Updated: March 1, 2019
Issue: The Teachers’ Retirement System Board of Trustees in December 2018 certified a state government funding contribution to TRS for fiscal year 2020 at $4.81billion. The state’s pension contribution for fiscal year 2019 is $4.47 billion.
Fiscal year 2020 begins on July 1, 2019.
Despite the action by the TRS Board, Gov. JB Pritzker proposed in his FY 2020 state budget to not include the $4.81 billion certified by the TRS trustees in the state budget. Instead, the governor proposed a state contribution to TRS of $4.24 billion, which is a $576 million reduction.
Discussion: The $576 million reduction is the product of a proposed “restructuring” of the state’s existing public pension debt repayment law that would extend the annual payment schedule by seven years.
Under a 1994 state law, state government must allocate enough money each year to TRS and the other pension systems to gradually raise all of the systems’ funded status to 90 percent in 2044.
The governor’s proposed revision would keep the funding target at 90 percent, but would extend the deadline for reaching that goal to 2052.
Gov. Pritzker says that the restructuring of the pension funding law will free up revenue that is needed this year to pay for other state government services and responsibilities. The governor estimates that this extension would reduce the state’s annual contribution to its pension systems in FY 2020 by $878 million to $8.2 billion, which includes the $576 million reduction for TRS.
The current pension funding law requires a state contribution in FY 2020 of $9.1 billion, which equals 21 percent of the state’s general fund revenues. The governor and most legislators say that earmarking 21 percent of the state revenue to pensions is too expensive.
The TRS-certified state contribution for FY 2020 falls $3.07 billion short of the amount of money that would be required to fully fund pension benefits in FY 2020 under standard actuarial calculations. The governor’s proposed contribution falls $3.6 billion short of full funding.
In either case, TRS absolutely will be able to meet its benefit obligations to retired teachers in FY 2020 and the near future. However, the System cannot guarantee retirement security for future generations of teachers unless the state’s future annual contributions meet an actuarial standard for full funding.
TRS earned a positive 8.5 percent, net of fees, on its investments during FY 2018.
Over the last several years state government has taken its responsibilities to TRS very seriously and has paid its legal obligation in full. Still, the legal state contribution for the last several years has been insufficient to improve the System’s long-term finances. State government’s annual contribution is set artificially by law. It is not an actuarial calculation.
As it does every year, for FY19 the TRS Board asked its actuaries to calculate two state contributions — the payment calculated under state law and the payment calculated under actuarial practices.
The calculations set in state law artificially lower the state’s annual funding level. For instance, state law:
- Requires pension costs to be calculated on a 50-year timetable instead of the standard 30 years.
- Establishes a 90 percent funding target instead of the standard 100 percent goal.
- Requires the debt payments on state pension bonds to be deducted from the total contribution.
Illinois teachers have always paid their required share and are counting on their pensions to sustain them in retirement. The state has never paid its full share.
The annual contribution is the amount of money required by state law to fund TRS pensions during the coming year, as well as a payment on the System’s unfunded liability, which currently stands at $75.3 billion.
The state’s annual contribution to TRS is scheduled to be paid in 12 installments during the fiscal year. Each year in the autumn, the TRS Board of Trustees is required by law to calculate and certify the state’s contribution for the next fiscal year. These calculations are then reviewed by the Illinois State Actuary, Cheiron, of McLean, Virginia.