Bob Lyons’ First Report as Annuitant
I have
retired from the TRS Board and I write this today as a fellow annuitant, not as
a TRS trustee. This past fiscal year ended on June 30 2017 and
it is my understanding that TRS investments made something above 10% for
the year As additional information comes from TRS holdings in private
equity and real estate, it is expected that the gains will only grow. And with
TRS funding level firmly above 40%, Illinois is no longer the worst-funded
pension state. Illinois has moved up and is now in 48th place, Kentucky
49th at 37.8%, and New Jersey is last with 37.5%. And that is not the only
reason to celebrate; Illinois finally has a budget.
According to
the editorial writers and columnists across the state, Governor Rauner was the
clear winner except for those that gave the victory to Speaker Madigan. For
more than two years Governor Rauner tried to hold the budget hostage: first,
for a set of union-busting demands, but in the end for several measures,
such as term-limits, a property-tax freeze, and workmen’s compensation changes
that were more popular. In the end while Governor Rauner got nothing for his
efforts, he can and will use the tax increase as a hammer against Madigan and
company in the 2018 election. One thing is certain: the two years without a
budget was a loss for the state. Even with the increased income tax, the state
bond rating hovers just above junk. Illinois owes a total of over fifteen
billion dollars to everyone it does business with. And the many candidates for
governor and the legislature are all in full campaign-mode a year and
four months before the election. The political pundits have already
given Illinois claim to be the most expensive campaign in the nation for
who will be our governor.
Even
without a budget, a combination of courts orders and continuing resolutions had
the state of Illinois paying out $39 billion a year, or more accurately a
combination of paying, or promising to pay a total of $39 billion. Now the
increase in the state income tax from 3.75% to 4.95%, which is an increase of
1.2%, according to Mike Madigan, or 32%, according to Bruce Rauner, is
expected to bring in an additional $4.3 billion in revenue. The rise in the
corporate tax from 5.25% to 7% should grow the state’s revenue by an additional
$460 million. The bill that gave us the tax increase also allows the state to
borrow $8 billion to pay down debt. Normally borrowing to deal with debt is not
a good plan, but with some debts paying interest as high as 12% the state
can borrow for far less and come out ahead. In addition, paying off
some debts will free up matching grants from the Federal government.
Illinois
needed the tax increases in order to fund TRS pensions. June 28, as
the state headed into a third year without a budget, a federal judge ruled
that Illinois was out of compliance with previous court orders to pay health
care bills for low-income and other vulnerable groups Judge Joan Lefkow
ordered the state to come up with $586 million per month to make immediate
payments and to start reducing the $2 billion debt which is owed to health
care providers. Without additional revenue, State Comptroller Susana Mendoza
would have obviously needed to take the money from somewhere else. The
monthly payments from the state going into the pension funds could likely
have been taken by Mendoza to help satisfy the judge’s demand.
Over
the last several years, following the advice of its own investment people and
its outside consultants the TRS Board has lowered its assumed rate of
investment return in three steps from 8.5% down to 7%. Each decrease in assumed
returns meant that the state of Illinois would need to increase its
contributions to the pension fund. The last decrease in assumed returns caused
the needed increased contribution from the state to TRS to grow by $402
million. The necessity of these increased payments was not well received by the
Governor and the General Assembly and as part of the legislation
recently passed TRS must now retroactively “smooth” the final effect of any
changes made in the TRS assumed rate of investment in the last five years with
20% being phased in each year over the next five years. Though the
results of this calculation have yet to be announced by TRS,
the estimate is that it could significantly lower the state's FY 18
contribution and it may mean that the annual payment from the
state of Illinois would remain approximately $4 billion, or even
less than it was for last year
The FY
2018 budget included changes to the Illinois Pension Code with the creation of
a new Tier III. None of the Pension Code changes enacted on July 6, 2017
affect Tier I members or retired members in any way. There will be no changes
to benefits, active Tier I member contributions, or health insurance. Tier III
will only affect Tier II members and those teachers yet to be hired only if
they want to be a part of it. The optional Tier III calls for a “hybrid”
retirement plan of two parts – a life-long-defined benefit pension and a
defined contribution plan similar to a 401(K). Details on Tier III still need
to be worked out and then the plans will be submitted to the Internal Revenue
Service for their approval. It is a shame that that stipulation was not part of
the creation of Tier II. Tier II members are paying 9% for a plan that is worth
only 6% at best. Tier I is funded at just over 40%, Tier II is currently
funded 151%.
One
other change to the Pension Code should be noted. Local school districts will
pay for the cost of a member’s pension if the member's salary is equal to or
greater that the governor’s statutory salary of $177,412 – only the portion
that is equal or over. Also local school districts will be responsible for the
“employer contributions” for both the DB and DC plans that will be part of Tier
III. For those of you who look ahead and fear the state wants to get out of the
pension business, you should know that the billions that Illinois owes to TRS
are binds that will not break. They owe it and they have to pay it.
Larry
Pfeiffer has taken my place on the TRS Board E-mail: pfeiff4@gmail.com
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