Tainted by Deep Financial Woes, Illinois Pension Boosts Alts in Allocation Review

(April 10, 2011) — Trustees have approved a new asset allocation for the $34.6 Illinois Teachers’ Retirement System (TRS) — the largest of Illinois’ five pension plans — that involves an increased exposure to alternatives.

“We have been steadily and methodically ramping up in alternatives for the last eight years or so,” TRS spokesperson Dave Urbanek told aiCIO. “We’re taking it very slowly, with the majority of our investments still in stocks and bonds,” he said, noting that TRS, suffering from a total liability of roughly $77 billion to be paid over the next 30 years, has been in debt since its creation in 1939.

In response to the massive shortfalls of Illinois’ pensions, deemed last year by the Pew Center on the States to be one of the worst-funded schemes in the country, Urbanek indicated that studies such as Pew’s often show a limited picture taken out of context. “The misleading thing in these studies is that they stir people into thinking that unfunded liabilities will show up someday and people will pay the entire amount, which doesn’t happen,” Urbanek said told aiCIO. “It’s good for people to know that we have major unfunded liabilities because it puts pressure on state officials to stay current with their payments to us. We have a severe liability not because we don’t pay contributions, but because the state government hasn’t given us their share.”

Specifically, under the new allocation as part of the fund’s normal five-year portfolio review, the domestic equity target will decrease to 20% of the portfolio from the current 26%, while international equity, real estate, and real return will remain at 20%, 14%, and 10% respectively. Exposure to fixed-income will increase slightly to 16% from 15%. Absolute return will rise to 8% from 5%, and private equity will increase to 12% from 10%. The revised allocation with an attention to alternatives mirrors the recent approach taken by the  New Jersey State Investment Council, which approved new investment guidelines allowing a higher alternatives allocation totaling 35% of assets from the current cap of 25%.

Illinois’ public statement about its unfunded pension liability is now being analyzed by the Securities and Exchange Commission (SEC) along with other states, such as New Jersey and California. The inquiry reflects the heightened effort by the SEC, which even announced the formation of a special unit for investigating state pension disclosures last year. In August 2010, for example, the SEC initiated its first action against a state, accusing New Jersey of securities fraud and claiming that when New Jersey issued $26 billion in bonds between 2001 and 2007, it fraudulently and erroneously portrayed its pension funds as adequately funded.