Illinois Teachers Retirement System's latest return-rate projections costs taxpayers $420 million
Illinois taxpayers are left with a bill for another $420 million paid into the state's underfunded pension account following a recent vote by the board of Illinois' largest public-pension fund to accept a lower rate of return on investments.
Illinois Teachers Retirement System (TRS) trustees voted recently to lower the assumed rate of return on their fund's investments from 7.5 to 7 percent, which will require the state to deposit $420 million extra into the pension account in the next fiscal year. The move reflects changes in the world's economy, which have dampened investment results, according to a statement issued by TRS Executive Director Richard Ingram.
The vote marked the third time in four years that the TRS reduced its assumed rate of return, Ingram's statement said.
"This is a prudent move for TRS in light of the conditions that we see in the economy," Ingram said in the statement. "We will continue to study expected returns as part of our asset-allocation review during the coming year."
That's what they should be doing, Gov. Bruce Rauner said prior to the TRS board vote.
"My understanding is that they are going to be discussing and debating investment returns and proper assumptions about pensions," Rauner told reporters in Decatur the day before the vote. "That's a good thing. That's part of their job. They should do that, but in terms of quickly voting on something that hasn't been discussed and they haven't discussed publicly with their prior analysis with the general public and quickly voting on making a decision could impact taxpayers in Illinois to the tune of hundreds and hundreds of millions of dollars every year. That decision should not be taken quickly, and it should not be taken without a lot of transparency."
Rauner told reporters that he could only hope that the TRS board would bring experts from around Illinois and around the nation who will look at pension performance and investment returns, and offer the best advice and input.
"I'm not an actuary; I'm not a deep expert," Rauner said. "I did invest a lot of pension money in my business career for 32 years, and I worked for teachers' retirement systems all over America. We generated more than 20 percent, but we were really good. That's not what the pension funds are generating on average."
Rauner recommended that the TRS board assess pension performance, compare that to the needs of its retirees and come to the right conclusion.
"The issue is transparency and the speed of the decision making," Rauner said. "What they shouldn't do is rush this decision. These are long-term, major, impactful decisions."
Ingram, in his own statement after the vote, said the TRS board did get advice from the system’s actuaries, Segal Consulting, of Chicago. Segal recommended the 7 percent rate based on expectations on returns from investments, combined with inflation and an expected decline over the next several years. Many economists have been saying that lower returns should be expected because fixed-income investments, such as bonds, are carrying interest rates at near-record lows and that stock market volatility continues, Ingram said in his statement.
“Along with our actuaries and investment consultants, we have methodically collected and analyzed all of the most recent economic projections and forecasts,” Ingram said. “The consensus is that investment returns in the foreseeable future will be lower than what we have seen in the previous few years.”
The vote has been widely seen as a loss for the Rauner administration, and Rauner himself was reported as being furious with the board vote. The governor previously had called on the board to delay its decision, saying the recommended change would be devastating.