By: Mark Glennon*
Another horrid installment on Illinois’ pension fiasco was released today. But this time, the actuary ridiculed the state’s pension accounting, used a far more transparent style of report, and coined a wonderful new term, “Illinois Math.” And, because most of the report can be generalized to other Illinois pensions, it provides some great insights about an entire pension system gone berserk.
Specifically, the state’s largest pension, Illinois Teachers’ Retirement System (“TRS”) released its actuarial valuation for the 2014 fiscal year, which ended June 30. The full report for is linked here and a summary presentation is here.
• TRS’ unfunded liability grew by $5.9 billion, an increase of over 10% since the previous year, despite favorable markets that allowed TRS to earn over 17% on its assets.
• Younger and newer teachers in the system are a much worse deal than older ones. Teachers joining the system after January 1, 2011 are called Tier II. They are forced to pay more than enough to cover their own scheduled benefits — $6.9 billion more over the course of next 50 years as scheduled. That’s what they will pay to subsidize the unfunded liability for Tier I employees with far more generous benefits.
• The unfunded liability is scheduled (yes, scheduled) to jump again. Along with the actuary report is the preliminary certification of how much the state will contribute to the pension for fiscal year 2016, which is $3.7 billion. While that’s an increase of $300 million over last year’s bill to taxpayers, a state contribution of $5.3 billion would be needed just to keep the unfunded liability from growing still further.
• The pension’s funded ratio (the assets it has as a percentage of what it needs to meet obligations) is 44.2%, a slight improvement over last year’s 42.5%. In an accompanying press release, TRS makes that improvement the headline — an absurd attempt to spin the bad news favorably. That’s like saying you continued to incur more liabilities than assets you accrued at about the same, unbalanced pace that you always have.
• “Illinois Math” is such a splendid addition to our pension vocabulary, and the actuary ridicules it throughout its report (though there’s no mention of that in TRS’ spin-job press release). The actuary even defines it in its glossary:
The term given to the various schemes in the Illinois Pension Code designed to systematically underfund public employee retirement systems in the state of Illinois.
Open derision of pension accounting in plain language like that is unprecedented and overdue. We are finally seeing it thanks to complaints about pensions and their actuaries. Kudos to people like Tia Goss Sawhney, an actuary who has been critical of her profession, who wrote guest pieces linked here and here and has been filing complaints, including one against TRS’ actuary about a past report. She has been lobbying for frank, clear disclosures and it looks like she is getting results.
• A major reason for the jump in unfunded liabilities is that TRS was forced to change its assumptions. We, like plenty of others. have long been saying TRS assumptions were overly optimistic. Two years ago, TRS published a letter in the Wall Street Journal saying its assumptions were fine. They weren’t. They still aren’t Reality gradually overtakes phony assumptions and taxpayers foot the bill for the resulting adjustments — it’s not just underfunding that causes pension deficits.
• Governor Quinn has continued to brag that he has made all “appropriate” pension payments, and payments that are “actuarially sound.” That’s a brazen lie that still nobody has called him out on. He didn’t pay the right amount last year and the actuary could not be more clear about this year. From the actuary’s valuation report:
By funding based on Illinois Math instead of Actuarial Math, the State has put the retirement security for the 390,000 current and former educators in the State of Illinois at risk.
Illinois Math. It’s sort of like classical theater: part tragedy, part farce, entirely fiction.
*Mark Glennon is founder of WirePoints