| The total unfunded liability for TRS stood at $30 billion as of June 30, 2008. The 56 percent funding ratio is far below the national average of 85 percent among public pension plans nationwide. It took generations of underfunding for the pension fund to arrive at their current financial condition. The following is a brief description of state pension contributions over the decades.
“The present valuation indicates that state contributions are far from adequate to meet the current requirements of the system…On the basis of the present rate of state contributions, the retirement system is actuarially unsound.” Teachers' Retirement System of the State of Illinois (TRS) Actuary Arthur Stedry Hansen, Fiscal Year 1950 Valuation Report. TRS had a funded ratio of 23 percent in FY1950.
- Percent of benefit payout was the method used to calculate state contributions to the Illinois pension systems for many years. From FY1973 through FY1981, state contributions to the five state retirement systems were based on 100 percent of each system’s expected benefit payout. However, funding based on percent of benefit payout bears no relation to the cost of benefits being earned, and this has added to the unfunded liability of the system. In FY1982 through FY1988, state contributions dropped to an average of 60 percent of benefit payouts. Eventually, payout was no longer used as the basis of appropriations and the prior year’s funding level (level funding) became the standard of determining state contributions.
- Public Act 86-0273 was enacted in 1989 and called for all state pension systems to be fully funded over 40 years, following a seven-year phase-in period. However, there was no continuing appropriation in the law and the state never complied with the funding requirements.
- Public Act 88-0593 created a statutory payment plan for all five state pension systems in Illinois. The law, which first affected state contributions in FY1996, established a 50-year funding plan designed to bring the pension systems to a 90 percent funded ratio by 2045. An important feature of this act mandated a continuing appropriation, which requires the state to pay an actuarially-determined contribution amount automatically each year. The law called for contributions to be gradually increased to a level percentage of active member payroll during a 15-year phase-in period. State contributions did increase for eight years, or through FY2004.
- Public Act 93-0002, the pension obligation bond (POB) legislation, was enacted in 2003 and first affected state contributions in FY2005. The act authorized the state to issue $10 billion in pension obligation bonds. The proceeds of the bond sale were used in the following manner:
- $2.7 billion mainly used to reimburse the state for contributions made to all five systems for some of FY2003 and all of FY2004.
- $7.3 billion used to reduce the unfunded liabilities of all the pension systems. Of that amount, the Teachers' Retirement System received $4.3 billion on July 2, 2003.
- Interest was paid on debt service between FY2004-07; principal payments on the bonds began in FY2008. Both interest and principal payments are made by the State of Illinois, not the retirement systems. However, the POB law limits and effectively reduces state contributions to the systems during the debt service period. For example, in FY2005, the state contribution to the five systems was $1.6 billion, $222 million less than the appropriation received in FY2004.
- Public Act 94-0004 became law June 1, 2005. The act specified fixed amounts to be paid by the state in FY2006 and FY2007, which represented a $2.3 billion cut over two years to the five pension systems. State contributions are greatly increased in FY2008 through FY2010 in order to achieve the “level percent of payroll” funding by FY2011. State contributions will then stay at a level percent of employee payroll for 35 years, reaching the 90-percent funding goal in 2045.
- The FY2006 contribution to the five pension systems was $938 million. The appropriation for TRS was reduced from $1.1 billion to $535 million, a $524 million reduction.
- The FY2007 contributions to the five pension systems were $1.4 billion. The appropriation for TRS was reduced from $1.2 billion to $738 million, a $497 million reduction.
- The FY2008 contribution to the five pension systems was $2.1 billion. The appropriation for TRS was $1.0 billion or $303 million more than the previous year.
- The FY09 contribution to TRS was certified as $1.4 billion.
- The certified FY10 state contribution amount to TRS is $2.1 billion.
Changes enacted under P.A. 94-0004 include requiring local school districts to cover the actuarial cost of pension increases resulting from all salary increases over six percent that are used to determine final average salary. The law also mandates school districts to cover the actuarial cost of excess sick leave used for service credit. In addition, the act eliminated the money purchase benefit for new hires.
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