Teachers' Retirement System
(Appropriated Spending in Thousands)
|To Provide Retirement, Death, and Disability Benefit(s)
|Interfund Transfers and Pass-Throughs
|State Agency Payments
Totals may not add due to rounding.
The Teachers’ Retirement System of the State of Illinois (TRS) is the administrator of a cost-sharing, multiple-employer, defined benefit, public employee retirement system. Membership is mandatory for all full-time, part-time, and substitute public school personnel employed outside of Chicago in positions requiring state licensure. Persons employed at certain state agencies and certain non-government entities allowed by law also are members. Established by the State of Illinois, TRS is governed by the Illinois Pension Code (40 ILCS 5/16). The mission of TRS is to continually deliver the retirement security promised to our members by maintaining the highest and most efficient level of service and by living our values.
TRS had five main operational goals during fiscal year 2018: investment in serving the TRS membership, ensuring future sustainability, providing thoughtful fiduciary and policy leadership, strengthening TRS’ organizational capacity, and investing in developing our staff. There were 26 corresponding objectives.
A synopsis of positive outcomes in meeting the System’s goals and objectives during fiscal year 2018 included the following: approved a change of authority from Board of Trustees to the Investment Department to finalize investment commitments; increased the percentage of WMBE managers to 20.1 percent, or $10.3 billion of the total investment portfolio, which is a 10 percent increase over fiscal year 2017; initiated a reciprocal data exchange with the Illinois Department of Public Health for identifying deceased members more promptly; increased the funded ratio of the actuarial value of assets from 40.2 percent in fiscal year 2017 to 40.9 percent for fiscal year 2018; started processes for developing a new pension administration system for future successful service to TRS membership; and began an upgrade and implementation of a new expenditure management and human resource system.
TRS provides retirement, death, and disability benefits. In 2011, Public Act 96-0889 was enacted, creating the Tier 2 benefit structure applicable to members that had not amassed any service credit in any of Illinois’ five public pension systems prior to January 1, 2011. Members with service credit prior to January 1, 2011 were classified as Tier 1 members. New legislation otherwise known as Senate Bill 1 was enacted in December 2013. The goal of the new law was to stabilize the finances of TRS and Illinois’ other public pension plans and eliminate the systems’ unfunded liabilities by 2044, primarily by reducing benefits for retired and active members and creating funding guarantees and contribution levels that would have gradually, over 32 years, fully funded TRS and the other systems. Retired public employees filed a lawsuit challenging the constitutionality of the law in the spring of 2014. The Supreme Court decided that changes in retirement benefits enacted by the law violated the Pension Protection Clause of the Illinois Constitution. The Illinois Supreme Court ruled unanimously on May 8, 2015 that a comprehensive plan to overhaul the Illinois Pension Code, Public Act 98-0599, was unconstitutional. With this decision, current TRS Tier 1 and Tier 2 members would see no changes in their retirement benefits and the administration of these benefits. In July 2017, the Illinois General Assembly passed a budget that included a new law creating a Tier 3 benefit level for TRS to set up an optional defined contribution (DC) retirement plan for members to participate in as well as the existing defined benefit (DB) plan.
A Tier 1 member qualifies for an age retirement annuity after meeting one of the following requirements: age 62 with five years of service credit; age 60 with 10 years of credit; or age 55 with 20 years of credit. By law, a retirement benefit is calculated based on the member’s creditable service, the member’s average salary of the four highest consecutive salary rates within the last 10 years of creditable service, and the percentage of average salary to which the member is entitled.
For Tier 2 members, the differences in the basic TRS benefit structure include a minimum age retirement requirement of age 67 with 10 years of service, a cap on salaries used in the initial pension calculation tied to the Social Security wage base, and limits on the annual cost-of-living adjustment to the lesser of three percent or half of any annual increase in the Consumer Price Index, not compounded.
The new Tier 3 level would be available to all current Tier 2 members and future TRS members to enroll in a hybrid retirement plan consisting of a small defined benefit (DB) plan and a defined contribution (DC) plan. Under the Tier 3 plan, members would make payroll contributions up to 6.2 percent of their salary with a minimum of 4.0 percent to the defined contribution plan. Tier 3 has not yet been fully implemented by TRS.
A new law requires TRS to offer all eligible inactive members a chance for a one-time, irrevocable accelerated pension benefit payment in return for giving up any future claim to a TRS benefit.
Inactive members in both Tier 1 and Tier 2 may be eligible for this accelerated payment. The program will exist until June 30, 2021. The buyout amount will equal 60 percent of the present value of the member’s anticipated pension benefits. There are approximately 20,000 TRS members eligible for this accelerated payment out of a total of 131,812 inactive members.
To be eligible, an inactive member must have “accrued sufficient service credit to be eligible to receive a retirement annuity” at some point in the future when other eligibility criteria are met. An inactive Tier 1 member must have at least five years of TRS service. An inactive Tier 2 member must have at least 10 years of TRS service.
A new law requires TRS to offer all retiring Tier 1 members an accelerated pension benefit payment in return for an irrevocable reduction in the automatic annual increase (AAI) that is applied to their initial TRS pensions. When the law is implemented, TRS will ask every Tier 1 member upon retirement whether they want to participate. Only retiring Tier 1 members are eligible. The program will exist until June 30, 2021.
The three sources of TRS funding include member contributions, investment income, and employer contributions through state appropriations and payments from employers.
Each employer remits nine-percent member contributions to TRS. Employers are responsible for the employer contribution for teachers paid from federal funds. This contribution rate was dropped from 38.54 percent in fiscal year 2017 to 10.10 percent in fiscal year 2018. Employers are also responsible for a 0.58 percent employer contribution for member benefit increases. Under Public Act 94-0004, employers are also required to pay the actuarial cost of pension benefits resulting from end-of-career salary increases for members that exceed six percent. A new law took effect and was signed into law on June 4, 2018 that reduces the threshold affecting employer contributions on year-to-year salary increases for a TRS member from six percent to three percent; but only if the pay hikes would factor into the calculation of a member’s initial pension. The new three-percent threshold on raises applies only to salaries paid to TRS members “under a contract or collective bargaining agreement entered into, amended, or renewed on or after” the effective date of the law for a school year that begins after July 1, 2018. The old six-percent threshold applies to raises and salaries paid to TRS members “under a contract or collective bargaining agreement entered into, amended, or renewed” before June 4, 2018, even if payments pursuant to the contract or collective bargaining agreement might extend beyond July 1, 2018. Employers also pay a contribution for sick leave days granted to members that are more than the member’s normal annual allotment and used for service credit upon retirement.
The State of Illinois provides a substantial annual contribution to TRS through a state appropriation from the Common School Fund. An additional source of the state contribution is the Education Assistance Fund. In fiscal year 2006 and fiscal year 2007, state contributions were dictated by state law and not actuarial funding requirements. The original 50-year funding plan was resumed in fiscal year 2008, and the level of the state contribution remained tied to a level percentage of payroll. The funding plan dictated the formula used to establish the state contribution in each fiscal year, and under the law the state’s annual contribution will never equal full funding for any individual fiscal year.
At the beginning of fiscal year 2018, a new law was enacted that required TRS and the other state retirement systems to recertify their fiscal year 2018 state contribution downward. The new law also requires a five-year phase-in of any monetary effect on state contributions due to any change in actuarial assumptions made since 2012. In practical terms, instead of a statutory contribution of $4.6 billion in fiscal year 2018 for TRS, the law resulted in a recertified statutory contribution of $4.1 billion.
Beginning in 2012, the persistent underfunding of TRS and the other state retirement systems caused the TRS board to begin certifying each year an alternative state contribution amount that aligns with its own funding policy.
While the statutory funding method backloads state contributions and increases financing costs, the board’s alternative funding policy begins reducing the TRS unfunded liability immediately and cuts state financing costs by $45 billion by 2045. The board’s alternative policy is different from the statutory formula because it:
• Uses the “entry age normal” actuarial cost method instead of “projected unit credit.”
• Funds 100 percent of the accrued liability instead of 90 percent.
• Is not capped by the state’s debt service on previously issued pension obligation bonds.
• Amortizes the unfunded liability and subsequent increases in the unfunded liability over 20-year periods.
In addition, the board’s funding policy does not retroactively or prospectively phase in changes in state contributions due to assumption changes.
The TRS-funded ratio at the end of fiscal year 2018 was 40.7 percent using the actuarial value of assets that smooths investment gains and losses over five years. This is a slight increase from 40.2 percent in fiscal year 2017. Using the market value of assets, the June 30, 2018 funded ratio was 40.9 percent, up from 40.2 percent in fiscal year 2017.
TRS is on schedule to receive the recertified fiscal year 2018 state contribution of $4.1 billion calculated under the formula dictated by Illinois statutes. Each year the contribution is received in 12 installments. Even though the state fulfilled its obligation under the statutory formula in fiscal year 2018, the amount required by statute fell $2.9 billion short of what the TRS Board of Trustees would recommend under its own internal funding policy. Under that policy, called “full funding” by the TRS actuaries, the amortization payment is high enough to begin reducing the unfunded liability immediately.
The state has underfunded TRS every year for nearly 80 years. This chronic and ongoing underfunding is the primary reason that the System’s unfunded liability stood at $75 billion at the end of fiscal year 2018. In the June 30, 2018 actuarial valuation, the assumed rate of return was 7.0 percent after having been lowered to that level in the 2016 actuarial valuation. The assumption has been lowered three times in the last six years – from 8.5 percent to 8.0 percent in 2012; to 7.5 percent in 2014; and to 7.0 percent in 2016.
The TRS Board of Trustees approved a significant change in the governance of TRS by granting the System’s Investment Department the authority to legally finalize investment commitments without first gaining approval from the board. The board retains the ultimate legal responsibility for the veracity of all TRS investments but is delegating the entire selection process to its investment staff, who are assisted by a bullpen of consultants with specific expertise in various asset classes. Until this year, all potential commitments from the TRS investment portfolio had to be approved by a majority vote of the trustees. Following due diligence and a formal recommendation by the investment staff, money managers were typically brought before the board for a final public presentation. The board then debated and voted on the proposed commitment.
As of June 30, 2018, TRS investment returns for the fiscal year were a positive 8.45 percent, net of fees, and the size of the portfolio stood at $51.5 billion. That’s a 4.25 percent increase in assets during the fiscal year. On June 30, 2017, total TRS assets were $49.4 billion.
In fiscal year 2018, TRS began implementing Microsoft Dynamics 365 to meet expenditure management, accounting, and human resource needs in the future. The new system will replace existing legacy applications and will fully integrate with the new planned pension administration system (PAS). TRS completed a “gap” analysis that compared our existing legacy PAS with several alternative replacements that are currently available. The recommendation from the analysis was to build a new PAS internally using TRS staff augmented with contractual assistance. Work began toward the end of fiscal year 2018. A fundamental change in the employer reporting function of the new Gemini project was identified as a pilot project that will help lay the planning and implementation groundwork for constructing the remaining portions of a new PAS. Work is scheduled to continue into fiscal year 2019. The change to monthly reporting will be the first aspect of Gemini to be developed, tested, and implemented. The initiation of monthly reporting will also serve as a “proof of concept” to determine how best to proceed with the other aspects of the Gemini project.
To combat potential fraud and abuse, TRS augmented its existing processes by initiating a first-ever reciprocal data exchange with the Illinois Department of Public Health. In the first month of the exchange, TRS was able to identify an additional 12 deceased members and recoup approximately $700,000 in overpayments. Cybersecurity is also a top priority at TRS. TRS requires its staff to participate in periodic awareness training that highlights threats through real world examples and interactive sessions. At TRS, the Board of Trustees and staff understand that it is imperative for the System to keep the private information of TRS members and their families and employers, as well TRS staff information, as safe and secure as possible and to implement practices and systems that guard against these growing threats.