Illinois Governor Furious After Pension Fund Cuts Returns Forecast, Sticking Taxpayers With “Crippling” Tax Hike, by Tyler Durden

It creates an awkward situation when a pension fund abandons an unrealistic rate of return assumption and substitutes a slight less unrealistic one. If the pension fund is playing it straight, it means present contributions must be increased. This is problematic in Illinois, which hasn’t played it straight for decades, and its governor is not happy. From Tyler Durden at zerohedge:

Earlier this week, we reported of an daunting predicament facing the dramatically underfunded Illinois Teachers Retirement System (TRS), the state’s largest pension fund which is only 41.5% funded: cut its existing future returns assumption from 7.5% to 7.0% (which was previously lowered from 8.0% in 2014) and suffer the wrath of the state’s governor Bruce Rauner, who would be forced to implement even more unpopular tax hikes, or keep its existing projected returns, and potentially suffer an even greater shortfall – and greater taxpayer funding needs – over the long-run if it was unable to hit its bogey.

Despite tremendous political pressure, on Friday afternoon, the Board of Trustees for the Illinois Teachers’ Retirement System, which serves almost 400,000 teachers, voted to cut the assumed rate of return to 7% from 7.5%. “We have to do what we believe is the right thing,” Richard Ingram, the pension’s executive director, said during the board meeting in Springfield.

As a reminder, Illinois’ fiscal 2017 pension payment to its five retirement systems was estimated at $7.9 billion, up from $7.6 billion in fiscal 2016 and $6.9 billion in fiscal 2015, according to a March report by a bipartisan legislative commission. The country’s fifth-largest state’s unfunded pension liability stood at $111 billion at the end of fiscal 2015, with TRS accounting for more than 55 percent of that gap.

This is how the Chicago Tribune summarized the Pension Fund’s dilemma:

“if the board voted for the 7 percent figure, state government would be on the hook to make up the difference, estimated to cost an extra $400 million to $500 million a year, an expense that would come due starting in July. The governor and lawmakers would have to find that extra money, worsening a state budget that’s already in free fall amid a budget impasse that’s lasted more than a year. Alternatively, if the board voted for the 7.5 percent figure, the state would not have had to pay all of that extra money right away. But if investments failed to hit the benchmark, the shortfall would have been tacked on to the pension fund’s $65 billion debt. Taxpayers would be hit either way; the question was whether it would be in the short term or long term.”

Needless to say, fearing a popular revulsion, Gov. Bruce Rauner wanted TRS to delay the decision, which was “odd position for him to be in” considering Rauner has long criticized state and city government for kicking the can down the road on financial issues, and yet that’s precisely what he was advocating as he tried to delay the teacher pension decision.

To be sure, the chronic under-funding of the pension system is not Rauner’s doing and predates him: TRS was created in 1939, and in no year since then has the system received enough money from the state to keep it fully funded. However, when push came to shove, and when the governor’s office learned that the change was afoot, his team mounted an effort to block it, firing off memos that warned of a secretive attempt by the TRS board to saddle taxpayers with a new, unaffordable expense.

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