The Examiner U-46 News Feed
Morass of unfunded pension liabilities The mess that impacts U-46 and all taxpayers
By Seth Hancock
The State of Illinois’ unfunded pension liabilities are at $134 billion with the state’s net pension liability for School District U-46 under the Teachers’ Retirement System (TRS) at $1.6 billion.
And data from ratings and investment agencies as well as questions being left unanswered show that there’s a lack of accountability from the state government down to the local government.
The state’s Commission on Government Forecasting and Accountability released the unfunded pension liability number for the end of Fiscal Year 2018 and it projects that number to be $136.8 billion by the end of FY2019. According to the agency’s November, 2018 monthly briefing, TRS represents 56.3 percent of those unfunded liabilities.
The total unfunded liabilities rose 3.7 percent ($4.8 billion) and has risen from $54.8 billion to $134 billion since 2008.
According to U-46’s most recent comprehensive annual financial report as of June 30, 2018, the state’s TRS obligations are $1.6 billion for the district. The district has a net pension liability of $83.5 million between TRS, $66.5 million, and the Illinois Municipal Retirement Fund, $17 million.
According to the report, U-46’s total TRS expense was $1.6 million for the year ending on June 30, 2018.
The report states an assumption of a 7 percent rate of return on TRS fund investments, a highly lofty expectation according to TRS’ data. Mary Fergus, U-46’s director of school and community relations, said that TRS “sets the rate of return assumption of 7 percent.”
On the actual rate of return, a 10-year history provided by TRS shows that investments are currently losing money. The one-year trend is at -1.3 percent, and the last time it exceeded 7 percent was 10 years ago when it was an 8.6 percent rate of return.
The newly seated Board of Education in U-46 unanimously approved an Elgin Teachers Association (ETA) contract running through 2021-2022 on May 6. The contract includes average salary increases of 3.85 percent and $30.6 million in additional salary costs over the life of the contract.
The Examiner asked the district how the new ETA contract will affect its pension liabilities, but the district did not respond. No board member questioned the district regarding pension costs.
The only publicly asked question on the contract from the board came from its president, Sue Kerr, who asked the district to respond to a concern stated during public comments by resident Tracy Smodilla.
Smodilla referenced a statement made by the district in the fall. A new law recently went into effect to limit school districts from excessively increasing salaries in the final years of service by lowering the cap from 6 percent to 3 percent.
In the fall, U-46 calculated between $7 million and $10 million in penalties from the new law under the previous salary schedule.
“I have the absolute, upmost respect for fair recompense for our teachers, but I’m coming with a different concern and that is the contract that is proposed could possibly subject taxpayers to penalties” said Smodilla who noted she didn’t have the details of the contract but wanted to make sure the contract “will clear those hurdles that would subject taxpayers to additional penalties.”
Dale Burnidge, director of financial operations, said the salary schedule under the new contract was shortened “to have lower increases towards the end of career which is where the 3 percent penalties would kick in” and “that should help reduce any potential liability for the district.”
As for the state, the pension liabilities are at a crisis level according to TRS.
The TRS board recently stated the “system is at a growing risk of insolvency in the event of an economic downturn” as it opposed Gov. J.B. Pritzker’s plan to reduce the state’s contributions by over $1 billion in 2020, and he also wants to extend target dates toward achieving 90 percent funding of pensions from 2045 to 2052.
Pritzker is also pushing for tax increases, this coming shortly after the most recent 32 percent increase in personal income tax rates and 33.3 percent increase in corporate tax rates to fund the new so-called “evidence-based” school funding formula. U-46 CEO Tony Sanders lobbied for those tax hikes.
Also, a March 11 presentation to investors shows a plan of adding $5.8 billion in new debt through the sale of bonds by 2020, $3 billion specifically to address pensions.
George Mason University’s Mercatus Center’s most recent ranking of states based on fiscal health has Illinois at dead last while a 2018 report by the Truth in Accounting states that the numbers are even worse than what the state is willing to admit.
The state’s fiscal health has been declining yearly since 2009 according to Truth in Accounting, and the burden on taxpayers has increased $21,700 over that period to a current burden of $50,800 per taxpayer.
“Most of the state’s overall debt comes from constitutionally protected pension benefits and retiree health care costs,” the report states. “Of the $279.6 billion in retirement benefits promised, the state has not funded $134.4 billion in pension and $52.5 billion in retiree health care benefits.”
The report adds: “Illinois’ financial condition is not only alarming but also misleading as government officials have failed to disclose significant amounts of retirement debt on the state’s balance sheet. Residents and taxpayers have been presented with an unreliable and inaccurate accounting of the state government’s finances.”
Moody’s Investor Service has consistently rated Illinois as the worst state since 2010, and data from actuarial reports from the state’s pension funds show that total benefits for government employees have risen 1,061 percent since 1987. Moody’s has downgraded Illinois to near junk-bond status, and it states the unfunded pension liability is actually $234 billion, not $134 billion.
A 2017 analysis by J.P. Morgan showed that Illinois is the worst in the nation and far worse than its neighbors with regards to pension liabilities. Using official state numbers, 26 percent of Illinois taxpayer funds go towards paying pensions and other debts.
If the state properly funded pensions based on their own mandates it would consume 51 percent of taxpayer’s funds according to J.P. Morgan compared to 5 percent in Iowa, 6 percent in Indiana, 7 percent in Wisconsin, 11 percent in Missouri and 28 percent in Kentucky.
United States Census Bureau data has consistently shown Illinois losing the most residents in the nation and the state is unattractive to private business.
In a recent interview with CNBC investor Warren Buffett was specifically asked about Illinois, and he said: “In the public sector, you know, it’s a disaster…. If I were relocating into some state that had a huge unfunded pension plan, I’m walking into liabilities… and those are big numbers, really big numbers…. And when you see what they would have to do, I say to myself, ‘Why do I want to build a plant there that has to sit there for 30 or 40 years?’”