TRS of Illinois

TRS in the News

Excess Salary Payments to TRS for End-of-Career Raises Greater than 6 Percent — 7/22/15

Updated: November 1, 2015

            Issue: During the summer of 2015, many news organizations reported that school districts were paying “excess salary payments” to TRS after granting annual raises in excess of 6 percent a year to teachers and administrators close to retirement.
On July 22, 2015, the Chicago Tribune reported that between 2005 and 2015 school districts paid only $39 million of $149.5 million that was due because of raises that exceeded 6 percent. The remaining $110.5 million was waived because of the exemptions in the law.

            Discussion: If a school district grants an educator a raise in excess of 6 percent in any given year and that raise factors into the educator’s initial pension calculation, then Illinois law requires the school district to pay for the long–term cost of the portion of an educator’s pension created by the portion of the raise that exceeds 6 percent.

These costs are called “excess salary payments.” In fiscal year 2014, 400 school districts out of 1,013 made excess salary payments, which totaled $5.28 million. The average excess salary payment in 2014 was $12,685.
This law was enacted in 2005 in order to prevent school districts from granting double–digit raises to educators approaching retirement in order to boost their pensions. Without this law in place, TRS and state government would be responsible for the long–term costs of pensions created by large salary increases.

Between 2005 and 2011, the law contained seven exemptions that allowed school districts to avoid the payments. Five of the exemptions were repealed in 2011 and covered raises larger than 6 percent for:

  • Educators whose salaries were contractually guaranteed by union contracts signed before 2005.
  • Teachers who engaged in additional classroom instruction beyond teaching the standard number of class periods that define “full–time.”
  • Full–time teachers that taught summer school.
  • Educators that received a promotion that required them to obtain a different teaching license from the state, such as a classroom teacher promoted to school principal.
  • Educators whose salaries were funded by state or federal government grants — salaries that were not under the control of the local school board.

Two permanent exemptions in the law cover raises larger than 6 percent for:

  • An educator that leaves one district and receives a raise when they start to teach in another school district.
  • Educators whose jobs are affected by school district consolidations or annexations.

The Tribune story and other media reports about these payments and the exemptions contain a number of inaccuracies:

  • The excess salary payments are referred to as “penalties” and “fines.” This is incorrect because the words “penalty” and “fine” are not used in the law. School districts are not breaking the law when granting raises in excess of 6 percent so they cannot be assessed a penalty.
  • The law does not outlaw raises by school districts that exceed 6 percent. The law only transfers the responsibility of paying for the pension created by a raise in excess of 6 percent.
  • TRS does not grant the exemptions. School districts are entitled under the law to the exemptions just like property owners are entitled by law to deduct the property taxes they pay on their federal income taxes. The Internal Revenue Service does not “grant” that deduction.
TRS does not determine that raises in excess of 6 percent are out of compliance. The law does not give TRS the power to characterize any salary increase as non–compliant because the law does not place any limits on raises granted by school districts.

“Pay to Play” Allegations at TRS are False and Unfounded – 7/15

Updated: November 1, 2015

Issue: In July, 2015, the International Business Times published a story which alleged that TRS trustees invested more than $500 million with a private investment firm in 2013 as a direct result of a political contribution made to former Gov. Pat Quinn by a political action committee run by the wife of the investment firm’s CEO.

This investment decision by TRS categorically was not the direct or indirect result of any political action committee donations. There is no evidence – and none presented in this story – to the contrary.

Discussion: The allegations in this story are based solely on conjecture, unsubstantiated innuendo and invented conspiracy. The claims made in this story were denied by TRS. The International Business Times made numerous factual errors in this story. In addition, critical information given to the reporters before publication by TRS that refuted the allegations was left out of the story. Federal and state laws, as well internal TRS policies forbid the approval of any investment as a quid pro quo for any action that benefits an elected official.

Here is the International Business Times story annotated by TRS to correct inaccuracies and provide a proper context for the information provided.

“Democratic Party Financier Got Big Illinois Pension Deal After PAC Contributions”
By Matthew Cunningham–Cook

David Sirota
Andrew Perez

International Business Times
July 29 2015 12:35

When officers of the Illinois teachers pension system opted to put more than $1 billion under the control of a single financial firm, Grosvenor Capital Management, they touted the arrangement as a step toward greater efficiency: Grosvenor would be entrusted to manage a larger slice of the state’s hedge–fund investments, a part of the portfolio that had previously been managed by a competing firm. 1

  1. Incorrect. The International Business Times was told before publication that Grosvenor was not allocated the money to “manage” for investment. The funds, totaling $537 million, came from an investment manager that had been terminated by TRS. Grosvenor collected no fees related to the former K2 assets.

    The sole intent of transferring these assets to Grosvenor was to assist TRS in the orderly liquidation of those assets. At the end of June, 2015, 64.8 percent of these assets had been liquidated. Of the original $537 million transfer, $189 million remained to be liquidated.

    In addition, Investment accounts in excess of $1 billion are not unusual. At the time of this decision by TRS, 13 financial firms administered separate investment accounts each totaling more than $1 billion in TRS assets. At the time, the TRS investment portfolio totaled $42.7 billion.

But the deal, blessed by Illinois pension officials in late 2013, was distinguished by more than the simple consolidation of two managers into one. 2 Grosvenor is run by Democratic Party financier Michael Sacks, a major campaign contributor to Chicago Mayor Rahm Emanuel and a prodigious fundraiser for President Barack Obama.

  1. Incorrect. This decision was not a “consolidation of two managers into one.” One firm, K2 Advisors, was terminated by TRS. Grosvenor was instructed to help liquidate the TRS assets once administered by K2. Grosvenor collected no fees on these assets.

The decision to retain Grosvenor and transfer more state pension funds to the firm was ratified by a board composed of officials appointed by then–Illinois Gov. Pat Quinn, 3 a Democrat who had been the beneficiary of substantial campaign contributions from a political action committee, or PAC, that was partially run and financed by Sacks’ wife, Cari Sacks. Though Michael and Cari Sacks had since 1990 contributed to the Personal PAC, which finances candidates who favor abortion rights, the couple’s contributions more than quadrupled during Quinn’s tenure in office compared to the previous decade.

  1. Incorrect. Under Illinois law, the TRS Board is composed of 13 members. Six are appointed by the governor and six are elected by TRS members. The State Superintendent of Education serves as the Board President and 13th member. At the time, the TRS Board had two vacancies among the seven seats that are designated as gubernatorial appointees. All six seats elected by members were filled. 

In short, as the Sackses escalated their giving to a PAC that supported Quinn, his appointees 4 signed off on shifting hundreds of millions of dollars to a financial management company run by none other than Michael Sacks. 5 That decision was made even as Grosvenor was underperforming less expensive stock index funds. 6 The pension system paid Grosvenor at least $3.2 million in fees in the year after the deal, state records indicate. 7

  1. Misleading. At the time of this decision, the majority of the seated TRS Board members were trustees elected by TRS members.
  2. This decision by TRS involving Grosvenor categorically was not the direct or indirect result of political action committee donations by Mr. And Mrs. Sacks. There is no evidence — and none presented in this story — to the contrary.
  3. It is misleading to compare the investment returns of any hedge fund with a public equity index fund. The nature of hedge fund investments and public equity investments are apples and oranges and the returns from each portfolio are not in competition. Investments in hedge funds are designed, as the name implies, to “hedge” investments in other strategies, including investments in the stock market. Hedge fund investments are included in the TRS portfolio to diversify investment returns and reduce the volatility of the overall TRS investment program. Most importantly, hedge fund investments are designed to mitigate potential losses of the overall portfolio when the public stock markets lose money.
  4. Misleading. This fee total is a worthless statistic unless it is placed in a proper context. The $3.2 million in fees paid by TRS to Grosvenor equaled just 0.667 percent of the funds invested with Grosvenor at the time. The return from TRS hedge fund investments totaled $662 million in the year after the Grosvenor decision was made. The actions taken by the TRS Board actually reduced fees paid by more than $4 million.

This all unfolded despite federal rules designed to prevent campaign contributions from influencing how governments manage their money. 8 The so–called pay–to–play rules explicitly bar financial executives who manage pension money from making campaign contributions to public officials who have authority over pension investments. 9

  1. This sentence implies by innuendo that federal rules were broken. There is no evidence — and none presented in this this story – that any federal rule or law was violated.
  2. Inaccurate. Illinois state law prevents state officials in the executive and legislative branches from having any “authority” over pension investments. There is no evidence – and none presented in this story – that any elected official in the executive or legislative branches of Illinois state government influenced, dictated or recommended any decision by the TRS Board. In addition, this story provides no evidence that Mr. And Mrs. Sacks made any “campaign contributions” to any public official. Rather, the story focuses on the Sacks’ donations to a political action committee.

Unlike Illinois’ own anti–corruption statute, the federal rules include so–called anti–circumvention provisions that seek to prevent end–runs around the law: Executives who are considered “covered associates” under the rule cannot funnel campaign contributions through family members. Third–party groups such as PACs also cannot be used as conduits.

International Business Times described the outlines of the deal to Greg Nowak, an attorney at Pepper Hamilton, a Philadelphia law firm that counsels corporations on compliance with financial regulations. “It raises the perception that the covered associate is attempting to circumvent the SEC's pay–to–play rule,” he said, referring to the federal Securities and Exchange Commission. He added: “I would advise against campaign contributions of this type.”

'Wholly Unrelated'

Michael and Cari Sacks did not respond to questions from IBTimes about the propriety of their personal campaign contributions in connection with the Grosvenor pension management contract. 10 But in an email, a spokesman for Michael Sacks and Grosvenor, Ben LaBolt — a former national press secretary for the Obama re–election campaign — rejected as “both preposterous on its face and incorrect” any suggestion that the contributions from the Sackses to the Personal PAC in question had been motivated by anything other than their interest in elevating political candidates who support abortion rights.

  1. The decision to restructure the TRS hedge fund portfolio categorically was not the direct or indirect result of political action committee donations by Mr. and Mrs. Sacks. No facts or evidence to the contrary is presented in the story.

“Cari Sacks has been committed to the women's reproductive health care organization Personal PAC for the last 25 years,” LaBolt wrote in an email to IBTimes. “Her engaged and active support of this cause is wholly unrelated to her husband’s business and it's factually inaccurate and an insult to her and spouses of other successful business leaders to suggest otherwise. Grosvenor has a strong culture of compliance.”  

A spokesman for the Illinois Teachers Retirement System, David Urbanek, told IBTimes that campaign contributions play no role in how the institution invests its money. Quinn did not return a request for comment. Terry Cosgrove, executive director of Personal PAC, told IBTimes that Cari Sacks has been involved with the committee for a quarter–century, out of sincere dedication to its cause.

“Cari Sacks has been involved in the pro–choice movement since the 1980s and made her first financial contribution to Personal PAC in 1990,” Cosgrove wrote in an email. “She has been donating consistently since then on an annual basis as she supports the mission of the organization, which is solely to protect reproductive rights in Illinois.”

In the nine–year period before Quinn became governor, Cari and Michael Sacks made a total of $157,200 in donations to Personal PAC. During Quinn’s six–year tenure in office, they gave $833,000 to the PAC and its independent expenditure arm. That latter entity, known as a super PAC, is free of campaign spending limits. $650,000 of the Sackses' donations came in 2013 and 2014 while Quinn was running for re–election. The Personal PAC committee gave over $70,000 in contributions to Quinn — who is pro–choice — as he was running for re–election. The super PAC also supported Quinn in his race against Republican Bruce Rauner, who is also pro–choice and was ultimately elected governor in November 2014. 11

  1. Reports on file with the Illinois State Board of Elections indicate that during 2013 and 2014 Personal PAC contributed a total of $1.99 million to candidates seeking election at the state and federal levels.

Cosgrove, the Personal PAC executive director, said Cari Sacks’ increased contributions in recent years were a direct result of the U.S. Supreme Court’s decision in the Citizens United case, which lifted restrictions on donations to political campaigns.

“Nearly all of our supporters, especially those at the top tier, have increased their contributions to Personal PAC quite significantly since Citizens United and the unrelenting attacks on choice in the past decade,” Cosgrove said.

He added that he has never been a party to a conversation about Michael Sacks’ commercial interests.  

“I don’t know anything about Grosvenor or its business,” Cosgrove added. “All conversation is about reproductive rights and efforts to protect access to women’s healthcare.”

Experts in pay–to–play laws say a donor’s motive in contributing to a PAC is effectively irrelevant: What matters, they say, is the mere fact that a financial firm gained an investment contract while an executive’s family made a contribution to an entity that helped elect a public official who appoints pension overseers. 

'A Relationship–Based Penalty'

“The SEC could not be more clear: They don't care about intent or the actual ability to affect public activity — it is purely a relationship–based penalty,” Stefan Passantino, who runs the political law team at McKenna, Long & Aldridge LLP, previously told IBTimes.

The federal pay–to–play rules were enacted by the SEC in 2011 to prevent corruption in the awarding of public pension contracts, following corruption scandals at major pension funds, including the Illinois Teachers Retirement System. In 2014, some Chicago lawmakers cited the rules in calling on the SEC to probe Mayor Emanuel after IBTimes reported that he accepted contributions from firms that were managing Chicago pension money.

Illinois also has a state version of a pay–to–play rule. But Craig Holman of the watchdog group Public Citizen told IBTimes that it can be legally circumvented. 12

  1. This story never describes the details in this allegation of how Illinois state law can be “circumvented.” In the decisions concerning Grosvenor by TRS there absolutely was no “pay–to–play” involved.

“Both the nature and the amount of Cari’s campaign contributions suggest this action was a well–calculated evasion of the [Illinois] state pay–to–play law,” Holman said.

“This reeks of pay–to–play abuse but, unfortunately, the exchange of funds through a third party may offer a legal end–run around the [state] law,” he said.

As Quinn’s reelection battle was heating up in late 2013, his appointees approved a deal to terminate a contract with investment firm K2 Advisors. Rather than following the conventional route of redeeming the pension’s assets from K2, the fund opted to “merge the assets into Grosvenor’s portfolio,” state documents say. 13

Misleading. There is no “conventional route” of liquidating the assets of a money management firm that has been terminated. The strategy employed by TRS is used frequently. The alternative to having another financial manager help with the liquidation is to have the financial manager that was just terminated liquidate the assets. That is an unsatisfactory option. The liquidation of assets from a terminated financial manager can take time, which is why the assistance of a professional financial manager is needed.

Before the deal, Grosvenor and its subsidiaries managed $769 million of the pension fund’s portfolio, as compared to the more than $2 billion it now manages after the deal, pension fund documents show. 14

  1. Incorrect. As the reporter was told, in December of 2013, when the TRS decision involving Grosvenor and K2 was made, Grosvenor administered $479.4 million for investment. In the 18 months since the decision was made to have Grosvenor help liquidate the K2 Assets, publicly–available TRS investment charts show that the TRS assets invested by Grosvenor averaged $424.2 million. Grosvenor has never invested funds for TRS that total more than $1 billion, much less $2 billion.

LaBolt, the Grosvenor spokesman, said the firm’s revenues from the state pension fund have declined since 2011 as the system has shifted money into Grosvenor vehicles that charge smaller fees. “Grosvenor is providing substantially more services to” the state pension system “now than in 2011, but without receiving any incremental revenue,” LaBolt said. 15

  1. TRS annual reports show that fees paid to Grosvenor by TRS dropped by 434.7 percent between fiscal years 2013 and 2014, from $17.4 million to $3.2 million.

The SEC’s rules are not contingent on how much money a firm makes from a pension fund.

Grosvenor was initially hired to manage state pension money in 2007 by appointees of Democratic Gov. Rod Blagojevich, who was convicted on corruption charges in 2011. The Illinois pension system’s investments in Grosvenor have so far significantly underperformed the Standard & Poor's 500, a leading proxy for the stock market.16 The firm had also underperformed the S&P as an asset manager for the fund before 2013. Financial experts have argued that such underperformance is driven in part by the higher fees that hedge funds, private equity and other so–called “alternative investments” charge, as compared to low–fee stock index funds. With “fund of funds” those fees can be even higher because they involve multiple layers of fees. Such fees have in recent months led financial gurus such as George Soros and Warren Buffett to advise pension systems to avoid alternative investments.

  1. It is misleading to compare the investment returns of any hedge fund with a public equity index fund. The nature of hedge fund investments and public equity investments are apples and oranges and the returns from each portfolio are not in competition. Investments in hedge funds are designed, as the name implies, to “hedge” investments in other strategies, including investments in the stock market. Hedge fund investments are included in the TRS portfolio to diversify investment returns and reduce the volatility of the overall TRS investment program. Most importantly, hedge fund investments are designed to mitigate potential losses of the overall portfolio when the public stock markets lose money.

Michael and Cari Sacks maintain close ties to Illinois’ state and national political leaders. The Sacks couple was Emanuel’s largest campaign donor, Michael Sacks is a top appointee of Emanuel, and he has been included on thousands of emails with the mayor and his staff, according to an IBTimes open–records request. Sacks has recently come under scrutiny in the wake of disclosures that Emanuel proposed shifting city pension money into the same state pension fund that his firm helps manage.

The Sackses are also one of the founding and four largest donors to the planned Obama presidential library in Chicago, giving at least $500,001. Michael Sacks is one of just 22 donors in Illinois who raised $500,000 or more for Obama’s 2012 re–election campaign, and he collected at least $100,000 for Obama’s first presidential campaign. In 2010, Obama appointed Cari Sacks to a national arts advisory committee.

The Illinois Campaign for Political Reform’s David Melton said the mix of political influence, money and pension investments spotlights a wider problem in Illinois.

“This appears to be another unfortunate example of the corrupting influence of big money and unlimited contributions in the politics of our state,” he told IBTimes. “Pay–to–play’ should not be the basis for awarding state contracts.” 17

  1. The decision to restructure the TRS hedge fund portfolio categorically was not the direct or indirect result of political action committee donations by Mr. and Mrs. Sacks. No facts or evidence to the contrary is presented in this story.

Response to an Article Published by the Illinois News Network/Illinois Policy Institute “Unions Hold Sway over Pension Board” – 2014

Updated: November 1, 2015

Issue: A 2014 article distributed by the Illinois News Network/Illinois Policy Institute presents an inaccurate view of the Teachers’ Retirement System Board of Trustees. The authors clearly misunderstand the role of the Board. The TRS Board is a fiduciary with a responsibility to administer state laws and policy set by the Illinois General Assembly. The TRS Board does not set state policy or enact laws.

For example, while it is true state government’s appropriation to TRS is the largest single line item in the state’s annual budget, that amount is determined by state law and independent actuaries. It is certified as a correct number by the TRS Board. The development of the annual contribution is not influenced by any outside considerations.

Discussion: The article expresses concern that a majority of the Board is made up of members, both active and retired, that have an affiliation with one of the two unions representing teachers in Illinois. However, this has long been the case and should not be a surprise.

The TRS Board is strictly a fiduciary, charged with administering state law and keeping the retirement promises made to TRS members over the years.

TRS shares the authors’ desire to have a full, 13–member board, but the facts cited in the article about the open seats on the Board are in error or incomplete. One of the two current Board vacancies arose just in August of 2013. The other vacancy has been open for nearly three years, but efforts have been made to fill that seat. Unfortunately, the person named to fill the vacancy in 2012 did not meet the statutory residency requirements for TRS trustees.

In addition, all investment strategies and opportunities, as well as the money managers hired to implement these strategies, are presented to the Board only after a due diligence process that is routinely described as one of the most thorough in the public pension world. Neither the Board nor individual trustees suggest or propose investment opportunities or “inside deals.”
Further, while this article notes that the state’s annual contributions to TRS far exceed member contributions in recent years, it fails to explain why this is so.

The state’s contribution to TRS has grown over the years solely because of consistent underfunding by the General Assembly over the past seven decades. Illinois taxpayers are paying financing costs caused by the legislature’s poor fiscal discipline, not benefit costs.

In reality, TRS members pay more than half the cost of their pension benefits. In fiscal year 2014, the cost of teacher pensions equaled 17.29 percent of the total payroll of active TRS members. Of that 17.29 percent, TRS members paid 9.4 percent and taxpayers, through the annual state contribution, paid 7.89 percent.

The expected long term rate of return on the TRS investment portfolio is a significant factor in determining the state’s annual contribution, and TRS has consistently exceeded these expectations because the System adheres to a disciplined investment process that is led by a professional staff in concert with respected outside experts.

Here is the Illinois News Network/Illinois Policy Institute article in full, with TRS annotations:

Unions Hold Sway over Pension Board

Illinois taxpayers contributed three times as much money to the Teachers’ Retirement System, or TRS, last year than did participating teachers,1 even as the makeup of board tasked with overseeing the state’s largest pension fund tilted more heavily in favor of teacher union representation.2

  1. This statement fails to provide any meaningful context of TRS funding. The State of Illinois’ contribution to Teachers’ Retirement System in fiscal year 2013 was $2.703 billion, while active TRS members contributed $921.4 million to TRS from their paychecks during the same period. However, the following caveats must be noted:

TRS members pay more than half of the cost of their benefits. In fiscal year 2014, the cost of teacher pensions equaled 17.29 percent of the total payroll of active TRS members. Of that 17.29 percent, TRS members paid 9.4 percent and taxpayers, through the annual state contribution, paid 7.89 percent.

The actual cost of teacher pensions in FY 2013 to Illinois taxpayers was approximately $901 million, or $91 per taxpayer. The remaining $1.8 billion paid by taxpayers ($183 per taxpayer) was the annual contribution to help pay off the unfunded pension liability created by decades of inadequate pension funding by the General Assembly.

The comparison ignores the fact that the 160,692 Illinois teachers contributing to TRS also are Illinois taxpayers, so they make a double payment to TRS.

  1. Incorrect. Prior to a 2009 change in state law that increased the size of the TRS Board to 13 members, the majority of seats on the old 11–member Board were held by members elected by active teachers and TRS annuitants. There was no “tilt” in “teacher union representation.” Prior to 2009, six seats on the Board were filled by members through elections and four were appointed by the governor. The State Superintendent of Education served ex–officio as the Board chair. Under the definition used by the authors of this article, the elected members were “teacher union representatives.”

In addition, this entire paragraph is an innuendo with no conclusion. There is no correlation – and no correlation is established in this article – between TRS funding sources and the makeup of the TRS Board. The annual taxpayer contribution to fund TRS is determined by independent actuaries following a formula in state law and is based on the total statewide payroll of TRS members. That request is certified by the TRS Board. The teacher contribution is set in state law and the TRS Board plays no role in that decision.

The influence of the unions – particularly the Illinois Education Association, or IEA – within TRS is significant.3

  1. This is an innuendo with no conclusion. This article does not establish any instance where this alleged “significant influence” is exercised to the advantage or disadvantage of any person or entity. To exist, influence must be used.

“It’s … about clout, they want a say how money is managed and how things are run,” said Jon Bauman, former executive director of TRS.4

  1. Another innuendo unsupported by any evidence in this article. As noted above, all investment strategies and opportunities, as well as the money managers hired to implement these strategies, are presented to the Board only after a due diligence process that is routinely described as one of the most thorough in the public pension world. Neither the Board nor individual trustees suggest or propose investment opportunities or “inside deals.”

The Teachers’ Retirement System manages $38 billion in assets and has an unfunded liability of $56 billion.5 The system’s money comes from contributions from taxpayers at both the state and local level as well as from educators through payroll deductions.6

  1. It is helpful to use the actual, updated numbers: At the end of fiscal year 2013, TRS had $39.859 billion in assets, not $38 billion. In the last TRS quarterly report published before this article was written, TRS reported $40.8 billion in assets. At the end of FY 2013, TRS had an unfunded liability of $55.7 billion.
  2. Incorrect. This sentence excludes one vital source of revenue for TRS: investment income. In FY 2013, the System’s investment income was $4.562 billion, a total that was 68.8 percent larger than the taxpayer contribution.

The TRS board is composed of 13 members: Six are elected by active or retired members of TRS and six are appointed by the governor. The board’s president is the state superintendent for education.

The idea behind dividing the board in this manner is to ensure that the interests of taxpayers as well as educators are represented.7

  1. This statement ignores the fact that the TRS Board is a fiduciary and its power is limited to administering state law established by the General Assembly. The Board’s powers do not include the establishment of state policy or law.

But the balance of power began to change under the administration of former Gov. Rod Blagojevich, who appointed Marcia Boone Campbell, secretary–treasurer of the Illinois Federation of Teachers, or IFT, to the board.8

  1. Incorrect. In information provided by TRS to the article’s authors, it is clear that by law, the representatives of Illinois teachers unions held a majority of the seats on the TRS Board in every year between 1990 and 2009.

IFT supported Blagojevich in his first and second gubernatorial runs.

Campbell’s appointment gave members of teacher unions a majority of members on the board. Gov. Pat Quinn has since reappointed Campbell.

And the balance of power at TRS has continued to shift in favor of the unions.9

  1. Incorrect. According to the information provided by TRS to the article’s authors, by law the representatives of Illinois teachers unions held a majority of the seats on the TRS Board in every year prior to 2009.

Only four of the board’s six gubernatorial positions are now filled; Campbell holds one of these positions.

This gives union representatives a clear majority — seven of 11 board seats.

“It’s curious to me that they haven’t moved with a greater sense of urgency on filling positions on that board. After all it is a board that does important work and needs to be at full strength,” Bauman said.

Bauman added that IEA dominates the election of teacher trustees, and the smaller IFT simply doesn’t have enough members in suburban and downstate schools served by TRS to win such an election. So the IFT is reliant on the governor to make an appointment.10

  1. Pure opinion unsupported by evidence, or any rationale why the Illinois Federation of Teachers must have a seat on the TRS Board. Also, it is clear that until 2009, “teacher union representatives” always held a majority of seats on the TRS Board.

Board members elected by educators are often officials in the labor union or longtime union activists.

The IEA recommended three members to the TRS board of trustees in 2011, and aided them in their re–election by circulating petitions.

It is virtually impossible for anyone to get elected to the board without the IEA’s support, Bauman said.

Arguably, the TRS board makes decisions that affect Illinois fiscal policy more than any other public body besides the General Assembly.11

  1. Incorrect. It is beyond argument that besides the General Assembly, the Governor’s Office of Management and Budget has a greater effect on Illinois fiscal policy than any other public body. In addition, the Illinois Department of Revenue plays a large role in the state’s fiscal policy. The TRS Board plays no role in Illinois fiscal policy. Like almost all other agencies of state government, TRS requests an amount of money from the state treasury every year to support its mission. Like almost all other agencies of state government, whether that request is fulfilled is up to the General Assembly and the governor.

The board chooses which firms invest pension money, makes an annual request for funds from the General Assembly based on what it believes future investment returns will be12 and oversees how TRS functions as an agency.

  1. for TRS is based primarily on the cost of pensions for that year, which includes an estimate of what “future investment returns will be.” The System’s assumed rate of investment return is a significant factor in that equation, but for the last 30 years, TRS has exceeded its long–term investment assumption. The annual state government contribution

“Having a union controlled board leads to major problems13 … they are always looking after the union,” said Bob Williams, president of State Budget Solutions. “They don’t have to worry about the bills coming due.14 As long as they can keep kicking the can forward15 and as long as the bond ratings don’t totally collapse,16 they can get benefits now and pass the bills off into the future.”17

  1. Another innuendo unsupported by any evidence in this article. No “major problems” due to “a union controlled board” are identified in the article.
  2. Incorrect. The TRS Board does have to worry about “the bills coming due.” In fact, the “bill” comes due every month when pension checks are sent to annuitants. The TRS Board has a fiduciary responsibility to its members to ensure that there is enough money available to the System to pay all pension checks.

It also is the duty of the TRS Board to warn the General Assembly and taxpayers when potential financial problems appear that could threaten the payment of pensions. This is exactly what the TRS Board did in 2012 when it unanimously approved a resolution warning legislators and taxpayers that without changes to bring TRS funding into balance, within 30 years the System would not have enough money to pay all pensions.

  1. The TRS Board cannot “kick the can forward.” The trustees cannot defer payments that under the law it must make to members. The TRS funding mechanism is established in law by the General Assembly and the TRS Board must work within that framework. The investment decisions of the TRS Board are designed to help make sure that sufficient revenue is in place in the future to pay all pensions.
  2. The state’s bond ratings are inconsequential to the operation of TRS and the payment of pensions to retired teachers. TRS does not sell bonds to raise revenue and does not have a bond rating.
  3. This statement sums up the effect of the General Assembly’s poor record of funding TRS over the last 74 years, not the actions of the TRS Board. Against repeated warnings by the TRS Board, for decades state officials have not supplied TRS with actuarially adequate amount money that would fully fund teacher pensions in the long–term. The result of this shorten–sighted practice is a $55.7 billion unfunded liability.

“Unions should have a voice on the board. But they shouldn’t have an overwhelming majority or even a majority. They should have a minority. The taxpayers should be in the majority on the board.” 18

  1. The TRS Board is a fiduciary, responsible for the administration of policy set by the General Assembly. The TRS Board does not set policy. Illinois taxpayers are represented in the General Assembly, where pension policy is made.

IEA officials declined to be interviewed for this article.

When Bauman was executive director, AFSCME sought to unionize the TRS workforce.

Bauman hired a law firm to fight the effort. Ultimately, the workers voted overwhelmingly not to join a union.

But this action may or may not have laid the groundwork for his 2009 dismissal from TRS.19

  1. The absolute qualification “may or may not” undercuts any notion that the conclusion of this sentence is true. One thing is certain: IEA leaders wanted him out. In 2009, then–IEA president Ken Swanson had this to say: “TRS needs to break with the past to get on with the future. If Mr. Bauman is unwilling to resign immediately, I call upon the TRS trustees to remove him at this week’s meeting.”

Bauman quit at that meeting.

Swanson said he didn’t like how Bauman handled a scandal within TRS in which an appointed board member was found guilty of corruption charges. 20

  1. The failed attempt of the American Federation of State, County and Municipal employees to organize TRS employees occurred in 2008 and the Illinois Education Association had nothing to do with that effort.

It is clear that the IEA’s displeasure was centered on the System’s implication in a scandal involving political payments to allies of former Gov. Rod Blagojevich.
Federal authorities investigated the matter and Bauman has never been charged with any wrongdoing.

Bauman said he believes IEA exerted pressure to have him effectively fired.

Some previous TRS executive directors came from leadership ranks of the IEA, but that was not the case for Bauman, nor is it for current TRS Executive Director Richard Ingram.

Officially, TRS is supposed to remain neutral on pending legislation, but TRS board members have been known to share their point of view.21

  1. In response to a question about whether TRS trustees are allowed to offer opinions on pending legislation that effects TRS, the authors of this article were told the following by the System in an email:

“The trustees, acting as trustees, have a fiduciary duty to the System’s members to report on the funded status of TRS and to call for changes that would affect the funded status of the System in a positive way.

We have been advised by counsel that the trustees, acting as trustees, have a fiduciary duty to the System’s members that prevents them from proposing, supporting or opposing legislative proposals that affect member benefits.

As individuals, outside of their roles as trustees, the Board members can, and have taken positions on legislative proposals that affect member benefits.”

Including this information in the article would have provided helpful context.

For example, Robert Lyons, one of the elected annuitant members of TRS’s board, wrote an online article in August of this year saying: “The more money that the General Assembly seeks to save, the more that they diminish the growth of our benefits; the more certain the bill is unconstitutional.”

Similarly, Cinda Klickna, who now heads up IEA, wrote an opinion column for Illinois Issues in 2011:

“...legislation that would have diminished pensions for active participants in the five state retirement systems was proposed in the spring 2011 legislative session. ... [it] is clearly unconstitutional. Should lawmakers pass the legislation, an expensive court fight would ensue, which the state is sure to lose.”

Although Klickna is also a TRS trustee, she identified herself in the article only as president of the IEA.

According to documents obtained by the Illinois News Network, Klickna asked TRS staff to fact check her article before publication.

TRS spokesman Dave Urbanek confirmed that TRS staff was used in this manner at the direction of Ingram. 22

  1. This is not unusual behavior at TRS, nor is it illegal or improper. TRS is an agency of state government and as such routinely assists members of the public, state officials, the media and independent organizations like the Illinois Policy Institute/Illinois News Network in collecting information for their use or in fact checking articles and news reports. The authors of this article asked TRS to “fact check” information for this story and TRS, obviously, complied.

Since 2011, three gubernatorial appointees left their positions on the board. And two of those positions have not been filled. One seat hasn’t been filled for 32 months and the other seat has been vacant for 14 months. Gov. Pat Quinn’s office did not respond to repeated calls regarding why he has not filled seats on the board.

TRS has requested $3.4 billion taxpayer funds from the state to cover the “employer” contribution to the pension system for the fiscal year starting in July.

Securities and Exchange Commission Fraud Charges against the State of Illinois — 3/11/13

Updated: November 1, 2013

Issue: On March 11, 2013, the State of Illinois agreed to settle securities fraud charges brought by the U.S. Securities and Exchange Commission which alleged that between 2005 and 2009 state officials misled bond investors about the size and nature of the unfunded liabilities facing TRS and the state’s other pension systems.

Discussion: Teachers’ Retirement System is not and was never under investigation by the Securities and Exchange Commission. In a November 29, 2010 letter to TRS, the SEC said, “This investigation has been completed as to the Teachers Retirement System of the State of Illinois, against whom we do not intend to recommend any enforcement action by the Commission.”

Illinois officials settled the securities fraud charges in 2013 by making changes to the way the state reports the finances of its pension systems. Since 2009 TRS has worked with the Governor’s Office of Management and Budget on ways to improve the reporting of pension system finances. In settling the charges, the state neither admitted nor denied any guilt. Illinois did not have to pay a fine or a penalty.

TRS cannot sell bonds, so the System cannot be the subject of this inquiry by the SEC. The inquiry has not and will not affect the status of any TRS member’s pension.

The SEC continues to look into the activities of various states that have sold bonds in recent years. The SEC inquiries look into the use of state government financial information during the sale of the bonds.

Specifically, the SEC wants to determine if any state used false, misleading or incorrect information to make their pension systems appear to be more financially sound than they really were in order to make the bonds more attractive to buyers. In other words, did the state mislead bond buyers with false information?

In the early fall of 2010, the SEC asked TRS and the other Illinois public pension systems for basic financial information. This data was swiftly provided by TRS to the SEC.

In 2010 the SEC charged the State of New Jersey with using false information in the sale of pension bonds. The SEC and New Jersey reached a settlement agreement and the state paid a penalty to the federal government.

Illinois Policy Institute Questions on TRS Investments — 2/13

Updated: November 1, 2013

Issue: In February of 2013, the Illinois Policy Institute’s director of health policy and pension reform, Jonathan Ingram, distributed statewide an email that raised several questions about investment practices and decisions at Teachers’ Retirement System. The positions and questions raised by the IPI were repeated in various publications across Illinois.

Discussion: The IPI email contained several inaccuracies, misunderstandings of fact and contradictions. In response to the email, TRS has identified each of the problems in the email and corrected the record.

Have you ever wondered what investments politician have made using teachers’ retirement savings?1

  1. Incorrect. “Politicians” do not control the investments decisions at Teachers’ Retirement System. No statewide elected official or member of the General Assembly or the General Assembly as a whole makes any investment decision concerning TRS funds once those funds are under the control of the System. TRS was created by the State of Illinois as an independent fiduciary with legal responsibility over the administration of money that TRS members and taxpayers set aside for the retirement annuities of the System’s members.

    That’s because the politicians want the state government, and by extension, your tax dollars, to financially guarantee the state pension funds.2
  2. The Illinois Policy Institute apparently is unaware that the payment of teacher pensions from TRS has been guaranteed by the state for years. By law, pension payments are an obligation of state government. The statute is found at 40 ILCS 5/16–158 (c): “Payment of the required State contributions and of all pensions, retirement annuities, death benefits, refunds, and other benefits granted under or assumed by this System, and all expenses in connection with the administration and operation thereof, are obligations of the state.”

    As the report illustrates, taxpayers aren’t being asked to back safe investments such as government bonds.3 Instead, they’re being asked to bail out riskier investment strategies4 if and when they fail to bring in the promised investment returns.5
  3. This statement leaves the incorrect impression that TRS does not invest its assets in “government bonds.” What the Institute does not say is that on pages 61 and 62 of the TRS Comprehensive Annual Financial Report for fiscal year 2012, cited by the Institute, it is clearly stated that TRS during the year held investments in government bonds totaling $1.8 billion. TRS is required by Illinois law, 40 ILCS 5/1–109(c) to prudently diversify its investments across an appropriate number of asset classes.
  4. The “risk” incurred by TRS investments falls within established parameters set by the TRS Board of Trustees. Compared to its peers, the System’s risk is lower than the median risk of the pension plans used in the comparison. Over the last 30 years, TRS investment strategies have resulted in a rate of return of 9.6 percent against a long–term target of 8.5 percent.
  5. This statement is incorrect and reveals a basic misunderstanding by the Institute of how pensions are funded by state government. The amount of money state government allocates to TRS every year is determined predominantly by the projected cost of pensions in the future and not by investment returns, either positive or negative.

    For example, in the wake of the 2009 worldwide financial meltdown and the last recorded investment loss for TRS, state government’s contribution in 2010 increased by $63 million. In 2012, a year after TRS’s investment return was an unprecedented 23.6 percent, the state’s annual contribution increased by $237 million.

    The System’s investment strategies are within acceptable risk parameters and have been successful over the long–term. “If and when they fail” is a contradictory phrase that says, at the same time, that something “may” happen and “will” happen.

    Over the 30 years ending in FY 2012, TRS investments recorded a positive 9.6 percent rate of return, compared to a target rate–of–return of 8.5 percent. The average rate of return for the last three years is 12 percent. For all of calendar year 2012, TRS investments returned 13.9 percent.

    Take a look at TRS’s investment portfolio: roughly 43 percent of teachers’ retirement savings are invested in equities, which by their nature are very risky.6 Another 12 percent is invested in real estate — the last few years have shown us all exactly how risky that type of investment can be.7
  6. TRS investments in stocks are not “very risky.” All investments carry some risk, but the fiduciary duty of the TRS Board requires it to set an acceptable risk tolerance and to prudently maximize TRS assets through investments. Together, the TRS investments in U.S. and international stocks have returned a positive 17.2 percent over the last 10 years.

    Based on the sheer volume of investments in equities, the reward from investing in stocks has been greater than the risk incurred. Worldwide 1.2 billion people invest in equity markets. The international stock market at the end of 2012 was worth $54.6 trillion.

    In addition, the vast majority of 401(k) plans owned by Americans are invested in stocks and bonds. Fidelity Investments alone administers 12 million 401(k) accounts in the United States on behalf of clients.

    Also, the Institute ignores the fact that over decades, the value of stocks has increased greatly and therefore is a benefit to TRS members. Between 1900 and 2012, the average total return per year from U.S. stocks was 9.4 percent. Created in 1939, TRS is a perpetual entity without a “life span” and its members benefit from the long–term increase in the value of stocks as the value of retirement investments increase. TRS is required by law to fund teacher pensions forever.
  7. Incorrect. At the end of fiscal year 2012, TRS real estate investments generated a positive return of 9.9 percent after all investment fees had been paid. Over the last 10 years, TRS real estate investments generated a 7 percent positive return after fees.

    But it doesn’t stop there. TRS is dumping money into fancier investments with less transparency, including complex derivatives, private equity and foreign currency bets.8
  8. The ill–defined term “less transparency” does not describe the decision process used by TRS to determine where assets are invested. All investment allocations are made by the Board of Trustees in open, public meetings. The System’s CAFR includes a tremendous amount of detail about where TRS assets are invested. TRS complies with quarterly investment reporting laws.

    The System is subject to the Illinois Freedom of Information Act and routinely provides detailed descriptions of various system investments to the public. Also, TRS finances and investment reports are reviewed annually by an independent accounting firm selected by the Illinois Auditor General. Annual actuarial valuations are reviewed by the Illinois State Actuary.

    The subjective term “bet” implies that TRS is gambling with its members’ money. That is incorrect. Since 1990, prudent investments by TRS have generated a total of $35.9 billion in investment income, or an average of $1.6 billion per year.

    All large institutional investors like TRS allocate money to derivatives, private equity and foreign currency as part of the process of portfolio diversification. These investments are not unusual.
    The world derivatives market is valued in excess of $600 trillion. All TRS derivative investments are secured by collateral. During the 2008–2099 worldwide financial crash, some investors got into trouble by investing in derivatives that were not backed up by collateral.

    The private equity investment market worldwide is valued at $2 trillion. TRS investments in private equity have been very successful, generating a 17.8 percent return for the System since 1982.
    Foreign currency transactions are a prudent aspect of portfolio diversification. Every day, worldwide foreign currency transactions total in excess of $4 trillion.

    TRS has more than $1 billion invested in bonds that Moody’s Investors Service or S&P Ratings Services rate as below investment grade. That’s the rating given to bond issuers who they don’t have the capacity to meet their financial commitments. They’re commonly called junk bonds. More than 14 percent of the TRS bond portfolio is tied up in junk bonds.9
  9. The Institute’s estimate of “more than 14 percent” of TRS bond investments in high–yield “junk” bonds falls way short of maximum limits on high–yield bond investments set by publicly available 401(k) plans and mutual funds that are registered with the Securities and Exchange Commission. In 2012, the average allowable limit for high–yield bonds held by 1,641 public and private investment funds was 35 percent of a total bond portfolio.

    Overall, $1.07 billion in high–yield “junk bonds” represents just 2.8 percent of the System’s $38 billion investment portfolio. In fiscal year 2012, almost half of the bonds held by TRS – 46.2 percent – were rated as “Aaa,” by Moody’s Investors Service, the highest quality rating possible.
    Since 2010, all TRS bond investments have returned 10.38 percent.

    And higher risks can mean bigger losses for government workers’ retirement savings.10
  10. A completely speculative statement with no basis in fact. Compared to its peers, the TRS risk is lower than the median risk of other comparable pension plans. Between 1990 and 2012, the TRS investment portfolio has grown from $8 billion to $38 billion. In that time period, TRS investment income averaged $1.6 billion per year.

    It’s quite another to force upon them the high–risk choices made in Springfield.11
  11. This analysis is not supported by the facts. Compared to its peers, the TRS risk is lower than the median risk of other comparable pension plans. Between 1990 and 2012, the TRS investment portfolio has grown from $8 billion to $38 billion. In that time period, TRS investment income averaged $1.6 billion per year. The System’s 30–year rate–of–return is 9.6 percent.

    It’s time to expand a program that already exists for workers at Illinois’ community colleges and public universities. Today, more than 10,000 government workers in Illinois participate in 401(k)–style plans that put them — not politicians — in charge of their retirement.12
  12. Actually, at the end of fiscal year 2012, State Universities Retirement System had 16,684 members enrolled in its Self–Managed Plan, not 10,000. Those 16,000 members represent just 14.6 percent of the 114,000 active and retired SURS members. In addition, all 114,000 SURS members, including the 16,000 that participate in the supplemental 401(k)–style plan, benefit or will benefit from a defined benefit pension plan that is very similar to the TRS pension plan.

    In championing 401(k) plans, the Institute contradicts its position that pension funds should not invest money in stocks, which it describes as “very risky.” The vast majority of 401(k) plans owned by Americans are invested in stocks and bonds. Of the SURS members enrolled in the Self–Managed Plan, over the last 10 years 71.2 percent of money dedicated to the SMP was invested in stocks and 28.6 percent in bonds. The average SMP account balance at SURS was $57,500 in FY 2012.

    Also, Fidelity Investments alone administers 12 million 401(k) accounts in the United States. According to Fidelity, the average 401(k) account balance of its clients at the end of 2012 was $77,300. Distributed equally over a 20–year period of retirement, $77,300 would create an annual payment of $3,865 on which to live.

    More than 1,600 401(k) plans and other investment funds regulated by the federal government set the maximum limit for high–yield bonds at an average of 35 percent of their total bond investments.

    Union leaders and politicians want you to guarantee the high–risk investment decisions made by the politician–controlled pension systems.13 If and when these risky investments fail,14 they’re coming for your wallet so they can dump even more money into the failed pension systems.
  13. See Number 1, Number 2 and Number 6, above. The state already has guaranteed public pensions in state law. TRS is not controlled by “politicians.” The investment decisions made by TRS are not high–risk.  
  14. “If and when they fail” is a contradictory phrase that says that something “may” happen and “will” happen at the same time.

    But providing a taxpayer guarantee for the high–risk investment decisions made by politician–controlled pension systems only guarantees one thing: disaster.15
  15. See Number 1, above. The state already guarantees public pension payments in state law.

Private Organization Employees in TRS — 10/11

Updated: November 1, 2015

Issue: An October 2011 article in the Chicago Tribune highlighted the fact that some TRS members who go to work for statewide or national education organizations, including organized labor unions, retain their memberships in TRS and when they retire are eligible to use their union salaries and service time in the pension calculations set by law. In 2007, two employees of the Illinois Federation of Teachers established TRS membership by obtaining a license and teaching in a classroom for the one day minimum prescribed by state law. Another statute, since repealed, allowed them — after they established TRS membership — to claim and add their service time as IFT staff prior to becoming TRS members to any IFT service credit they earned after becoming TRS members.

Discussion: In January, 2012, former Governor Pat Quinn signed House Bill 3813 to address concerns about private organization employees in TRS, especially those who had not been teachers previously but used a state law to claim past employment service toward their TRS pensions. The law is Public Act 97–0651.

The law forbids these members from including any service time with the IFT prior to joining TRS in the calculations to determine their TRS pensions. They will be able to receive a TRS pension based on IFT service and salary after they became members of the System.

It was not a TRS decision to open membership to the employees of education unions or organizations. For decades, state law has allowed certain people who are not currently working in a public school system to be TRS members. Employees of the Illinois Association of School Boards have been allowed to participate in TRS since the 1940s. Employees of organized labor unions have been allowed to participate in TRS since 1987.

In 2011 there were 56 active or inactive members and 60 retired members in TRS who fell into this category. Out of 362,000 members, 116 members did not and do not affect the cost of the System to members and taxpayers, even though the average pension for these particular retired members was $100,089. The average pension for all 90,967 retired TRS members is $46,000.

Also, under current state law, these members must adhere to the rules that apply to all other TRS members:

  • They must be certified by the State Board of Education.
  • They must have established creditable service with TRS prior to taking a job with a union.
  • They must pay the teacher contribution of 9.4 percent.
  • If they receive an annual raise of more than 6 percent, and that salary is used in the calculation of their average salary, the employing organization must pay the added cost of the pension, just like a school district.
  • Post–retirement employment in a TRS–covered position is restricted, just as it is for other TRS members.

The union or outside organization pays more in contributions to TRS than school districts pay. The union must pay the entire “employer’s normal cost” of the member’s pension, which is comprised of the organization’s share and the state’s share. For all members employed by a school district, the district pays 0.58 percent of the normal cost and the state pays the remainder.

School Districts “Picking Up” Members’ TRS Contributions — 10/13/11

Updated: November 1, 2015

Issue:The Illinois Policy Institute on October 13, 2011 released a study of the school districts in Illinois that “pick up” or pay the 9.4 percent teacher contribution for their TRS–covered employees. IPI research indicated that about half of the 867 school districts in Illinois “pick up” all or part of the teacher contribution. The IPI concluded incorrectly that when districts pick up all or part of the teacher contributions, that means teachers are not paying the contribution. The IPI says this amounts to $400 million “extra” that taxpayers must pay every year to TRS that teachers should be paying.

Discussion:Illinois taxpayers are not paying an “extra” $400 million for teacher pensions and teachers are not being spared the responsibility of paying $400 million in contributions. The IPI incorrectly described the way TRS member contributions are remitted to the System.

Teacher contributions to TRS are deferred income. The TRS contributions are part of a teacher’s overall compensation package along with their take–home pay and other benefits. The TRS contribution is designed to come back to the teacher later in life as a retirement benefit.

When a school district “picks up” the contribution, the money still comes from the teacher’s total compensation package. The “pick up” is in reality only a difference of when the district deducts the contribution from the teacher’s salary – either before taxes are deducted or after taxes are deducted. Teacher unions for years have negotiated this point with school boards as part of overall salary and benefit packages for teachers. There is an income tax savings for teachers if the contribution is deducted pretax.

In practical terms, no teacher writes TRS a check every month and mails it, so no teacher in Illinois directly “pays” TRS. All TRS contributions from every teacher in every school district are deducted from paychecks by the school districts and remitted to TRS in one lump sum. Member contributions to TRS in fiscal year 2012 totaled $917.6 million.

The IPI conclusion that taxpayers are paying “extra” for the pick–up rings false because, in the end, taxpayers pay for everything in a school district, including all teacher salaries. There is no “extra” $400 million.

If you carry the IPI’s conclusion about TRS contributions to other examples you’ll realize that everyone who is not self–employed and participates in Social Security hasn’t paid their share of federal Social Security taxes because their employer is paying the tax for them. No one writes a check to Social Security when they get paid unless they are self–employed. The FICA tax is deducted from the paycheck by the employer. It’s the same thing for TRS contributions. One of the reasons Illinois teachers don’t contribute to Social Security or get a Social Security benefit is because they make the same type of paycheck contribution to TRS.

Better Government Association Report on TRS Investment Fees — 2012

Updated: November 1, 2012

Issue: The Chicago Sun–Times and WBBM–TV in Chicago published a report in 2012 written by the Chicago–based Better Government Association that compared Teachers’ Retirement System investment results between 2001 and 2010 with fees paid to external money managers hired to invest our members’ money. The report said that during this decade, TRS spent $1.3 billion on fees, yet the average investment rate of return for the decade was 3.7 percent, well below the System’s long–term target of 8.5 percent.

Discussion: Between 2001 and 2010, Teachers’ Retirement System generated $10 in investment revenue for every $1 paid in fees to outside investment managers. While fees totaled $1.3 billion between 2001 and 2010, investment revenues totaled $10.937 billion.

The BGA comparison does not provide an accurate picture of TRS investments. It’s like comparing apples and oranges. The real comparison is between fees paid and investment revenue earned and not the rate of investment return. The TRS rate–of–return statistics are actually inconsistent.

The BGA arbitrarily chose to study a decade that included an unprecedented world–wide financial downturn in 2008–2009. That crisis, you will recall, caused all large investors, including TRS, to lose money, as well as a lingering recession. Other arbitrary measures of time produce different investment results for TRS against the System’s target return of 8.5 percent:

  • Between 1981 and 2011, investment returns averaged 9.3 percent.
  • Between April of 2009 and March of 2012, investment returns averaged 14.8 percent.
  • Between 2003 and 2007, investment returns averaged 12.64 percent.

In fiscal year 2011, TRS recorded a 23.6 percent rate of return after all fees had been subtracted and generated $7.2 billion in investment income. At the end of March 2012, total TRS assets stood at $37 billion.

TRS’s investment management fees are competitive, and often superior, to public pension plans of a similar size. In the 10–year period being studied by the BGA, TRS assets available for investment averaged $33.6 billion per year. A total of $1.3 billion in fees equates to an average annual fee of 39 basis points over the period.

For comparison, the average public pension fund paid fees of 48.5 basis points in fiscal year 2010. Pension systems with more than $20 billion in assets had average investment manager fees of 55.2 basis points in fiscal year 2009. A “basis point” is a standard measurement in investing — one–hundredth of 1 percent.

The BGA and CBS 2 report warned that their findings are not good news at a time when TRS is facing a $44 billion unfunded liability and the very real prospect that the General Assembly will not appropriate to TRS its entire annual payment as required by law. The truth, however, is that without strong investment returns over the last 30 years, and especially in the last two years, the TRS financial picture would be much worse. You cannot properly analyze TRS finances in 2012 using only statistics from 2001 to 2010.

The $44 billion TRS unfunded liability was caused by legislators not appropriating sufficient funds to TRS every year for the last 60 years.

“Pensions vs. Schools” — Illinois Policy Institute Study — 1/12

Updated: November 1, 2015

Issue: The Illinois Policy Institute published a study in January 2012 which estimates that by 2029 the state’s annual contribution for Teachers’ Retirement System — $6.796 billion — will be larger than the state’s appropriation for suburban and downstate schools — $6.555 billion.

Discussion: The IPI manipulated the numbers to create this “tipping point” in 2029. They artificially reduced the amount of state funding for K–12 education and artificially increased the amount for “retirement costs.” In reality, this “tipping point” may never happen.

While the IPI says that in fiscal year 2012 “aid to schools” is $5.639 billion and “retirement spending” is $3.432 billion, in reality the total budget of the Illinois State Board of Education for the entire state in FY 2012 is $10.265 billion while the state’s annual contribution for TRS is $2.406 billion.

Here’s how the IPI calculated the numbers:

  • They only included funds directed to suburban and downstate schools, not all funds for all schools throughout Illinois.
  • They included appropriations for retired teachers’ health care, which is not part of the TRS funding mix.
  • They included the debt service cost of retiring the pension obligations bonds issued since 2000 to pay the state’s annual contribution.

Even if the state’s budget for K–12 education were to stay level at $10.265 billion in every year until 2046, the state’s annual pension contribution is expected to never be higher than $7.644 billion in any one year.

The IPI’s analysis also fails to keep in mind that the annual allocation for teacher pensions is part of the overall compensation package for educators, so it is money dedicated to the education of children. Without a teacher, a classroom is just four walls and a bunch of kids.