(September 21, 2012) – It’s official: the board of trustees for Illinois’ Teachers’ Retirement System (TRS) voted 11-2 in favor of cutting the fund’s assumed rate of return from 8.5% to 8%.
This decision boosts the system’s unfunded liability ratio to 57.6% from 54.8%, necessitating an estimated $300 million increase in state contributions for the 2014 fiscal year. The fund has $36 billion in assets under management, and total liabilities of $89.1 billion–$5.6 billion more than when calculated with the previous discount rate.
“The assumed rate of return greatly influences the financial future of TRS. Reducing the rate from 8.5% to 8% is a prudent move that balances reality with the needs of TRS members,” said Executive Director Dick Ingram in a statement. “The Board’s decision takes into consideration many things: the volatility of the world economy, the fiduciary duty we have to keep the System strong, the financial problems faced by Illinois and state government’s long-term responsibility to teacher pensions.”
Earlier this month, Illinois’ Governor Pat Quinn made a strong push to start solving these financial problems through pension reform. Quinn called lawmakers back for a special session to vote on an overhaul package, but the bill did not pass. Reform may now have to wait until the start of the next legislative session in January.
In Illinois, unlike many other states, the public pension system does not have to seek legislative approval to change its discount rate. Ingram has been publicly mulling over the decision since early June, based on advice from TRS’ actuaries.
“Our process is very deliberate and considerable analysis is used to develop this estimate,” Ingram said. “It is the fiduciary duty of the Board to set a rate that is realistic and will fairly distribute the cost of TRS benefits among several generations of taxpayers.”
TRS has been using the 8.5% rate since 1997, and has returned an average of 9.3% since 1981. Over the past five years, however, TRS’ investments have far missed their benchmark, returning an average of 2.7%.
At 8.5%, TRS had become an outlier among its peers. Many major asset owners have concluded that such returns may be wishful thinking in the current economic climate. More than half (54%) of public funds in the US forecast annual returns of less than 8%, according to the Public Fund Survey’s study of 126 pension systems. The most common target is 8%, with 44 pensions following it. In early August, Indiana cut its assumed rate from 7% to 6.75%, making it the lowest of any pubic fund in the United States.