The Illinois Pension Problem What is Wrong with Illinois Pensions?

State Retirement Systems Illinois controls the benefit levels and operates 5 State retirement systems 1.Teachers’ Retirement System 2.State Universities’ Retirement System 3.State Employees’ Retirement System 4.Judges Retirement System 5.General Assembly Retirement System

Pension Funds The Illinois General Assembly also controls the benefits and funding requirements of other public pension funds but makes no direct contribution. 1.Chicago Teachers’ Retirement Fund 2.Chicago Police and Fire Funds 3.Chicago Municipal Employees and Laborers’ Funds 4.Chicago Park District Fund 5.Cook County and Cook County Forest Preserve Funds 6.Metropolitan Water Reclamation District Fund 7.Illinois Municipal Retirement Fund 8.Downstate Police and Fire Funds

What is a Defined Benefit Pension? A type of pension plan in which an employer promises a specified monthly benefit upon retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, with no consideration on the risk of investment returns. (Years of Service X Benefit Formula) X Final Average Salary = Annuity

Teacher Benefits Retirement Age Benefit Formula Maximum Annuity Final Average Salary COLA Employee Contribution Age 62 with 5 years of service credit. Age 60 with 10 years of service credit. Age 55 with 20 years of service credit (discounted annuity or Early Retirement Option) Age 55 with 35 years of service credit. 2.2% of final average salary for each year of service credit earned after June 30, % of final average salary Average of the four highest consecutive annual salary rates within the last 10 years of service. 3% compounded 9.40%

Example of a Teacher Benefit A teacher who has worked 35 years and retires making $100,000 (35 x 2.2) x $100,000 = An annual annuity of $75,000 that has an annual compounding cost of living adjustment of 3%

Who Pays for the Benefit? Every paycheck an employee contributions a certain percentage of income towards their pension. For a teacher it is 9.4% The additional cost of the benefit is paid by the State. Any risk like investment returns and actuarial assumptions is assumed by the State.

The Illinois Pension Problem Illinois has $96.8 billion in unfunded liability in its 5 State pension systems. This is the amount of money needed to cover benefits that have already been earned. The City of Chicago has an additional $24 billion in unfunded liability. The Cook County Pension Fund has an unfunded liability of $6 billion. IMRF is behind $5.2 billion. The Water Reclamation District is unfunded at $1 billion. Local governments owe the over 600 police and fire pensions funds countless billions. That’s well over $125 billion in debt for pension benefits already earned!

Current Funding Accrued Net Unfunded Funded SystemLiabilityAssetsLiabilityRatio TRS$90,024.9$36,516.8$53, % SERS$33,091.2$10,960.7$22, % SURS$33,170.2$13,705.1$19, % JRS$2,021.7$578.0$1, % GARS$303.5$52.7$ % TOTAL$158,611.5$61,813.3$96, %

Systems Breakdown Active Members Retirees FY12 Benefits Paid TRS133,75294,868$4,553.8 SERS62,72950,000$1,627.4 SURS71,05645,548$1,757.7 GARS176294$19.3 JRS968725$106.6 Total268,681191,435$8,064.1

The Illinois Funding Plan In 1996 the State started its first organized pension funding schedule, it has commonly been referred to as “the funding ramp”. The funding plan called for the State to make contributions as a level percent of payroll in fiscal years 2011 through 2045, following a 15-year phase-in which began in fiscal year The contributions are required to be sufficient, when added to employee contributions, investment income, and other income, to bring the total assets of the systems to 90% of the actuarial liabilities by Fiscal Year 2045

How It Really Was Funded In 2003, 2010, and 2011 the State has had to issue bonds in order to make the pension payment. In 2006 and 2007 the State contributed less than what was required by the 1996 law.

Benefit Increases To make matters worse the General Assembly passed numerous pension benefit increases that were never properly paid for. For example, the COLA in Illinois used to be 2% simple interest now its 3% compounding, all without raising employee contributions. Another example is that teachers are allowed to use 2 years of sick days to count towards their pension, again no employee contribution increase was required for this new benefit.

Market Forces Every unexpected change in actuarial assumptions and investment return changes the cost of a pension and the State assumes all the risk in a defined benefit pension plan. In 2007 the unfunded liability totaled $42 billion, after the market collapse in 2008 the unfunded liability has now risen to $96.8 billion. Actuarial assumptions, like life expectancy, also play a role. For every year longer a person is expected to live, the longer they will collect a pension, and the more expensive the pension benefit is.

Future Contributions