Tuesday, September 21, 2010

Illinois is #1 in Underfunded Pensions

 We have repeatedly spoken and written publicly about the horrible underfunding of Illinois pension systems, including here.  Illinois now ranks as having the worse underfunded pension systems out of all fifty states according to recent data accumulated by the Bloomberg Cities and Debt Briefing in the U. S Pensions Funds Ranking by Bloomberg News at 50.6% underfunded for all Illinois pension systems.

Part of Illinois' funding problem (2005 study) was the adoption in 1995 of a RAMP funding program that would increase State funding payments in future years to reach 90% funding by 2045.  The increasing funding amounts are impractical (2007 study) and often suspended by the General Assembly.

This has contributed to the Teacher's Retirement System and, to a lesser degree, the State Universities Retirement System to engage in risky investing policies involving securitized derivatives.  With the Illinois State Board of Investment, all three have high domestic and international equity exposure and low hedge fund direct investment.  Illinois pension systems do not have adequate staff to individually investigate due diligence on investments and rely on third party investment managers.  While the Illinois State Board of Investment has posted 8.9% investment return for FY2010 and the SURS has reported 16.7% for FY2010, the Teacher's Retirement System has yet to post their FY2010 return.  In June, the spokes person for TRS was estimating 19% but has made statements in September that it was 13%.

The sad fact is that benefit payments from the Illinois State Board of Investment were 10% in FY2010 and the benefits paid by the TRS were supposedly 12%.  Although employee and employer contributions continue to be made, the failure to make the required actuarial funding of liabilities will escalate the under funding with the percentage of benefits paid increasing to levels which cannot be sustained by investment return and employee/employer contributions.  Here is a video on how the more conservative Illinois State Board of Investment could run out of money in ten years or slightly more.  While this is extremely serious and must be addressed immediately, it is not a "death spiral" yet.

In a Chicago Federal Reserve paper, Lance Weiss provides an overview of the Illinois pension problems and funding and provides two gross solution alternatives: 1) reducing costs by reducing benefits, increasing invest return, reducing administrative costs, and finding alternative funding sources or 2) deferring costs by changing funding policy, changing actuarial assumptions, changing actuarial funding method, and changing actuarial asset valuation method.  It should be noted that the 2003 Pension Obligation Bonds of $10 billion mentioned in his paper were not fully deposited in the pension funds but partially used for other States expenditures.

In another Chicago Federal Reserve paper by Laurence Msall again details the current Illinois budget problem and the necessity to institute pension reforms.  He references the recently enacted legislation to raise retirement ages, limit pension double dipping, and limit pension wages which applies only to future participants.  He continues his argument, with which I am in general agreement although we might disagree on some details, that cutting State expenses cannot achieve enough savings without significantly damaging essential social safety services and a tax increase is necessary which includes specific funding for pensions.

In "Coping with Unfunded Pension Liabilities", Howard Cure delineates the general causes, current situation, and competing political pressures.  He also lists revenue streams, special purpose revenue, defined contribution plans, and the use of tiered pension systems as possible funding solutions.  He mentions that Illinois in the recently enacted pension reform legislation adopted a two tiered pension system applicable to future participants hired after January 1, 2011.  Unfortunately, it has since been disclosed that there are actuarial and accounting problems with how the two tiered pension system was used in the current FY2011 budget.  I will cover this in more detail in my next post

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