Public Accountability Report Public Accountability Report

Teachers' Retirement System
(Appropriated Spending in Thousands)
  FY 2019 FY 2018
Reporting Programs Expenditures Headcount Expenditures Headcount
To Provide Retirement, Death, and Disability Benefit(s) $ 4,467,612.0 189.0 $ 4,095,125.4 188.0
Non-Reporting Programs
Interfund Transfers and Pass-Throughs  $ 125,261.9 N/A $ 114,167.7 N/A
State Agency Payments  $ 330.0 N/A $ 350.0 N/A
Totals $ 4,593,203.9 189.0 $ 4,209,643.1 188.0

Totals may not add due to rounding.

Agency Narrative

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 nongovernment 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 2019: 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 2019 included: continued processes for developing a new pension administration system for future successful service to TRS membership; the implementation of a new expenditure management and financial reporting system; and initiating accelerated pension benefit payment programs.

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 (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 an annual cost-of-living adjustment to the lesser of 3% 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 DB plan and a DC plan. Under the Tier 3 plan, members would make payroll contributions of up to 6.2% of their salary, with a minimum of 4.0% to the DC plan. Tier 3 cannot be implemented by TRS at this time.

New legislation was also approved in 2018 for TRS to initiate two accelerated pension benefit programs for members. The law requires TRS to offer all retiring Tier 1 members an accelerated pension benefit (APB) payment in return for an irrevocable reduction in the automatic annual increase (AAI) that is applied to their initial TRS pensions. As of June 30, 2019, of the 3,224 Tier 1 TRS members in the retirement pipeline, 685 had requested additional information about the AAI program. As of June 30, 2019, 79 members have elected the accelerated payment. Total payments equal $2,777,767. A second program that requires TRS to offer all eligible inactive members a chance for a one-time, irrevocable APB in return for giving up any future claim to a TRS benefit will be initiated during the late summer or fall of 2019. 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. The APB payments are funded by the proceeds of state government bond sales and not from TRS assets. The law gives state officials the authorization to sell $1 billion in general obligation bonds to fund the program. Thus far, the state has sold $300 million in bonds for the program. Both programs were originally scheduled to automatically expire at the end of the 2020 – 2021 school year, but a new law enacted in 2019 extends that sunset deadline to the end of the 2023 – 2024 school year.

The three sources of TRS funding include member contributions, investment income, and employer contributions through state appropriations and payments from employers. Each employer remits 9.0% member contributions to TRS. Employers are responsible for the employer contribution for teachers paid from federal funds. This contribution rate was dropped from 10.10% in fiscal year 2018 to 9.85% in fiscal year 2019. Employers are also responsible for a 0.58% employer contribution for member benefit increases. Employers also pay a contribution for sick leave days granted to members that are in excess of the member’s normal annual allotment and used for service credit upon retirement.

Under Public Act 94-0004, employers are required to pay the actuarial cost of pension benefits resulting from end-of-career salary increases for members that exceed 6%. A new law took effect and was signed into law on June 4, 2018 by Gov. Bruce Rauner that reduced the threshold affecting employer contributions on year-to-year salary increases for a TRS member from 6% to 3%, but only if the pay hikes would factor into the calculation of a member’s initial pension. The new 3% threshold on raises applied 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 6% 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. But this year, after facing a negative backlash from TRS members, lawmakers boosted the threshold back to 6%. TRS spent a considerable amount of time and money in the last year to reconfigure processes to administer the 3% threshold. That work has been shelved.

The state provides a substantial annual contribution to TRS through an appropriation from the Common School Fund. An additional source of the state contribution is the Education Assistance Fund. In fiscal years 2006 and 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. The TRS appropriation required under the statutory formula was $4.5 billion in fiscal year 2019. The 2018 act required TRS to recertify the state funding requirement for fiscal year 2019 during the last weeks of fiscal year 2019, but the recertified amount did not change. In fiscal year 2020, the TRS appropriation under the statutory formula is $4.8 billion, and that is the amount that has been appropriated.

As originally proposed in January, the state budget for fiscal year 2020 would have cut the TRS statutory contribution by nearly 13% ($576 million) and extended the life of the current statutory pension funding plan from 2045 to 2052. However, the original budget plan was withdrawn following improvements in the fiscal year 2019 and 2020 revenue forecasts as well as strong opposition from the TRS board and a general outcry. Also, because of the continuing appropriation provisions in the Illinois Pension Code, state statutes would have had to be amended to allow a state contribution lower than the statutory funding requirement.

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% of the accrued liability instead of 90%;

  • is not capped by the state’s debt service on previously issued pension obligation bonds; and

  • 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 2019 was 40.6% using the actuarial value of assets, which smooths investment gains and losses over five years. This is a slight decrease from 40.7% in fiscal year 2018. Using the market value of assets, the June 30, 2019 funded ratio was 40.5%, down from 40.7% on June 30, 2018. As of June 30, 2019, TRS investment returns for the fiscal year were a positive 5.15%, net of fees, and the size of the portfolio stood at $53.2 billion, increasing 2.5% from the June 30, 2018 assets of $51.9 billion.

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 exceeded $75 billion at the end of fiscal year 2019. In the June 30, 2019 actuarial valuation, the assumed rate of return continued to be 7.0% 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% to 8.0% in 2012; to 7.5% in 2014; and to 7.0% in 2016.