Illinois Teachers Pensions ... Government Is Still Talking About the Wrong Stuff

Illinois government officials are having a silly debate about what to do about its approximately $85 billion underfunded public sector retirement fund liabilities.

Of course, that debate should have been held years ago, and should have centered around how much funding taxpayers and public sector workers alike would agree to support with their taxes and contributions each year.

Such a discussion never took place. Government officials and public sector union leaders decided "in the proverbial smoke filled room" that the state would somehow get enough money to pay the benefits "down the road." They then handed to smiling public sector workers an itemization of their future benefits and handed unsuspecting taxpayers a blank check to sign on behalf of future taxpayers.

That's a telling example of our public servants and public sector union leaders in action! And that's exactly why politics sucks.

So now the politicians and their actuarial consultants are discussing whether and how much to change the rate of return assumptions that Illinois will earn on its pension fund investments. And this they're doing with respect to money that the state pension fund doesn't even have in hand and available to invest. It's simply impossible to earn a return on nothing.

Here's a suggestion for the Illinois politicians. Put the maximum amount of money in the pot that you can get Illinois taxpayers, teachers and other similarly affected public sector employees to contribute, and then monitor results and see what happens over time.

In other words, currently you can't invest that money which you don't have available to invest. The presence of money precedes the investment of money. It's that simple.

If a basketball team is behind by 30 points at the half, it's not useful to take the time to fine tune its game plan, including its offensive and defensive strategies. Nor is it useful to take much time to discuss the relative merits of employing a zone or man-to-man press to get back in the game. But it is time to DO SOMETHING, and quit talking about the silly woulda-coulda-shoulda beens. That train has left the station.

Pension shortfall may increase puts what looks to me as the Illinois pension funding 'talking points' theoretical silliness discussion this way:

"SPRINGFIELD — State government’s largest pension system is evaluating whether to lower the rate of return it expects to get on its investments, a step that could significantly increase the state’s pension payment shortfall.

 

An actuarial firm employed by the Teachers’ Retirement System recommended to the TRS board of trustees that the rate of return be lowered, the TRS said in a statement Thursday.

 

The system now assumes its investments will earn 8.5 percent annually. Investment income is one of the revenue sources used to pay pension costs, along with contributions from educators and money paid by the state.

 

The actuary recommended that TRS consider options ranging from 8.25 percent to as low as 7.75 percent.

 

Lowering the expected rate of return will result in higher payments by the state into the system and also cause TRS’s unfunded liability to increase. TRS released numbers showing one change could cost the state an additional $600 million in the next budget year. The TRS board decided last week to postpone its rate of return decision until September.

 

“This is one of the most important decisions the board will make,” TRS executive director Dick Ingram said in the statement. “Our members and the board should have the benefit of other opinions and analysis before making a key decision that affects the next five years.”

 

TRS’s actuary, Buck Consultants, recommended a number of changes to actuarial data used by the system to determine benefit costs, including assumptions about mortality, salaries of TRS members, retirement age and length of retirement. For example, if salaries don’t increase as much, pension costs will be lower.

 

The estimated rate of return, however, is crucial.

 

“Buck is not confident that 8.5 percent can be sustained as much as we need it to be sustained,” said TRS spokesman Dave Urbanek. “To them, it’s better to have something that is more achievable.”

 

The state will pay $2.9 billion into the TRS system in the current fiscal year. Buck estimates that will increase to $3.5 billion next year if TRS adopts all of its recommendations, but continues to assume an 8.5 percent rate of return.

 

However, if TRS lowers the expected rate of return to 8.25 percent, the state will have to pay an estimated $3.7 billion. If TRS cuts the rate to 7.75 percent, the state payment would be an estimated $4.1 billion.

 

The board also could decide to leave the estimated rate of return at 8.5

percent."

 

My Take ... Just Do It!

 

Here's what I would advise all interested parties and Illinois taxpayers to do.

Put lots more money in the pension pot. As much as possible and as much as the taxpayers and teachers will agree to contribute. Immediately and then continuously.

 

Then agree among yourselves on how that money will be invested. How much in stocks and how much in bonds, for instance.

 

Whether the current shortfall is $85 billion, or less or more than that, doesn't really matter at this time. Or at any time in the foreseeable future, for that matter.

 

Except to the bean counting actuaries and accountants, of course. The eventual real world liability may turn out to be substantially more or less than $100 billion, depending on lots of things, but especially how much taxpayers and teachers are willing to contribute, how those funds are invested, and what the retirement benefits will be over time.

It would also be timely to discuss replacing all or part of the current pension plan with a defined contribution 401(k) type matching plan. The amount of the taxpayer match should be agreed to as well.

 

If all the pension fund's investments are going into stocks, continuing to use an actuarial rate of return assumption of 8.5% is acceptable. But if 50% or so of the funds are going to be invested in bonds, then dropping the rate of return assumption to 7.75%, as the consultants suggested, won't be enough.

It probably would need to be reduced to 7% or lower. And to the extent a 401(k) plan is implemented, there's no need for any rate of return assumption at all on that portion of the money. The employee would receive all the rewards and bear all the risks of investment returns on that 401(k) money.

 

In sum, it makes little if any difference what rate of return assumption is used for the foreseeable future. The lower the rate of return, of course, the more contributions will be required.

But maximum contributions are required right now anyway, regardless of the rate of return assumptions used. There's a huge hole to be filled. And debating what that money invested will earn is just plain silly. It won't be enough to fill the $70/$85/$100 billion or whatever hole that exists. Not for a very long time, if ever.

 

In other words, taxpayers and teachers have to agree (1) either to cough up at least $4 to $5 billion or more each year (compared to the current $2.9 billion now being contributed) or instead (2) decide to alter the amount of guaranteed retirement benefit amounts to be paid.

And they also have to decide whether they're willing to put all of the investment funds in stocks or not. These will not be easy decisions for teachers and taxpayers to make, for sure, but nevertheless they are totally necessary ones.

 

It's definitely not a "tweaking" or fine tuning of the rate of return assumption on investments that's needed. It's an acknowledgement that there's a huge and currently unaffordable matter which must be addressed. Taxpayers have to be brought completely on board, as do teachers, both those employed and retired as well.

Unions and pols will resist all this transparency, since disclosing the truth and sharing the decision making won't make them look so pretty. But it will reveal the reality of the situation.

 

To be blunt, government already has done enough. So have the teachers' unions. It's the OPM sickness at work.

 

It's time to let the people with their skin in the game take over. Put MOM in the game, coach.

And whether MOM "guesstimates" that contributions will earn 7%, 7.5%, 8%, 8.5% or something else over time isn't important until a clear headed decision is reached about how MOM's money will be invested.

After that, it's sit back, watch the game unfold and wait and see time. If America gets its competitive act together. and if We the People get our mojo back and U.S. economy on track, and if we as a nation emphasize and support private sector growth and global competitiveness, we'll be fine. So will the teachers and taxpayers of Illinois.

In that case, an average assumed annual rate of return on investments of 8.5% isn't at all unrealistic for an all stock portfolio over a lengthy period of time.

 

But if the money isn't going to be there to be invested, or if the money isn't going to be invested almost entirely in stocks, or if the U.S. economy fails to resume its position as the global leader, then maybe a return of 5% or less will be the reality. And that will be a nightmare.

 

So for now, let's all just get back on the court, play hard, play smart and play together as a team.

 

Halftime is over, and Illinois is behind by 30. The time for talk, strategizing and planning is over.

 

An all out, all hands on deck, FULL COURT PRESS is absolutely essential.

 

Thanks. Bob.