Largest State Pension Fund Calls for Major Reforms in FY2013

April 12, 2012

The Teachers’ Retirement System of the State of Illinois (TRS) has concluded that it can no longer rely on the State to follow the law for funding its five retirement systems and that sweeping changes are needed to sustain the pension funds.

On March 30, 2012, the TRS Board of Trustees approved a resolution stating that “the fiscal situation of the State has deteriorated to the point that the Board no longer has confidence that the State will be able to meet its existing funding obligations to TRS.” The Board reached that conclusion after analyzing how much of the State’s future revenues will have to go toward pension costs under current law. 

TRS has not proposed a plan to solve the problem. However, it has stated on its website that “new revenues must be generated and if they are not benefits may have to reduced” to prevent TRS from becoming insolvent.

The resolution represented a change of position for TRS, the State’s largest pension system, whose 362,121 members are active and retired teachers outside of the City of Chicago. TRS’ previous public stance had been that the State would adhere to a pension funding law (Public Act 88-0593) that began in FY1996. After a 15-year phase-in period, the law requires the State to contribute a level percentage of payroll sufficient to bring the retirement systems’ funded ratios to 90% by 2045. The funding plan and subsequently enacted changes deferred a large portion of the required State contributions to later years.

At the end of FY2011, the State’s five retirement systems had a total unfunded liability of $83.1 billion and a combined funded ratio of 43.3%, according to the General Assembly’s Commission on Government Forecasting and Accountability.[1] TRS had an unfunded liability of $43.8 billion and a funded ratio of 46.1% as of June 30, 2011. These figures are based on the market value of assets.

A funded ratio shows the percentage of a retirement system’s actuarial liability that is covered by assets. Actuarial liability is the projected benefit obligation due to past service by employees and retirees. Unfunded liability is the difference between the a retirement system’s actuarial liability and its assets.

The State’s total statutorily required General Funds contributions will increase from $526 million in FY1996 to $5.1 billion in FY2013. General Funds support the regular operating and administrative expenses of most state agencies and are used to determine the State’s operating surplus or deficit. In FY2013 roughly $778 million in pension contributions will come from other state funds.

In addition to pension contributions, the State is also required to make debt payments on pension bonds. The State issued $10 billion of pension bonds in FY2003, $3.5 billion in FY2010 and $3.7 billion in FY2011. Debt service on pension bonds totals $1.6 billion in FY2013.

The following chart compares the growth of General Funds pension costs—including both contributions and debt service—to the growth of actual and projected State-source General Funds revenue through FY2045. The chart reflects scheduled partial sunsets in 2015 and 2025 of temporary income tax increases enacted in 2011 and assumes that State-source General Funds revenue will increase at a compound average rate of 3% a year. Pension costs grow from 3.6% of revenue in FY1996 to 19.3% in FY2012 to 27.5% in FY2033. In FY2013 pension costs of $6.6 billion are expected to represent 22.1% of State-source General Funds revenue.

While pension costs absorb a growing share of revenues, the State is facing a backlog of unpaid bills of more than $9 billion at the end of FY2012 and the need to cut $2.7 billion from the Medicaid budget in FY2013. This situation led TRS to conclude that the General Assembly is likely to change the State’s pension funding law to lower the statutorily required pension contribution.

TRS accounted for $2.4 billion, or 58.2%, of the State’s General Funds pension contributions in FY2012 and is budgeted to account for $2.7 billion, or 53.1%, in FY2013. TRS’ actuaries examined how the fund would fare under several different scenarios: if the FY2012 contribution grows by 3% a year for 37 years; if the FY2012 contribution is frozen for 37 years; and if the FY2012 contribution is cut to $1.4 billion and is frozen at that level for 37 years. The analysis showed that the fund would become insolvent in 2049 under the first scenario, in 2038 under the second and in 2030 under the third.

A working group of the General Assembly is scheduled to develop a pension reform plan during the current legislative session. Governor Pat Quinn has asked the group to consider historical funding practices, employer and employee contributions, the retirement age and the annual automatic benefit increase.

Recent discussion has also focused on shifting pension costs for members who are not State workers to their actual employers. In the case of teachers, that would mean requiring local school districts to take on a share of the State’s contribution, such as the normal cost. Normal cost is the projected cost of benefits during a fiscal year. The State’s normal cost for TRS in FY2013 is $676.2 million; the rest of the $2.7 billion contribution goes toward paying down the system’s unfunded liability.

[1] The other four systems are the State Employees’, Universities, Judges’ and General Assembly Retirement System.