In a country where unscrupulous union bosses have colluded with cowardly politicians to promise — but not to fund — high pensions to public employees for year after year, Illinois stands out.
Specifically, the Illinois Teachers Retirement Fund is one of the country’s worst funded pension funds. According to accountants — who use softer methods to measure the health of public funds than they do of private pensions — teacher pensions in Illinois are only 45 percent funded — the fund is expected to be able to pay less than half the pensions Illinois politicians and union heads have been promising for years.
$44 billion in promised benefits isn’t going to be there unless something magical happens.
Actually, as this article in The Southern.com points out, it’s even worse. The fund’s trustees have “assumed” a totally unrealistic rate of return: they are pretending to believe that the fund’s investments will return 8.5 percent per year.
How crazy is that? In their defense, it can be argued that this is just projecting historical experience: in the last 30 years, investments actually achieved a 9.3 percent rate of return.
But those were highly unusual years. The two longest US economic expansions in history came back to back. While we could all get lucky and have the same kind of run in the next future years, most analysts don’t think anything like these results are possible. New York’s Mayor Michael Bloomberg, a man who knows something about finance, says that assuming an 8 percent rate of return is “laughable” and “absolutely hysterical.” In fact, any assumptions over 7 percent are “indefensible.”
Unfortunately, trustees of public pension funds often have good reasons to overstate future returns. Both the politicians and the union leaders often seem more interested in making the numbers look pretty than in making sure that the funds will actually be able to honor their promises.
It is, in other words, a scam. Both the politicians and the unions want to fool people. They want teachers to think they have secure pensions and they want taxpayers to think that these big pension promises won’t cost them much money. Assuming unrealistic rates of return allows them to square the circle: they can promise big pensions without raising taxes to pay for them right away.
Under growing pressures from the forces of reality (aka the bond rating agencies who increasingly believe that years of misgovernment have made Illinois a bad credit risk), the trustees now, we are told, are considering ratcheting back their insane and even fraudulent assumptions about future returns to something merely irresponsible and wrong: 7.75 percent. If somebody promises you 7 percent, says Bloomberg, make sure their name isn’t Madoff before you give them the money.
The other problem with assumed high rates of return is that in order to meet these ambitious targets, fund managers are drawn toward high risk investments. Pension funds generally should be conservatively managed; the casino is no place for grandma’s nest egg. Prudent, thoughtful trustees only thinking about the welfare of pensioners would be looking for ways to minimize risk rather than driving pension funds toward aggressive, go-go bets on the latest hot derivative products from Wall Street.
Already Illinois lawmakers are looking for ways to chip away at the disingenuous, unfunded promises their predecessors made teachers and other employees in past years. They promised too much, failed to set aside the money to pay for it, and now they have to claw the money back from retirees.
The only real solution to problems like this is a fundamental reform of public sector pensions. Where defined benefit pensions remain, truly independent trustees need to be appointed who don’t care anything about the credibility of union leaders and politicians — their sole and paramount concern should be the welfare of current and future recipients. Both the politicians and the unions will hate this because it means they can only promise benefits they are actually ready to pay for, but in the long run, both taxpayers and state employees will benefit from honest and independent pension management.
In the meantime, if you are a teacher in Illinois, you need to know that your pension is not safe and that those who are managing the issue are not putting your welfare first. The political establishment in Springfield wants your pension managers to assume unrealistic rates of return to help make the state budget look pretty.The politicians don’t care if that means that you bear big risks down the road; it makes their lives a little easier now and that is what, apparently, most of them want.
If you aren’t doing this already, you should open an IRA and look at other ways to save more for a future that is less secure than you think. It’s the only smart thing to do. If an economic miracle occurs and the state pension funds earn those high rates of return the politicians are projecting, you’ll just be that much better off down the road. You’ll have a nice pension and some private savings too.
But if the law of gravity actually prevails, and the pension fund and the state budget implode, you will have a cushion to protect you when the lawyers and bankruptcy courts get to work on reducing the pension you were promised to something that the state and local school districts can afford.