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Keep the pensions the same with a cap of $100K a year, extend the years people must work to get their full pension.. problem solved
Teaching for me is a second career, I am currently 51 and would like to get 20 years in TRS, would mean work until I am 62, if I can do it the rest of the teachers can as well.. retiring at 56-58 like most do is crazy, same with state cops that retire at 50..
As much as I would like to see your proposals implemented, I am not sure your two proposals would even get close to solving the problem. But they certainly should be part of the solution.
One big issue is the minimum 3% kicker on the majority of pensions.
The other is simply the likelyhood of positive returns on the portfolio going forward given the current amount funded. Assuming you can get a positive return given current valuations you simply do not have the assets in the plan from which to generate a return from. As of December 2018 Illinois 5 pensions had 36% of the assets they needed to be theoretically sound.
The way this works is the plans assume you have X amount to work with and then an assumed rate of return. In Illinois case the assumed rate of return is at least 7%.
So even if you did not have a 64% short fall in funds you would still have to get a 7% return on the assets in the plan. The plans are roughly 60-40 plans, equity to debentures. Let's assume you can get 3% on the debentures so you have to solve for your equity return
(.60 * return on equities) + (.40 * return on debentures) = .07
(.60 * return on equities) + (.40 * .03) = .07
(.60 * return on equities) + (.012) = .07
(.60 * return on equities) = .058
(.60 * .097) = .058
so you need to earn 9.7% on the equity portion of your portfolio going forward. Does that seem realistic from today's valuations? But that assumed you had the assets needed in place. You don't, you only have 36% of them...so...the rough equation you need to solve is if I have 36% of something what interest rate do I need to generate in order to equal a 7% return on 100% of something.
.36 * ? = .07
.36 * 19.44 = .07
The answer is 19.44%
So forgetting all about the 3% kicker on pensions being collected you need to earn 19.44 annually on the current assets in the plan to get to the theoretical 7% return. And that assumes that the 7% return was realistic in the first place! Before he passed away in January 2019 , John Bogle estimated returns on equities at 4% for the next decade, he made the prediction on Nov 28th 2018. That is less than half of 9.7% we were targeting above.
To say Illinois is in a challenging place is an understatement. Looking at the armchair numbers above outlines some of the problems and the challenges ahead.
This is why if you are going to crack the Illinois Constitution open you should do more than pave the way for a graduated income tax, you need to alter the pension equation.
No doubt having made the contributions they were suppose to would mean Illinois would be in a better position, but it would not solve the problem. There are two problems.
One, the benefits grew after the plans were started so the past annual contributions while theoretically adequate for the time when they were contributed were diminished by the retroactive increases. Think of it this way, we agree that in ten years you need to pay me 100 dollars. You looked at your budget and realistically assumed all you had to do was cough up 10 dollars a year and you would be good to go. But then in year 6 suddenly the amount owed is not 100 dollars it is now 180 dollars. So now despite having already contributed your 60 dollars in years one through six you suddenly see you owe 120 more dollars and would need to contribute 30 dollars a year. More or less this is what actually happened. Illinois actually did more or less account for and make the contributions it was suppose to under old formulas but the goal post moved and the contributions were not increased as needed to meet the new demand.
The next huge factor is illustrated in my previous example. To be at plan (actuarially) all you have to do is meet the assumptions of the plan. There are two components, your annual contribution and the rate of return on the investment. It has just been in the past couple of years that Illinois pension plans reduced their assumed rates of returns to around 7%. Before that they were around 8.5% (as I recall, subject to faulty memory). The issue is in the end the same as illustrated above. If you were stumbling along diligently making your yearly contributions based on a 8.5% return and suddenly you have to base them on a 7.0% return, guess what you suddenly find out you underpaid in all the previous years. In a blink of an eye your payment must dramatically increase. This has happened too.
And this of course is the problem with all defined benefit plans except cash balance plans. They are inherently unstable. Even if you make what you think are your annual contributions those contributions are not absolute, they rely on you actually hitting the target of your assumed rate of return.
And none of what I wrote should be construed to exonerate the State, the State of Illinois has done almost everything wrong. The primary reason I wrote this was to dispel the myth that the entire issue boils down to the oft repeated: the state did not make its contributions. That type of statement is not true in the strong sense of the word. The contributions made would not have been adequate even under ideal circumstances because the benefits were increased retroactively and the assumed rate of return was too high (and it still is).
I'm saying for decades and continuing in the present the state did not put money into the pension funds, therefore they did not get returns on money they didn't invest. It is like not putting money into your 401k between the ages of 30 and 60 and then yelling at your financial adviser why can't I afford to retire at 65? Go back to grade school and learn about compound interest!
The state is $250E09 short of having the funds invested sufficient to grow and sustain the pensions. That is if they magically invested that money right now they would be OK. Since they don't and they don't get returns on money not invested that number is going to get worse and worse you get the idea.
For the most part the money they did invest and was managed by Rauner's firm GTCR did very well so the investments weren't the issue, the lack of money invested was and is the problem.
Okay, this was a matter of semantics. We're talking about contributions vs. investments, so I misunderstood the terminology you were using.
Some of the investments were an issue, per the article I posted. That was a small allocation of the portfolio, but problematic still. It's too small of a sample size to draw too much of a conclusion, but generally you're not better off paying a high fee fund.
To you're point, your correct. Not making contributions was a major factor in the plans being underfunded.
As much as I would like to see your proposals implemented, I am not sure your two proposals would even get close to solving the problem. But they certainly should be part of the solution.
One big issue is the minimum 3% kicker on the majority of pensions.
The other is simply the likelyhood of positive returns on the portfolio going forward given the current amount funded. Assuming you can get a positive return given current valuations you simply do not have the assets in the plan from which to generate a return from. As of December 2018 Illinois 5 pensions had 36% of the assets they needed to be theoretically sound.
The way this works is the plans assume you have X amount to work with and then an assumed rate of return. In Illinois case the assumed rate of return is at least 7%.
So even if you did not have a 64% short fall in funds you would still have to get a 7% return on the assets in the plan. The plans are roughly 60-40 plans, equity to debentures. Let's assume you can get 3% on the debentures so you have to solve for your equity return
(.60 * return on equities) + (.40 * return on debentures) = .07
(.60 * return on equities) + (.40 * .03) = .07
(.60 * return on equities) + (.012) = .07
(.60 * return on equities) = .058
(.60 * .097) = .058
so you need to earn 9.7% on the equity portion of your portfolio going forward. Does that seem realistic from today's valuations? But that assumed you had the assets needed in place. You don't, you only have 36% of them...so...the rough equation you need to solve is if I have 36% of something what interest rate do I need to generate in order to equal a 7% return on 100% of something.
.36 * ? = .07
.36 * 19.44 = .07
The answer is 19.44%
So forgetting all about the 3% kicker on pensions being collected you need to earn 19.44 annually on the current assets in the plan to get to the theoretical 7% return. And that assumes that the 7% return was realistic in the first place! Before he passed away in January 2019 , John Bogle estimated returns on equities at 4% for the next decade, he made the prediction on Nov 28th 2018. That is less than half of 9.7% we were targeting above.
To say Illinois is in a challenging place is an understatement. Looking at the armchair numbers above outlines some of the problems and the challenges ahead.
This is why if you are going to crack the Illinois Constitution open you should do more than pave the way for a graduated income tax, you need to alter the pension equation.
Well its probably going to need to be baby steps if the problem is going to be solved, each one stretching out the number of years the system will be solvent. Thats the only way I see the unions selling it to membership. Tier 2 is TRS was a step in the right direction, but thats a lot of years until the Tier 1 people retire/die off..
Baby-steps aren't going to solve a $250E9 continually compounding hole in pension funding, nor the spiraling taxes and exodus of residents. The Pols need to realize this is a massive crisis that requires radical and emergency action.
As much as I would like to see your proposals implemented, I am not sure your two proposals would even get close to solving the problem. But they certainly should be part of the solution.
One big issue is the minimum 3% kicker on the majority of pensions.
The other is simply the likelyhood of positive returns on the portfolio going forward given the current amount funded. Assuming you can get a positive return given current valuations you simply do not have the assets in the plan from which to generate a return from. As of December 2018 Illinois 5 pensions had 36% of the assets they needed to be theoretically sound.
The way this works is the plans assume you have X amount to work with and then an assumed rate of return. In Illinois case the assumed rate of return is at least 7%.
So even if you did not have a 64% short fall in funds you would still have to get a 7% return on the assets in the plan. The plans are roughly 60-40 plans, equity to debentures. Let's assume you can get 3% on the debentures so you have to solve for your equity return
(.60 * return on equities) + (.40 * return on debentures) = .07
(.60 * return on equities) + (.40 * .03) = .07
(.60 * return on equities) + (.012) = .07
(.60 * return on equities) = .058
(.60 * .097) = .058
so you need to earn 9.7% on the equity portion of your portfolio going forward. Does that seem realistic from today's valuations? But that assumed you had the assets needed in place. You don't, you only have 36% of them...so...the rough equation you need to solve is if I have 36% of something what interest rate do I need to generate in order to equal a 7% return on 100% of something.
.36 * ? = .07
.36 * 19.44 = .07
The answer is 19.44%
So forgetting all about the 3% kicker on pensions being collected you need to earn 19.44 annually on the current assets in the plan to get to the theoretical 7% return. And that assumes that the 7% return was realistic in the first place! Before he passed away in January 2019 , John Bogle estimated returns on equities at 4% for the next decade, he made the prediction on Nov 28th 2018. That is less than half of 9.7% we were targeting above.
To say Illinois is in a challenging place is an understatement. Looking at the armchair numbers above outlines some of the problems and the challenges ahead.
This is why if you are going to crack the Illinois Constitution open you should do more than pave the way for a graduated income tax, you need to alter the pension equation.
Slightly off-topic from what you're getting at, but the 2018 portfolio allocation for TRS is as follows:
Total Equity 51.5%
Income 26.3%
Real assets 12.4%
Diversifying strategies 9.8% https://www.trsil.org/investments
Another page specifies this: https://www.trsil.org/investments/portfolio-information
The Equity Composite consists of domestic equity, international equity, private equity, and opportunistic real estate.
The Income Composite consists of short duration, core/core plus, non-dollar/EMD, floating rate, and private debt.
The Real Assets Composite consists of core/value-add real estate, inflation-linked securities, targeted real assets, and farmland/other.
The Diversifying Strategies Composite consists of risk parity, global macro/GTAA, and absolute return.
Last edited by fusillirob1983; 04-02-2019 at 08:18 AM..
Reason: Forgot links
Baby-steps aren't going to solve a $250E9 continually compounding hole in pension funding, nor the spiraling taxes and exodus of residents. The Pols need to realize this is a massive crisis that requires radical and emergency action.
They have to know the truth of your words, which is why I think their actual strategy is to just rearrange the deck chairs and for whatever reason, have faith that a Federal bailout will come. It is weird, no rating agency will call IL bonds junk (perhaps they want the revenue from new issues) and there seems to be bond market complacency; the only rebukes I have seen was from Vanguard and Fido in their bond funds, I expected that to get larger play, the bond market ignored the moves by those giants.
Baby-steps aren't going to solve a $250E9 continually compounding hole in pension funding, nor the spiraling taxes and exodus of residents. The Pols need to realize this is a massive crisis that requires radical and emergency action.
Why are the pensions always the point of attack when solving the state crisis? Why aren't we talking about state entitlements for those that are not supporting themselves? If the state would have been investing the money like they should have been, this problem wouldn't have been as severe, instead they used the pension funds as their personal banks to fund their pet projects.
As a person who works in finance... that article is actually terrifying... ho-lee-guacamo-lee!
As another person who works in finance I can't believe how uneducated people are when it comes to investing. 0.00000000001% of people can beat the S&P500 over a 10 year period after accounting for fees. EVERYONE should watch "An Evening with John Bogle" who's the founder of Vanguard. This hour long video teaches you everything you need to know about investing for the rest of your life. Regarding the article above watch from the 9:30 - 12:00 mark...when hedge funds / private equity take 2-3% fees we as the taxpayer invest 100% of the capital, take on 100% of the risk and only get 25% of the returns...while Wall Street puts up 0% capital, takes on 0% of the risk but get 75% of the returns. It's crazy.
For those who want to know how to invest:
1. Open a Vanguard account
2. Invest approx. $150 every single month in a low cost S&P500 index fund or Total Stock Market Index Fund
3. Keep doing it for 50 years
4. You're very likely to retire a millionaire
I have no idea why our pension funds aren't doing the same thing. I could go on about how if you lose money in risky investments how hard it is to catch up but that's another post! haha
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