Updated: January 1, 2018
Issue: The Teachers’ Retirement System Board of Trustees in December, 2017 set a revised state government funding contribution to TRS for fiscal year 2018 at $4.09 billion. The state’s pension contribution for the previous fiscal year was $3.986 billion.
This was the second time since FY 2018 began on July 1, 2017 that TRS had to certify a change in the FY 2018 state contribution. The changes were necessitated by new state laws that altered the pension funding formula that TRS uses to calculate the state government obligation.
The original contribution set by the TRS Board in October of 2016 was $4.56 billion. The first revision to the formula in August, 2017 lowered the state contribution to $4.034 billion.
The changes to the statutory pension funding formula made during 2017 effect the funding formula in a few ways:
- Beginning in FY 2018 and retroactive to FY 2014, TRS must smooth, over a five-year period, the fiscal effect of any changes made to the TRS actuarial assumptions. This has the effect of reducing the FY 2018 state contribution by approximately $500 million.
- School districts will assume a greater share of the cost of a member’s pension if a member’s salary is equal to or greater than the governor’s statutory salary, which in FY 2017 was $177,412.
- A new law will prevent state government from forcing local school districts to divert federal grant funds away from critical student services to help pay off the TRS unfunded liability. TRS has long believed that it is unfair for state government to force local districts to use federal money to help solve a problem the districts did not create.
Discussion: Even before the funding formula The final state contribution for FY18, $4.09 billion, falls $2.93 billion short of the amount of money that would be required to fully fund pension benefits in FY18 under standard actuarial calculations.
TRS absolutely will be able to meet its benefit obligations to retired teachers in the near future, but the System cannot guarantee retirement security for future generations of teachers unless the state’s future annual contributions meet an actuarial standard for full funding.
TRS earned a positive 12.6 percent, net of fees, on its investments during FY17.
Over the last several years state government has taken its responsibilities to TRS very seriously and has paid its legal obligation in full. Still, the legal state contribution for the last several years has been insufficient to improve the System’s long-term finances. State government’s annual contribution is set artificially by law. It is not an actuarial calculation.
As it does every year, for FY18 the TRS Board asked its actuaries to calculate two state contributions — the payment calculated under state law and the payment calculated under actuarial practices. Under standard actuarial practices, the state’s annual contribution for FY18 should be $6.99 billion.
The calculations set in state law artificially lower the state’s annual funding level. For instance, state law:
- Requires pension costs to be calculated on a 50-year timetable instead of the standard 30 years
- Establishes a 90 percent funding target instead of the standard 100 percent goal
- Requires the debt payments on state pension bonds to be deducted from the total contribution.
Illinois teachers have always paid their required share and are counting on their pensions to sustain them in retirement. The state has never paid its full share.
The annual contribution is the amount of money required by state law to fund TRS pensions during the coming year, as well as a payment on the System’s unfunded liability, which currently stands at $73.4 billion.
The state’s annual contribution to TRS is scheduled to be paid in 12 installments during the fiscal year. Each year in the autumn, the TRS Board of Trustees is required by law to calculate and certify the state’s contribution for the next fiscal year. These calculations are then reviewed by the Illinois State Actuary, Cheiron, of McLean, Virginia.