SPRINGFIELD, IL – The Teachers’ Retirement System Board of Trustees has given preliminary approval to a $4.813 billion state contribution to the System for fiscal year 2020, a 10.6 percent increase over the current fiscal year’s contribution.
The FY 2020 preliminary contribution falls short of the amount of money that actuaries calculate would “fully fund” the cost of TRS pensions in the new fiscal year. The FY 2020 statutory contribution is $3.065 billion below the full funding amount of $7.878 billion.
“In fiscal year 2018 the legislative and executive branches lowered the state’s contribution three times – by more than 11 percent. Those unprecedented cuts totaled some $470 million and eroded progress toward financial stability,” said TRS Executive Director Dick Ingram. “The future viability of TRS is directly dependent on continued state support that adequately meets the cost of benefits and pays off the unfunded liability.
“TRS investments had a good year, but we cannot invest our way out of this problem,” Ingram added. “The unfunded liability is too large and grows every year. The principal and interest we owe on that debt comprises about 76 percent of the state’s annual contribution. Without those costs, the FY 2020 contribution to TRS would be $1.2 billion, not $4.8 billion.”
In FY 2018, TRS investments returned 8.45 percent net of fees and the System’s 40-year return rate was 9.2 percent, which exceeded the System’s long-term assumed rate of 7 percent. Total investment income in FY 2018 was $2.06 billion.
Nonetheless, due to the 80th consecutive year of underfunding from state government, the TRS unfunded liability grew during FY 2018 by 3.04 percent to $75.8 billion. The TRS funded status at the end of FY 2018 remained relatively steady from the previous year at 40.7 percent. Total long-term liabilities for TRS grew 3.9 percent to $127.7 billion. The System has $51.5 billion in assets. Since its founding in 1939, state government has never once appropriated an annual contribution to TRS that equaled full funding in any year.
The TRS Board is required each year to certify the state’s annual contribution to the System for the next fiscal year. That preliminary contribution is then reviewed by the State Actuary before it is included in the state budget for the upcoming year.
In other news from the Board’s regularly-scheduled October meeting:
- The trustees discussed a draft of administrative rules that will govern the implementation of two new “accelerated pension benefit payment” programs that were enacted in 2018. The first program would partially “buy out” inactive members who are eligible for an eventual pension. These members would receive a lump sum equal to 60 percent of their expected lifetime retirement benefit. The second program gives retiring Tier 1 members an option: continue to receive the existing 3 percent automatic annual pension increase, or agree to a reduction in the AAI. In return for lowering their AAI to 1.5 percent, a member would receive a lump-sum check equal to 70 percent of the difference between what they would receive in retirement under the 3 percent AAI and what they would receive under the 1.5 percent AAI.
Both programs are scheduled to run through June of 2021. However, while TRS is preparing to implement these accelerated payment options in 2019, as yet no funding is in place for the lump-sum payments. Money for the programs depends on the sale of $1 billion in state bonds by the Governor’s Office of Management and Budget. Those bonds have not yet been sold.
- The trustees hired Aksia, of New York, New York to serve for the next five years as the System’s consultant on investments within the $5.9 billion Diversifying Strategies Portfolio. State law requires that contracts for consulting services be no more than five years in length.
- Within the $6.8 billion Private Equity Portfolio:
- The commitment of $75 million to A&M Capital Partners of Greenwich, Connecticut.
- The commitment of $50 million to Ridgemont Equity Partners of Charlotte, North Carolina.
- The commitment of $50 million to Silver Lake Management Company of Menlo Park, California. Silver Lake currently administers $271.6 million in TRS assets.
- Within the $10.7 billion Global Income Portfolio:
- The commitment of $125 million to AllianceBernstein, of New York, New York.
- The commitment of $100 million to LCM Capital Management, of Chicago. LCM currently administers $55.3 million in TRS assets.
- The commitment of $137.5 million to Prudential Investment Management of Newark, New Jersey. PGIM currently administers $1.4 billion in TRS assets.
- The commitment of $100 million to Pacific Investment Management Company of Newport Beach, California. PIMCO currently administers $2.9 billion in TRS assets.
- The commitment of up to $100 million to J.P. Morgan Asset Management of New York, New York. Morgan currently administers $1.7 billion in TRS assets.
- The commitment of $75 million to Varde Partners of Minneapolis, Minnesota.
- Within The $5.9 billion Diversifying Strategies Portfolio:
- The commitment of $80 million to Tilden Park Capital Management of New York, New York. Tilden Park currently administers $37 million in TRS assets.
- The termination of the mandate of ISAM Group of London, United Kingdom. ISAM had administered $126.3 million in TRS assets.
About Teachers’ Retirement System
The Teachers’ Retirement System of the State of Illinois is the 37th largest pension system in the United States, and provides retirement, disability and survivor benefits to teachers, administrators and other public school personnel employed outside of Chicago. The System serves 417,292 members and had assets of $51.5 billion as of June 30, 2018.