its 7% assumed rate of return and its custom benchmark of 11.4%. The fund returned less than 1% in fiscal 2016, 4% in 2015, 17.4% in 2014, and 12.8% in 2013. Total investment income, net of fees, was $5.5 billion. The 30-year investment return for TRS currently is 8.1%.

“TRS investments performed well during FY 2017 and that’s always good news,” said executive director Dick Ingram, noting that the fund’s investment strategy leans to the conservative side. “Risk management is critical because we know we can’t invest our way out of our funding shortfall. The TRS unfunded liability was created by seven decades of inadequate funding by state government and our future sustainability relies on consistent state funding to pay down this debt.”

TRS is the 27th largest public pension system in the nation and serves 412,500 members. It accounts for the single largest chunk of the state’s $126.5 billion of fiscal 2016 unfunded liabilities.

The state’s massive pension obligations are a major factor weighing against Illinois as a credit. The state carries lower ratings than any other state.

The budget package enacted in July adopted several pension changes including a measure that TRS has warned further damages its condition. The change smooths the impact of actuarial changes such as changes in assumed rates of return.

The measure forced TRS to revise its fiscal 2018 contribution request, lowering it by $531 million to $4.034 billion from $4.564 billion.

The fund has reduced its assumed investment return rates several times, most recently last year when it lowered it to 7% from 7.5%. The smoothing measure is expected to generate overall state budget relief of $800 million between the five funds. The original contribution for all five funds was certified at $8.8 billion. The state operates on a $36 billion general fund.

“Cutting the state’s contribution only increases our concern that TRS will eventually become insolvent,” Ingram said at the time. In fiscal 2018, the state’s contribution will fall $2.839 billion short of what the system’s actuaries say is a sound actuarial funding level.

The state faces a tough road on reforms. Lawmakers previously enacted reforms that cut benefits and raised employee contributions but the Illinois Supreme Court voided the changes in May 2015 as a violation of state constitutional provisions that protect benefits from being impaired or diminished.

Under a Senate Democratic proposal known as the consideration reform model, employees would be asked to forgo compounded cost of living increases and other COLA changes. In exchange, salary increases would continue to count toward their pensionable salary upon retirement. The changes could trim $1 billion off annual payments.

It’s unclear whether lawmakers will vote on the plan in their next session and if eventually enacted it would face legal challenge from unions.

Under the current funding schedule established by lawmakers in 1995, the state is required to make contributions as a level percent of payroll in fiscal years 2011 through 2045. The contributions are required to be sufficient, when added to employee contributions, investment income, and other income, to bring the total assets of the systems to 90% of the actuarial liabilities by fiscal year 2045.

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