Illinois Thwarted in Attempt to Cut Pension Shortfall

Rating agencies are on alert after an attempt to reduce a $100 billion pension gap was thrown out by the state’s Supreme Court.

The Supreme Court in Illinois has thrown out proposed pension reforms designed to reduce the $100 billion funding shortfall across its five public pension plans.

In a ruling on Friday, the US state’s supreme court declared the reforms, which were originally introduced in 2013, were in breach of a clause in Illinois’ constitution protecting employees’ pension payments from being changed.

Illinois’ five pensions are among the poorest-funded in the US, with an aggregate funding level of just 41.1% in June 2013—a figure that was almost unchanged in more than 40 years, the Supreme Court noted in its ruling.

“The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and… it is a crisis for which the General Assembly itself is largely responsible.” —Illinois Supreme CourtCredit rating agency Standard & Poor’s placed Illinois on negative watch following the ruling, meaning the state is more likely to have its rating downgraded. Illinois is already the US’ lowest ranked state by all three major credit rating agencies.

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However, in a statement following the ruling, Fitch Ratings said the court’s decision was “not a surprise” given the strength of benefit protections.

Illinois’ General Assembly initially proposed to reign in its pension shortfall by delaying the age at which members can first claim a pension by up to five years, as well as capping the amount of salary used to calculate an individual’s pension. Annual pension increases were also slashed. Introducing the proposals in 2013, Senator Kwame Raoul claimed the reforms would save $21.4 billion.

The reforms were derailed by a clause in the state’s constitution, introduced in 1970, designed to protect members’ benefits and force the Illinois government to fund its pension liabilities without breaking pension promises.

“The law was clear that the promised benefits would therefore have to be paid, and that the responsibility for providing the state’s share of the necessary funding fell squarely on the legislature’s shoulders,” the Supreme Court said in its report. “Accordingly, the funding problems which developed were entirely foreseeable. The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and… it is a crisis for which the General Assembly itself is largely responsible.”

The Supreme Court’s ruling can be accessed on its website.

Last week, Oregon’s Supreme Court ruled against reforms to its state pension, a result that is expected to see the Oregon Public Employees’ Retirement System’s funding shortfall balloon by as much as $5 billion.

State governments across the US are grappling with sometimes crippling public pension shortfalls. Last year, SEC Commissioner Daniel Gallagher warned that the total unfunded liability across local and state pensions nationwide could be as much as four times bigger than the $1 trillion official estimate.

“To fully fund these public pension shortfalls, every household in the US would need to pay $1,400 per year for the next 30 years,” he said.

Related Content:The Hardest Job in the Business? & SEC Hits Out at Underfunded Public Pensions

Wanted: Someone to Manage $36 Billion in Equities

New Jersey is looking for a portfolio manager for its massive equities programand it's taking applications.

New Jersey’s $78 billion retirement system is in the market to hire a portfolio manager for its public equities program.

The Newark-based public fund manages its entire $35.7 billion stock portfolio in-house, outsourcing only alternatives and global credit mandates. Stocks represented 46% of its total assets as of the end of February. 

The New Jersey fund has earned accolades for its early, innovative partnerships with alternatives firms and consistently outperformed
its benchmark.

The position’s responsibilities include “monitoring existing portfolio investments and identifying new opportunities for inclusion in the portfolio within specific industry groups,” according to the job posting.

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To qualify, candidates must have spent at least four years “engaged in investment management and research with primary accountability and authority for the management of at least $50 million.”

A CFA and strong track record are preferred.

The New Jersey fund has earned accolades for its early, innovative partnerships with alternatives firms and consistently outperformed its benchmark. It closed last fiscal year with 16.72% returns and nearly 100 basis points of alpha, and posted three-year gains of 10.13% versus the benchmark’s 8.81%.

Retaining investment staff, however, has proven to be a problem. Over the past several years, a series of well-respected leaders have departed for private sector positions, all citing compensation as the primary reason for leaving. 

While the portfolio manager posting stated that “salary is commensurate with education and work experience,” New Jersey lawmakers control all state employee salary and benefit packages.

The fund’s head of international equity, for example, earned $116,342.86 in 2014 and is on track to make the same this year, according to public records. Pension fund chief and former Forty Under Forty member Chris McDonough is the treasury department’s highest paid employee at $185,000.

Interested? Applications for the portfolio manager position are open until June 8.NJ PM PostingSource: New Jersey Department of the Treasury, Division of Investment

Related Content: New Jersey Pensions to Scrutinize Fees  

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