Market Crash Means Illinois Taxpayers Owe More for State Pensions

By Bill Zettler


The current worldwide market slump has undoubtedly affected the investment returns of many people and organizations including the Illinois Teachers Retirement System (TRS). The reason this is a problem for Illinois taxpayers is because all of the pension fund market risk is passed to the taxpayer not the retiree. In other words if the value of the investments go down $2 billion the amount of taxpayer liability goes up by a like amount. This is because the taxpayer is the ultimate guarantor of the teachers pension. The teacher has no liability because the pension amount and increases are guaranteed by law. This is true for all of the state pension plans not just the teachers.


The degree of this liability is highlighted by TRS 2007 investment returns. According to the TRS 2007 CAFR (Comprehensive Annual Financial Report), 2007 was an outstanding year for investment returns as the TRS was able to achieve a record return of 19% well above its estimated 8.5% per year return. But the bad news is even with a 19% return taxpayers accrued liability actually increased by $2.4 billion from 2006 to 2007.


How could that happen, record returns and taxpayers owe more than the year before? It happened exactly the way we told you it would happen in our article on investment returns and increased taxpayer liability. What happened is during the 2007 5-year actuarial review actuaries determined that:

  1. Teacher salaries were going up faster than projected.
  2. Teachers were retiring in greater numbers than expected.
  3. Retired teachers were living longer than expected.

When you change upwards key assumptions used in projecting taxpayer liability forward 35 years it adds up to a lot of money, more money indeed than even one year 19% investment returns can cover.


Which brings us to the investment returns we should expect from TRS in the fiscal year ending June 30, 2008 a mere 3 months from now. According to the TRS 2007 CAFR 9 out of 10 of their largest stock holdings were down in price as of 3/18/08. Also $5 billion of the assets were in real estate, almost certainly down in value from last year. In addition they held $4.5 billion in mortgage-backed securities including almost a billion dollars in the infamous CMO's (Collateralized Mortgage Obligations). Things can certainly change in 3 months but as of now it looks like a substantial loss in asset value should be expected this year.


Let's for the sake of argument assume the loss for 2008 is 5%, a reasonable estimate at this time. That would mean for the 8 year period 2001-2008 TRS has had a return of 6.4% very close to the 6.5% estimated by Warren Buffet for the next 2 decades. If this trend would continue, the INCREASE in required taxpayer payments to the TRS over the next 35 years would be in excess of $100 billion. Add in the other state pension funds and you are up to $150 billion. That's on top of the $300 plus billion we are required by law to pay now assuming an 8.5% return. That would also mean $150 billion fewer dollars available for taxpayers' own retirement.


So as taxpayers own retirement incomes are threatened by a decrease in the value of their 401K and IRA's, their tax liability for funding other peoples retirement goes up, just at the time when they are least able to afford it. This is not only unfair but as the above numbers indicate, will be virtually impossible to pay for.


Social Security and 401K's for all public employees is the only equitable and affordable solution. The question remains when will Illinois politicians face up to this problem and their responsibility to the taxpayers of Illinois. Public employees do not deserve better pensions than the people they work for, the taxpayers of Illinois.


 Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address. Click here to read more by Mr. Zettler.