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TRS Issues Update

In recent months, while reporting on the financial problems faced by Illinois and other states, several news organizations, including the New York Times and Fox News, have focused attention on public pension systems throughout the country as one reason why states are facing multi-million-dollar revenue shortages.

The common thread in these stories is that public pensions are too generous, are mismanaged, make too many risky investments and force states like Illinois to spend billions of dollars every year on retirees instead of states services, and that increases the potential for budget deficits and higher taxes.

TRS has not been immune to these complaints, but in most cases the criticisms have been outright falsehoods. TRS can refute the inaccuracies that have been leveled in the media against the System in the following explanations.

The State of Illinois is Going to Declare Bankruptcy

Claim: The State of Illinois is going to declare bankruptcy after Congress changes federal law to allow states to declare bankruptcy. Some congressmen are currently considering a state bankruptcy law.

Truth: Illinois isn’t about to declare bankruptcy because there is no law allowing a state to declare bankruptcy.

The claim is the result of a front-page story in the January 21st New York Times describing how some legislators in Washington are seriously discussing legislation to allow states to declare bankruptcy. The story was repeated by the MSNBC cable TV channel. The stories indicate that one power bankruptcy would give a state is the ability to unilaterally re-do pension agreements and union contracts.

But despite the talk, this proposal has no immediate effect on TRS pensions. Right now this idea is just that – an idea. There is no legislation – nothing in writing – pending before Congress.

A proposal like this faces a very long and difficult road to become law. There are constitutional questions and legal questions, and the public can expect strong opposition from organized labor, retirees, bondholders and service providers for the states. It is unlikely that a proposal like this would be enacted very quickly, if at all.

Bankruptcy protection, essentially, prevents a creditor from suing you to recover debts that are not being paid. Under current federal law, individuals, businesses and municipalities can file for bankruptcy. In return for not getting sued by creditors, a federal bankruptcy court restructures the debt to make it easier to repay as much of it as can be paid, either over time or by selling off assets.

State governments currently cannot file for bankruptcy – and do not have to – because they are granted “sovereign immunity” by the U.S. Constitution and cannot be sued.

Some in Congress are pushing the idea of a state bankruptcy law because in theory bankruptcy would allow a state to renegotiate union contracts, pension agreements, the repayment of bonds and contracts with service providers, like hospitals. They could, in theory, reduce payments to every entity that is owed money. This is what happens when a municipality files for bankruptcy.

But there are legal questions about this kind of proposal that would generate lengthy lawsuits: A bankruptcy law would change a state’s sovereign immunity status, so does that mean anyone can now sue a state? How would a federal bankruptcy law affect the pension protections in the Illinois Constitution?

It’s not even a sure bet that any state would want to declare bankruptcy. No entity can be forced into bankruptcy, not even municipalities. Right now, any person, company or local government that declares bankruptcy forfeits certain rights about what they can spend to the court. In other words, the governor of an officially bankrupt state would have to get the approval of a federal judge in order to spend any tax dollars. It’s very unlikely that a governor would want to give that kind of broad control to a court.

Borrowing to Fund State Government’s Contribution to TRS for Fiscal Year 2011

Claim: It is irresponsible for the State of Illinois to borrow $3.7 billion in order to fund the government’s annual cash contribution to Teachers’ Retirement System and the other state pension systems.

Truth: The approval of state-backed bonds to meet the annual funding requirements of TRS and the other public employee pension funds is good news for teachers and their families. The bond sale helps stabilize the financial future of TRS for its 372,000 members and will put a stop this year to the sale of investment assets.

We recognize that approval of the bonds was a difficult decision for legislators, but in the end it is the right course of action for teachers, now and in the future.

The $4,096,348,300 billion bonding program received final approval early on January 12 from the Illinois Senate. The bill was approved by the House in May of 2010. Gov. Pat Quinn is expected to sign the bill.

State government is required by law to annually appropriate a cash contribution to the state’s public employee pension funds, including TRS, to help ensure that the System’s obligations to retirees and future retirees are met. For the current fiscal year – FY 2011 – the state contribution is $2.358 billion. Up through December 2010, TRS has received only $150 million because the state simply did not have the money.

Over the long term, borrowing the state pension contribution is cheaper for taxpayers than not making the contribution at all. The fiscal year 2011 borrowing plan will cost taxpayers $1 billion in interest over the next eight years, or about $125 million per year. The estimated cost of not borrowing the money for TRS alone in FY 2011 was about $194 million in each of the next 34 years due to lost investment income.

Because the state has not made the majority of its annual contribution since July, TRS has been forced to sell more investment assets than usual in order to generate the cash necessary to pay pensions and benefits. Since July, TRS has sold $1.538 billion in assets. If the full $2.358 billion contribution had not been received, TRS was expected to sell as much as $3 billion in assets by June 30, or about 10 percent of the System’s total investment portfolio. With the annual contribution in place, TRS will not have to sell assets and will be able to replenish the lost assets sold out of the investment portfolio.

While TRS sells some assets every year to meet cash flow requirements, those past sales have not approached the $3 billion level in any of the last five fiscal years. Selling assets reduces the amount of stocks, bonds and real estate available for future investment, which in turn lowers the System’s total investment income.

In fiscal year 2010, TRS paid out $3.928 billion in pensions and benefits to 97,754 retired members and beneficiaries. The average benefit was $40,182 and the average pension was $42,782.

Teachers’ Retirement System Is Not Going Out of Business in 2018

Claim: A story that has been posted on Yahoo Finance and other Web sites that says TRS will go bankrupt in 2018 because of growing unfunded pension liabilities and the inability of the state to cover those future liabilities.

Truth: The story is completely false and has been discredited repeatedly by financial experts and pension officials from around the country.

TRS is not going out of business in 2018 and all pension checks this year and in the foreseeable future will be good.

The incorrect 2018 doomsday prediction was made months ago by Jonathon Rauh, an associate professor of finance at Northwestern University. All his “study” has succeeded in doing is to scare retired and soon-to-be-retired teachers.

TRS does carry an unfunded liability of about $35 billion because the General Assembly has not always fulfilled its commitment to retired teachers and made a large enough financial contribution to TRS, as it is supposed to do. That unfunded liability is the source of Rauh’s incorrect prediction. But he cannot with any certainty whatsoever say that TRS will run out of money in 2018. TRS has carried an unfunded liability of various degrees since the 1950s and is still in business.

Rauh makes his predictions based on a set of facts of his choosing, and financial experts point out that he chooses a set of facts to ensure that he comes up with the conclusion he wants.

  • For instance, he greatly underestimates the investment income pension systems will create in the future. He uses an unrealistic rate of return of about 2 percent on investments, which deliberately shorts all future income for TRS.
  • The agency’s target rate of return is 8.5 percent. In the last year, the agency’s actual rate of return was 12.9 percent. Over the last 25 years it is 8.6 percent and over 28 years it is 9.4 percent.

Rauh’s calculations are also based on the unpredictable assumption that Illinois state government will not be contributing much to the public pension systems in the future. There is no way he can predict that successfully.

Here are the true facts:

  • TRS currently has about $33 billion in assets.
  • We will pay out $4.1 billion in pensions and benefits this year.
  • We earned $2.8 billion in investment income during the last fiscal year.
  • We have enough money on hand, and expect investment income in the future, to ensure that TRS will still be in business beyond 2018.

Rauh’s prediction will only come true if TRS does not earn another dime in investment income or receive any state contribution over the next eight years. That scenario is not only unlikely, it is impossible. His prediction is wrong.

Placing Illinois Teachers in Social Security

Claim: Critics of public pension plans say that requiring newly-hired Illinois teachers to become part of Social Security would help ease the burden on the underfunded Teachers’ Retirement System, help ease the long-term financial problems facing Social Security, and create more income stability for retired teachers.

Truth: Making newly-hired teachers pay into Social Security and allowing them to be eligible for benefits would negatively affect all current and retired teachers, destabilize TRS finances and create budget problems for all local school districts; all without helping Social Security solve its financial problems.

Illinois teachers have not been part of the Social Security system for decades. Teachers currently rely almost solely on a TRS pension during retirement. Active teachers contribute 9.4 percent of their paycheck to help fund TRS and school districts contribute 0.58 percent of every teacher’s salary to the System. Last year, all told, teachers contributed $899 million to TRS and school districts contributed $170 million.

For new teachers to become part of Social Security, it is assumed that they would no longer be covered by the current TRS benefit rules and would be part of a self-administered 401(k)-style plan. Retirement benefits would depend on the members’ abilities to save money during their careers. This type of plan would supplement Social Security benefits.

For teachers, this scenario would mean a mandatory 6.2 percent payroll deduction for Social Security as well as voluntary contributions for a 401(k)-style plan. If a teacher voluntarily saved 3.2 percent of his or her salary – equaling the current 9.4 percent required contribution – their ultimate pensions likely would not equal the pension they would receive under the current system. The difference would be due to the lack of a centralized investment program and Social Security benefit rules. Teachers likely would have to voluntarily contribute more than 3.2 percent to equal the benefits they would receive under the current system, decreasing their take-home pay.

For school districts, the cost of teacher pensions would immediately rise by a considerable amount under this scenario. Instead of contributing 0.58 percent per new teacher, every district would have to contribute 6.2 percent per teacher. It is estimated that this increased cost would equal $41 million for Illinois school districts in the first year and more than $2.4 billion over 10 years. Plus, districts would still have to contribute 0.58 percent for each participant in the current system. With most school districts already facing serious financial troubles, this added burden would be difficult to manage successfully.

For TRS, moving new teachers to Social Security creates a “double hit” on annual revenue needed to pay pensions. Removing the contributions of new teachers and school districts from the revenue mix of the current pension system reduces the amount of money available for investment. Last year, TRS investment income made up 49 percent of each pension check. Plus, as teachers in the current system retire, those contributions are lost, as well, and are not replaced as they had been in the past. In the meantime, pension obligations must be met. By reducing a significant funding source, TRS becomes more dependent on general tax dollars appropriated by state government.

Finally, a 1999 study by the General Accounting Office found that adding teachers and other public employers from around the country who are not currently in Social Security would create, at best, a temporary surge in revenue for Social Security. Over the long term, adding teachers to Social Security would only increase the System’s total obligations and deepen the long-term funding problem.

“Risky” Investments

Claim: A Northwestern University study from March, 2010 concludes TRS has the “fourth riskiest” pension system in the country, with 81.5 percent of investments classified as “risky.”

Truth: The “study” is misleading. It merely totals the assets that TRS and 24 other pension systems have that are not held in cash or invested in fixed income securities, and labels these investments as “risky.” No valuation is assigned to any of the thousands of individual investments held by TRS, so the study does not rank how risky the TRS portfolio is compared to any other system. TRS is required to maximize the resources available for retired teachers. All investments carry some element of risk. Without its investment portfolio, TRS could not keep pace with the resources needed for pension and benefit checks. Forty-nine percent of a TRS pension check comes from investment income. Check out the “study” at www.npr.org/templates/story/story.php?storyId=125059110.


Claim: TRS is endangering teacher pensions by seeking to make a fast buck through “risky” trades in derivatives – attempting to recoup $4.4 billion in investments that were lost during fiscal year 2009.

Truth: TRS did lose $4.4 billion during 2008-2009, but almost every investor lost money. The losses stemmed from a worldwide economic downturn in stocks, bonds and real estate, not because of mismanagement or trading in derivatives. This year TRS has not made any substantial changes in its investment philosophy, and the overall $33.7 billion portfolio is on track for a positive rate of return that exceeds 19 percent. The target rate of return for TRS is 8.5 percent.


Claim: TRS is needlessly risking members’ assets in the last year on derivative investments in order to make a lot of money quickly. The media point a negative finger at TRS for trading in derivatives because many financial commentators blame derivative trading for sparking the 2008-2009 economic downturn.

Truth: TRS has been successfully trading in derivatives since 1986 without harming pensions. In the last year, TRS saw those derivative investments return $173 million. That is not a lot in a $33 billion portfolio and certainly not enough to cover the $4.4 billion losses of the previous year. In reality, for institutional investors like TRS, derivatives serve another purpose. They are never used to make quick profits, but to reduce risk in a large portfolio and to make some investments available at a lower cost. Despite the negative image, all large pension funds and institutional investors trade in derivatives. Derivatives comprise the largest investment market in the world, valued at $650 trillion. Derivatives are investment contracts whose value is based on the performance of a bundled group of financial assets, almost like a mutual fund. At TRS, a derivative investment is only made in conjunction with an investment in an asset that is included in the derivative package. The value of a particular investment, on its own, may vary over a period of time. But coupled with other investments, the average value of the package does not vary as wildly because the combined investments buffer each other – as one falls, another rises.


Claim: TRS, like many other pension systems throughout the United States, is “underfunded” over the long term and does not have sufficient resources to meet all its obligations to retired teachers in the future.

Truth: Unfortunately, TRS is underfunded in the long term. During the last fiscal year, the System’s unfunded liability, as measured under state law, stood at $35 billion, leaving a funded ratio of 52 percent. In other words, if all obligations were called due today, the System could not meet 48 percent of the outstanding pensions and benefits. That won’t happen because not all teachers will retire at once. This underfunding problem is several decades old, and has been caused primarily by state elected officials not contributing enough money to the System to meet its projected long-term needs. Evidence exists that an unfunded liability problem existed as far back as the 1950s.

Teacher Pensions are too “Generous”

Claim: The guaranteed benefits of retired teachers and other government workers are too high and are out of synch with retirement benefits found in the private sector. The rising costs of maintaining these pensions should be scaled back in order to avoid tax increases and cuts in other public services.

Truth: The average annual retirement benefit for an Illinois teacher is a little more than $43,000. When you consider that Illinois educators do not qualify for Social Security during their teaching years, this benefit cannot qualify as “too generous.” Not only are these benefits the sole monetary lifeline for retired teachers, but they stimulate the economy: The pensions and benefits paid annually to retired teachers living in Illinois create more than $4 billion in economic activity, including more than 30,000 full-time jobs that mean $2.3 billion in wages for non-teachers.

Reduce Pension Benefits for Current TRS Members

Claim: Because of Illinois’ financial trouble, benefits to existing teachers and government employees should not be guaranteed, but lowered to save the state billions of dollars every year. One argument is that pension credits for existing teachers should be left intact for service they have performed but reduced for future service they have not yet performed.

Truth: Pension benefits for existing teachers and government employees are guaranteed by Article XIII, Paragraph 5 of the Illinois Constitution and cannot be “diminished” in any way. Since 1972, at least seven court cases have affirmed the meaning of this clause. It is highly unlikely that the General Assembly will challenge this well-established legal precedent. There is no language in the Constitution that remotely comes close to allowing pension benefits to be changed prospectively for service that has not yet been performed.

Pension Guarantee

Claim: The Civic Committee of the Commercial Club of Chicago has said that pensions due to Illinois teachers and public employees are not guaranteed by the state; implying that if a state pension system goes broke, retirees have no recourse to collect the money owed them. It cites the Illinois Pension Code – 40 Illinois Compiled Statutes 5/22-403 – as saying that “any pension payable under any law herein before referred to shall not be construed to be a legal obligation or debt of the State…”

Truth: For TRS members, their pensions are guaranteed by the State of Illinois. The Civic Committee does not quote the entire law when referencing the Illinois Pension Code and leaves out an important phrase – “…unless otherwise specifically provided in the law creating such fund.” In other words, language in another state law creating a pension fund can override this section of the Illinois Pension Code.

For Illinois teachers, the section of the Pension Code cited by the Commercial Club is overridden by 40 ILCS 5/16-158(c), a part of the law that created TRS. This section specifically states, “Payment of the required State contributions and of all pensions, retirement annuities, death benefits, refunds, and other benefits granted under or assumed by this System, and all expenses in connection with the administration and operation thereof, are obligations of the State.”

In addition, Article XIII Section 5 of the Illinois Constitution says protects “membership” in any state pension system as an “enforceable contractual relationship.”