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The Teachers’ Retirement System of the State of Illinois (TRS) continues to chart a course to ensure it safeguards benefit security through committed staff, engaged members, and responsible funding. Here are a few issues, accomplishments, and challenges TRS recently navigated to reach its destination.
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All statistics provided below are as of June 30, 2007.
TRS Statistics
- 344,432 members
- 58 years old, average age at retirement
- 29 years, average service credit at retirement
- $3,344, average monthly retirement annuity
- 11-member Board of Trustees
- $41.9 billion net assets
- 63.8 percent funded ratio
- 19.6 percent investment return during fiscal year 2007
End-of-Career Salary Increases
Senate Bill 27 was signed into law (Public Act 94-0004) in June 2005 and affected many functions at TRS:
- Public Act 94-0004 requires school districts to pay the actuarial cost of pension increases resulting from salary increases above 6 percent and excess sick leave used for service credit.
- The Teachers’ Retirement System does NOT cap salary increases at 6 percent. Pay hike limitations remain at 20 percent above the previous year’s salary. However, the law requires school districts to pay an additional cost to TRS for salary hikes above 6 percent that are used to determine pension benefits. The cost varies from district to district, but in general: for every dollar in salary paid in excess of 6 percent, school districts would be required to pay between $2.00 and $2.60 for a typical retiree, depending on their age and service credit.
Excess Sick Leave, Salary Hikes Above 6 Percent
TRS benefits are predicated on service credit (years worked) and final average salary, which is based on the four highest years of salary during the last decade of service. Excess sick leave is defined as any sick time granted in excess of what is contained in collective bargaining agreements. School districts are exempt from paying these costs if their contracts or collective bargaining agreements were in place by June 1, 2005. Other exemptions include:
- salary increases paid to a teacher who is 10 or more years from retirement eligibility;
- earning increases that are the result of overload work, summer, or promotions that require a member to hold another certificate or supervisory endorsement than what they previously held;
- salary hikes that result from the consolidation of annexation of schools.
State Funding Cuts
Public Act 94-0004 also cut state pension funding by $2.3 billion to all five state pension systems:
- State funding cuts in FY 2006 and FY 2007 totaling just over $1 billion to TRS were contained in P.A. 94-0004. The reductions in state appropriations worsened an already negative cash flow at TRS and required the System to liquidate $2.4 billion in assets during those fiscal years to make benefit payments.
- TRS continues to advocate for full state funding to achieve the goal of being 90 percent funded ratio by 2045. Click here to view the state funding history of Illinois pension funds.
Early Retirement
Early retirement options at TRS remove the statutory reduction in benefits of members who are under 60 years of age and have less than 35 years of service credit. The reduction totals 6 percent a year for each year a member is under 60 years old. Benefits are based on final average salary and service credit.
- Public Act 94-0004 extended the costs for the “Pipeline” Early Retirement Option until July 1, 2007, which contributed to a greater number of members who retired in 2005, 2006, and 2007.
- Members can still retire early under the modified option, but the costs to do so are now higher for both the members and employers. Please scroll to page 25 and view the current costs in the Member Guide.
Defined Benefit Plan
TRS has felt compelled to educate the public and its members about the security provided by the current, defined benefit plan in the wake of a recent public policy debate about whether the state should switch to a “401 (k)” style plan.
- Defined benefit plans pool assets that are professionally managed and ensure a benefit that cannot be outlived. The “401(k)” style plan is dependent on how well the member invests and on market conditions; providing no guarantees of retirement security.
- Studies show administrative and investment costs for the current, defined benefit plan are nearly five times lower than those associated with the other type of retirement plan.
Unfunded Pension Liability
The unfunded pension liability of all five of Illinois’ state pension systems reached $42 billion in 2007 and is an issue that remains on the front burner at TRS. The unfunded pension liability or debt is the difference between net assets and the present value of earned but unpaid benefits.
- The unfunded pension liability was created mainly by inadequate state funding over the past three decades. However, constitutional protections ensure TRS members cannot have their benefits “diminished or impaired.”
- The State of Illinois authorized the sale of $10 billion in pension obligation bonds in 2003, a move designed to reduce the unfunded pension liability. TRS has earned over $2 billion in returns on the $4.3 billion in bond proceeds by investing at what proved to be an exceptional time in the financial markets, conditions that are not currently present.
- Despite changes contained in P.A. 94-0004 designed to reduce the cost of pensions, most of the savings that would have been achieved have been offset by reductions in state funding during the fiscal years 2006 and 2007.
- TRS continues to advocate for full state funding to achieve the goal of being 90 percent funded ratio by 2045.
Investment Performance
Outstanding investment performance of the TRS Trust Fund has been driven by the skillful selection of external asset managers as well as the expertise and due diligence performed by TRS staff.
- TRS was ranked among the Top 100 largest retirement plans in the world by Pensions & Investments, December 25, 2006.
- TRS earned a 19.6 percent investment return before fees during fiscal year 2007, among the highest return in the pension system’s history. TRS earned annualized returns of 14.3 percent during the three-years ended June 30, 2007, 12.9 percent for the five-year period, and 9.5 percent over the 10-year period. The Teachers’ Retirement System remains the top performing Illinois state pension fund for six of the past seven consecutive years.
- TRS investment returns placed TRS in the top quartile of the Wilshire Trust Universe Comparison Service (TUCS) for the seventh consecutive year.
- TRS hired general investment consultant R.V. Kuhns & Associates and private equity advisor PCG Asset Management in 2006. Additionally, TRS has expanded its asset classes designed to further diversify the investment portfolio and minimize overall risk. Click here to go the investment page.
Sudan Divestment
The Sudan Divestment Law, implemented in January of 2006, had a noteworthy impact on the TRS Trust Fund:
- Public Act 94-0079 required TRS to divest from companies that have links to the Republic of Sudan. TRS held minimal investments in companies that did business in Sudan but restructured billions of dollars in assets in its portfolio to comply with the law, which was struck down in February of 2007.
- A similar Sudan divestment law, Public Act 95-0521, was enacted in August of 2007. The new law clarifies compliance requirements for private equity investments and excludes holdings in companies that are licensed by the U.S. Treasury Department.
Federal Investigation
The ongoing federal investigation of a former board trustee and an outside counsel has been a significant concern for TRS during the past two years. Click here to read TRS news releases on this issue.
- The federal investigation revealed the betrayal of a sacred public trust by a former TRS trustee, Stuart Levine, who admitted in October 2006 that he extorted money from investment managers who wanted to do business with TRS.
- No TRS assets were used to fund the illegal payments and not a penny of teachers’ retirement money was lost or put at risk. Levine and a former outside counsel to TRS both pleaded guilty to concealing the illegal fees from the TRS Board and agency staff.
- TRS continues to actively cooperate in the investigation to ensure justice is done.
- TRS has taken additional steps to protect the integrity of the investment process by banning so-called “finders fees” for private market investments, except those paid by investment firms to legitimate marketing companies and investment bank placement operations. Such fees were already prohibited for public market investments.
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