Updated: May 8, 2019
Issue: As part of his proposed $38.7 billion state government budget for fiscal year 2020, Gov. JB Pritzker in February of 2019 unveiled a multi-faceted proposal to address the financial issues involving TRS and Illinois’ four other state public pension systems.
In March, the Teachers’ Retirement System Board of Trustees unanimously approved the following statement concerning the governor’s pension funding proposal:
The Teachers’ Retirement System is currently 40 percent funded. The system is at a growing risk of insolvency in the event of an economic downturn. This danger is the direct result of eight decades of state contributions that always have fallen far short of actuarially based funding. TRS long-term investment returns consistently exceed the System’s expectations; but investment income alone will not be enough to prevent insolvency.
The TRS Board’s fiduciary duty to its 417,000 members is its paramount concern. The payment of future TRS benefits are jeopardized without a credible plan to address the System’s long-term sustainability. The TRS Board and staff unanimously adopts the following positions and will actively pursue their realization as a state government budget is developed for fiscal year 2020:
- TRS opposes any fiscal 2020 budget for the state of Illinois that will appropriate to the System less than $4,813,577,696, the contribution calculated under state pension funding law and certified by the System on January 14, 2019.
- TRS opposes any extension of the target date currently in statute for the System to reach 90 percent funding. The target should remain no later than fiscal year 2045.
- TRS repeats its long-standing warning that the state’s current pension funding law perpetually locks in underfunding for the system. A “full funding” state contribution for TRS in FY 2020 is $7,878,670,709, as certified in January of this year.
- TRS opposes any expansion of the current member “buyout” program if an expanded program does not fund the buyouts with monies other than from System assets. At a funding level of 40 percent, TRS is not accumulating any assets to pay the future benefits of active members and could not afford to buy them out.
- We respectfully request that, as in recent years, TRS and our system actuaries participate in the fiscal analysis and evaluation of any proposals that would impact the system and its members.
We stand ready to work with anyone on solutions to these important issues.
Discussion: Here is a summary of the funding program outlined in Gov. JB Pritzker’s proposed state budget for fiscal year 2020. The budget proposal is being examined and debated by the General Assembly.
The State Pension Contribution in FY 2020
As part of his $38.7 billion state budget plan for fiscal year 2020, Gov. Pritzker originally proposed a $4.238 billion annual contribution to Teachers’ Retirement System. The $4.2 billion contribution would have been $576 million less than the $4.814 billion contribution request certified last year by the TRS Board of Trustees. Overall, the governor had proposed a reduction of $878 million in contributions for TRS and the state’s other public pension systems.
However, because state revenues in April of 2019 were $1.5 billion greater than originally projected, in May Gov. Pritzker cancelled plans to reduce the FY 2020 appropriations for TRS and the other pension systems.
As a result, TRS will receive the originally-certified state contribution of $4.814 billion in fiscal year 2020.
Restructuring the Current 50-Year Pension Debt Repayment Schedule
The $576 million reduction in the state contribution for TRS was the result of a proposed “restructuring” of the state’s existing public pension debt repayment law. The restructuring would have extended the annual payment schedule by seven years.
However, because of the sharp rise in state revenues during April of 2019, Gov. Pritzker postponed plans to restructure the state’s pension debt during fiscal year 2020.
Here’s the background: 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 2045. The current funding law requires a state contribution in FY 2020 of $9.1 billion, which equals 21 percent of the state’s general fund revenues.
In the governor’s original proposal, the 90 percent target would have remained in place, but the target date for reaching that goal would be extended from 2046 to 2052.
Pension Obligation Bonds
In the spring of 2020, state government would borrow $2 billion and use the proceeds to supplement the FY 2020 annual contribution to TRS and the other pension systems. If the $2 billion is split proportionately based on each system’s pension debt, between $1 billion and $1.2 billion could be available to TRS.
Permanent “Buyout” Programs for Members
The two “accelerated pension payment” programs enacted in 2018 – commonly known as the “buyout” options – would be made permanent. Under current law the buyout options would automatically expire at the end of FY 2021.
One program is only for retiring Tier 1 members. TRS asks every Tier 1 member when he/she fills out retirement paperwork whether he/she wants to participate. Members who choose to accept the program:
- Give up the current 3 percent compounded annual raise in their pension benefits.
- Accept an annual 1.5 percent not-compounded annual raise in their pensions.
- Receive a lump-sum “accelerated pension benefit payment” that equals 70 percent of the monetary difference between the estimated current lifetime value of the 3 percent annual raise and the estimated current lifetime value of the 1.5 percent annual raise.
The second program is for all inactive members eligible for a benefit.
- Members accepting this buyout give up any future claim to a TRS benefit.
- The buyout amount will equal 60 percent of the present value of the member’s anticipated pension benefits.
The current buyout programs are funded solely by as much as $1 billion in state government borrowing. State officials sold $300 million in April, 2019 to fund the first buyouts and the first accelerated payments to retiring Tier 1 members were made in May.
State Government Asset “Transfers”
A task force has been created to look into the potential for “transferring” the value and/or revenue-generating potential of state-owned property and other assets to TRS and the other state pension systems.
Adding these assets and potential revenue streams to the assets already controlled by the pension systems would boost the funded status of TRS and the other pension systems. The current TRS funded status is 40 percent, which is one of the lowest among the country’s largest public pension systems.
“Asset transfer” is a concept that is gaining traction in New Jersey, Florida and in Alton, Illinois. Alton is selling its wastewater treatment plan to a private company for $53.8 million. The proceeds from the sale will be added to the existing assets of the city’s underfunded municipal pension plans.
Local Government Pension System Consolidation
A second task force has been formed to study the consolidation of local government pension funds throughout Illinois into a statewide system. Currently there are more than 600 local pension systems and most of them cover police and firefighters.
Increased Annual State Pension Contributions
The governor said in the future he wants to add $200 million in state revenue each year “on top of” the annual contribution amounts certified by the state pension systems. If this program were in place this year for TRS, the $4.813 billion contribution certified by the trustees would become $5.013 billion.
However, funding for this annual increase in the contribution is dependent on the future passage of an amendment to the Illinois Constitution that would allow a “progressive” state income tax that consists of different rates based on a person’s income. The current state income tax is a “flat” tax because all taxpayers pay the same rate.
In practical terms, the earliest this $200 million annual increase could take effect is in fiscal year 2022 because of the constitutional and legal steps necessary to enact a “progressive” tax.
The earliest a constitutional amendment can be placed on the ballot for the required voter referendum is in November of 2020. If the amendment is approved, the General Assembly would then have to pass a law replacing the flat tax with a progressive tax. At the earliest, a progressive tax could take effect in Illinois is July 1, 2021, which is the beginning of FY 2022.