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IL: Teachers’ Retirement System bleeding out, experts say

By   /   October 29, 2012  /   News  /   5 Comments

PAY, OR GO BUST?: Illinois will have to shell out more for its share of payments to the state’s Teachers’ Retirement System next year.

By Jayette Bolinski | Illinois Watchdog

SPRINGFIELD – Illinois’ teacher pension system could go broke if the state does not figure out a way to fully fund the system soon, the leader of the retirement system and others have warned again.

Illinois’ Teachers’ Retirement System is seeking $3.4 billion from the state for its portion of the pension costs for fiscal year 2014. That’s about $500 million more than the system sought from the state for the previous fiscal year.

“TRS faces the real risk of future insolvency because of insufficient state funding over the last 30 years,” said Dick Ingram, executive director of the Teachers’ Retirement System, who  previously has made the same dire prediction.

“TRS absolutely will be able to meet its obligations to retired teachers in the near future, but we cannot guarantee retirement security for future generations of teachers unless the state meets its total obligations.”

TRS calculates the state’s annual funding contribution based on a formula designed by the state in 1995, and the system reports the required funding amount to the state every year in October.

The latest funding increase comes on the heels of dismal investment returns during the last fiscal year. TRS announced last week that it earned a mere .76-percent return on its investments, primarily because of a negative 11.71-percent rate of return on international stocks. Other investments, including real estate, bonds, private equity and hedge funds, had positive investment returns.

A year ago TRS reported a 23.6 percent return on its investments. TRS officials say long-term returns are what matters most, not year-to-year returns. They noted that TRS’ 20-year return on investment is 7.73 percent — a figure that is not nearly sufficient to make a dent in the debt, critics say.

During the summer, TRS revised downward its expected rate of return from 8.5 percent to 8 percent, under pressure from government accountability groups that say anticipated rates of return were unrealistic and too exaggerated. Other pension systems also revised their rates.

“There’s nothing to do about rates of return, but what we have to do is find a system that is fair for everybody — one in which teacher retirements are funded, but also one in which the taxpayers aren’t always called upon to make up the differences,” said Ted Dabrowski, vice president of policy at the Illinois Policy Institute, a Chicago-based think tank that studies the state’s pension crisis.

Also factoring into the increased contribution amount is the state’s “ramp”-style funding system that predicts Illinois can fund 90 percent of its pension system by 2045. However, underfunding of the system and payment holidays have muddied the water.

TRS says the state’s funding system is flawed because it is artificially set and is not based on actuarial calculations. It requires pension costs to be calculated on 50 years instead of the commonly accepted 30 years.  And it is designed around a 90-percent funding target instead of a 100-percent goal.

In fact, TRS says, the state’s latest calculated contribution falls nearly $942 million short of what it would take to fund the pension system under standard actuarial calculations.

“Over the years, state government has taken its responsibilities to TRS very seriously, has paid its legal obligation in full and should be congratulated for that,” Ingram said. “However, the legal state contribution for FY 2014, and for the last several years, has not been enough to improve the system’s long-term finances.”

Bob Williams, president of State Budget Solutions, a nonprofit organization that studies state budgets all over the country, said Illinois is dangerously close to a breaking point on funding its pension systems. He, like others, paints a bleak picture, noting that during the past 10 years not only did Illinois underfund its public pension systems by $5.4 billion, it also racked up $17.2 billion in unfunded pension bonds.

“That means Illinois taxpayers have to make up the $5.4 billion that wasn’t invested into pensions, plus the principal and interest on the $17.2 billion in pension obligation bonds, plus the lost assumed rate of return on the $5.4 billion,” he said. “In addition, taxpayers need to make up any increase in pension benefits or pension spiking that was never factored into the original pension calculations.”

Williams said Illinois needs to switch from a defined-benefit system to a defined-contribution system, which is similar to a 401-k retirement plan common in the private sector. He also recommends having all local school districts pick up their own employee pension costs instead of transferring that burden to the state of Illinois.

“We’re going off a cliff, and in some places employees aren’t paying into their own pensions? It’s crazy,” Williams said. “Employees have to pay more, and they have to go to a defined-contribution system. That’s the only way out. There’s only so much you can get out of the taxpayers.”

A heated debate over shifting pension costs to local school districts is ongoing among state lawmakers and Gov. Pat Quinn. Quinn, House Speaker Michael Madigan and others are in favor of the cost shift. Others, including state Senate Republican Leader Christine Radogno, are against the idea.

Radogno on Monday said it “should scare the daylights out of suburban property taxpayers” because it will shift millions of dollars in pension costs to local schools and could force massive cuts to education or property tax increases for suburban and downstate homeowners. Chicago property owners already pay for Chicago teachers’ pensions.

“It makes sense for schools to have ‘skin in the game,’ but pension benefits are set by the Illinois General Assembly. To allow politicians in Springfield to set the benefits but send the bill to suburban property taxpayers is a recipe for disaster,” Radogno, of suburban Lemont, said Monday.

“Illinois desperately needs public employee pension reform, but we cannot allow decades of mismanagement to be shoved onto the suburban and downstate property taxpayers and call it ‘reform’,” she said.

Abdon Pallasch, assistant budget director for Quinn, said TRS’s need for more money from the stateunderscores the need for the comprehensive pension reform “as the increased costs associated with pensions continue to squeeze all areas of state government, including education, services for our most vulnerable and public safety.”

Pallasch said money for the state’s portion of the pension contribution to TRS will come from the general revenue fund.

“Increasing pension payments, due to the back-loaded structure of the 1995 pension ramp, as well as skipped pension payments by prior administrations, continue to be the biggest threat to state resources,” he said.

Contact Jayette Bolinski at [email protected]. Find Illinois Watchdog on Facebook and follow us on Twitter @ilwatchdog.


Jayette formerly served as staff reporter for Watchdog.org.

  • The private sector got rid of DB retirement ages ago. This is the taxpayers point, we are held hostage to poorly managed and negotiated deals for the unions. This is why even FDR was totally against government unions.

  • Mongolia3

    The State’s pension payments are increasing because both salaries and pension benefits increased. Teacher salaries increased as a result of collective bargaining agreements which are approved by school board members whose path to re-election is typically the endorsement by the local teacher union and whose campaign often includes teacher union campaign contributions and/or teacher union members campaigning for the aforementioned candidate. Michael Madigan and John Cullerton, as Chicago Democratic leaders of the House and Senate, are focusing “reform” efforts on the salary piece, as the Chicago pension system is separate from TRS, blaming salary increases for the increased pensions. But the salary is only part of a pension calculation. The other part is the benefit calculation. TRS benefits are changed by changing state law. As leaders of their respective branches of the General Assembly, Madigan and Cullerton obviously know this but don’t bother explaining it to the public. Legislation starts as a House Bill or Senate Bill in the Illinois General Assembly, gets approved by both houses, then signed into law by the Governor. How many were there? New or increased benefits were signed into law 38 of 40 years between 1971 – 2011. What happened in 1970? Three pivotal events.
    1. Michael Madigan was a delegate to the 1970 Constitutional Convention.
    2. The pension protection clause was added to the Illinois State Constitution.

    3. Michael Madigan was first voted into office as a State Representative.
    What are some of these benefit increases?
    1. Cost of Living Allowance (COLA) increased from 1.5% not compounded to 3% compounded.
    2. Maximum allowable sick leave credit increased from 1/2 year to 2 years.
    3. Annual accrual rate (service credit multiplier) increased from 1.5% to 2.2%.
    4. Maximum allowable rate (years of service factor) increased from 70% to 75%.

    5. Minimum age to receive maximum allowable starting pension decreased from 66 years to 54.5 years.
    6. Minimum number of years of service to receive maximum allowable starting pension decreased from 45 years to 33 years.
    What does all that mean? How does it work?

    Teachers receiving a pension, receive a 3% increase every year. Furthermore, that 3% increase is included in the following years calculation (compounding).
    Teachers can exchange 2 years of accumulated sick leave for 2 years of service credit, allowing them to retire 2 years early.

    Years of Creditable Service (different in most cases than actual years worked as we learned above) is multiplied by the Accrual Rate (Service Credit Multiplier) and the result is known as the Years of Service Factor.
    The Years of Service Factor is multiplied by what is typically the Average of the Last Four Years salary (add up last 4 years salary and divide by 4) to determine the starting pension.
    So a teacher out of college, starts working at 22, works 33 years, retires at 55. A suburban Chicago teacher who started working 33 years ago in 1979, has taken college classes (in many districts the classes are paid for by the school district) regularly during their career (to receive salary increases called lane movements), has worked full-time, is typically retiring at around $100,000, with a starting pension around $75,000. You can do the research yourself, as teacher salaries and pensions are public data and available through FOIA or on Family Taxpayers, For The Good of Illinois, and the Better Government Association.

  • Mongolia3

    Now lets tinker around with some of the pension benefit increases.
    Let’s look at how increasing the Annual Accrual Rate (Service Credit Multiplier) from 1.5% to 2.2%, increases the pension payout.
    Our teacher worked 33 years, exchanged 2 years of accumulated sick leave to retire 2 years early, for 35 Years of Creditable Service.
    Remember, Years of Creditable Service x Annual Accrual Rate = Years of Service Factor.

    .015 x 35 = .525 Years of Service Factor

    .022 x 35 = .770 Years of Service Factor

    The maximum years of service factor is 75%, so use .75 instead of .77.

    Remember, Years of Service Factor x Avg Last 4 Years Pensionable Earnings (includes stipends) = Starting Pension. Using $100 as the average of the last 4 years pensionable earnings.

    .525 x $100,000 = $52,500.

    .750 x $100,000 = $75,000.

    This teacher earns $22,500 more in starting pension thanks to the change in Illinois state law that increased the Annual Accrual Rate (Service Credit Multiplier) from 1.5% to 2.2%, and the law that increased the Maximum Rate (Years of Service Factor) from 70% to 75%. Remember, this teacher is 55 years old and retired.

  • Mongolia3

    Now let’s look at another benefit increase, maximum allowable sick leave credit. Maximum allowable sick leave credit was increased in state law from 1/2 year to 2 years.
    A teacher year is 180 days.
    1/2 year is 90 days.
    2 years is 360 days.
    Let’s say the teacher wants to exchange accumulated sick leave, for years of service credit, so they can retire earlier.
    Typically a full teacher retirement is after 35 years of service.
    So in 1970, you could work 34.5 years, exchange 1/2 year accumulated sick leave for 1/2 year of service credit, to be eligible for full retirement with 35 years of service.
    Now in 2011, thanks to the benefit increase, you can work 33 years, exchange 2 years accumulated sick leave for 2 years of service credit, to be eligible for full retirement with 35 years of service.
    How does an unused sick day fund a pension plan?
    The number of sick days a teacher receives is found in the collective bargaining agreement a teacher negotiates with a school district. Collective bargaining agreements are required by state law to be on a school district’s website. If you can’t find the agreement, which is not uncommon, call the district office and ask them to point you to the link or email it to you. If you want to be sure you receive everything that may have modified the initial agreement, which is not uncommon, FOIA the district to include not only the collective bargaining agreement but any appendixes, addendums, memorandums of understanding, letters of agreement, and any other modifications to the agreement. If the district states they are “in negotiations,” ask for the previous agreement.
    Many suburban Chicago school districts grant teachers 15 days of sick leave per year, which can be accumulated up to two years (360 days). Let’s see how quickly 360 days accumulated sick leave can be achieved.
    Let’s say you don’t sick during a teacher year (teacher year is 180 days).

    360 days goal / 15 days accumulated per year = 24.0 years
    360 days goal / 14 days accumulated per year = 25.7 years.
    360 days goal / 13 days accumulated per year = 27.7 years.
    360 days goal / 12 days accumulated per year = 30.0 years.
    360 days goal / 11 days accumulated per year = 32.7 years
    So a teacher receiving 15 sick days per year can get sick 4 days per year and still retire 2 years early.
    There are endless exceptions.
    Some collective bargaining agreements allow 2 personal days to be used in lieu of 2 sick days.
    Some collective bargaining agreements grant 16 sick days per year, others 14 days per year, etc.
    There is also the Early Retirement Option (ERO), we’ll save that discussion for another day.

  • based on quick estimate… data from
    http://www.bettergov.org/pension/ counted how many pensions in ranges, estimate average as being the half way point in the range, and played what if… If pensions were capped at $60,000 (max individual SS is about $29,000 – so this is about double that) would result in a little over $1 billion less going out each year.
    if the above is correct that $942
    million more would fully fund TRS, capping pensions at what is affordable could work.