Illinois Governor Furious After Pension Fund Cuts Returns Forecast, Sticking Taxpayers With "Crippling" Tax Hike

Tyler Durden's picture

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. 

As a result, Michael Mahoney, Rauner's senior advisor for revenue and pensions, unleashed the "fire and brimstone" scenario, writing to the governor’s chief of staff, Richard Goldberg. "If the (TRS) board were to approve a lower assumed rate of return taxpayers will be automatically and immediately on the hook for potentially hundreds of millions of dollars in higher taxes or reduced services," Mahoney also cautioned that "unforeseen and unknown automatic cost increases will have a devastating impact on the state’s ability to provide adequate resources to social service programs and education,” and would lead to "crippling" tax hikes.

This is how we simplied the verbal pressure the fund was facing from politicians:

"please keep your heads stuck in the sand, and dare not admit the reality of near-zero returns in the new normal, but instead keep the projected return rate at 7.5%, or else you will not only admit just how much bigger the underfunding hole truly is, but the resultant surge in public anger following the broad rise in taxes coupled with cuts to pensioner benefits could lead to millions of furious voters sweeping all of Illinois' current career politicians right into the unemployment office."

When the verbal threats failed, as trustees prepared to consider the question Friday morning, Rauner attempted to stack the board with allies by appointing new trustees to fill three vacancies the Tribune adds. Had that move been successful, Rauner may have had a majority of the votes on the board. It's made up of 13 members — six trustees appointed by the governor and six chosen by pension system members, and it is chaired by the state superintendent of schools, also an appointee of the governor.


Bruce Rauner and his wife Diana


However, Rauner erred by attempting to fill one of those seats with a person who hailed from Chicago. State law requires that appointees reside in an area that is covered by the retirement system. Chicago teachers have their own pension system and aren't covered by TRS. Rauner's staff said the erroneous appointment was the result of a "miscommunication" and withdrew it. As a result, just 12 trustees were seated for the Friday vote. Ten voted in favor of lowering the expectations on returns, while Rauner's two new appointees abstained.

As a result, the TRS voted to lower its long-term return estimate to 7%, "given widespread belief that retirement funds won't continue to perform as well as they have in recent years."

Naturally, Rauner was furious. His spokesman Lance Trover blasted the decision as a blow to taxpayers, and questioned whether legal requirements to provide advance notice of such a meeting had been met.

"With less than two hours' notice, Illinois taxpayers including our social service providers and small business owners were just handed a bill for nearly a half-billion dollars," Trover said in a statement. "While questions remain about the legality of today's action, it further underscores the need for real pension reform in Illinois."

The irony deepens because, as the Tribune notes, Rauner - a wealthy PE executive - sold himself to voters as a businessman with the financial discipline to right Illinois' ship. That the first-term governor found himself on the other side of that message by resisting calls to better fund a historically shortchanged pension fund was an indication of Rauner's continued struggle to grapple with the pressures of governing when they run up against his political promises.

He won't be the last.

Meanwhile, even Rauner's allies on the TRS board were convinced that the financially responsible move was to lower expectations and start sending more dollars to the pension fund. The vote came after an actuary chided the trustees for the state's poor funding of its pension systems. "When you're paying a bill off, you want to at least make some progress toward paying the bill off," said Kim Nicholl, an actuary with Segal Consulting, who lamented that in Illinois "your bill keeps getting bigger and bigger each year."

In what was one of the more somber analogies, Nicholl said that "at some point, it starts to come down. But it would be like taking out a 30-year mortgage on your home and then not paying your mortgage payment so that at the end of the year you have to take out a bigger loan and then start paying it again."

Sadly, in a world of low returns, there is no simple explanation; in fact, as we put it several weeks ago, it is an "unsolvable math problem" in a world of ZIRP and NIRP, and as the Tribune said "Taxpayers would be hit either way; the question was whether it would be in the short term or long term."

Perhaps the biggest surprise is that Illinois politicans decided on a short-term hit, despite knowing that by deciding to make pensioners whole on legacy funding promises, they put their own careers in jeopardy as the taxpayer blowback would be swift and merciless to the existing administration. 

Finally, as we concluded earlier this week, "this is precisely the fight that countless ponzi schemes, pardon pension funds, across the US will be forced to go through in the coming months, unless somehow the Fed funds a way to guarantee 8% returns every year, or else sending inflation soaring, and wiping out the fund's liabilities."

For now, however, the "hit" will end up as a new line item to local tax bills, first in Illinois then everywhere else, as the gradual bailout of pension funds by taxpayers across the nation (and then, the world) begins.

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Urban Redneck's picture

And exactly which of their existing investments are they counting on to earn MORE THAN 7% THIS YEAR, so that the average for their entire portfolio hits that 7% benchmark?

Infocat's picture

Let the pension funds finally die for gods sake!

Looney's picture


Bruce Rauner’s wife looks like Bruce Jenner.   ;-)


BuddyEffed's picture

This could be a kiss of death for many things.  I'm sure corporate representatives were actually hoping the assumed rate of return would be made larger so that their contributions to the funds could be made even lower.  This dose or reality will indeed be a bitter pill and it will likely be a snowflake to start an avalanche on the whole slippery slope of urealistic fund expectations.

ShrNfr's picture

Yep, the turd Obama came from it.

bamawatson's picture

well, at least he was comfortable there

AlaricBalth's picture

The nominal yield on the Illinois pensions bond portfolio is a paltry 2-3%. However, these bonds are marked to market and also reflect gains from bond price appreciation as yields fall. Price gains are counted in the average annual return calculation.

If interest rates were to start ticking up, these low nominal yield bonds will see massive losses. This will be the death knell for pension plans nation wide. Just another reason why Yellen cannot raise interest rates.

Think about it...when nominal yields on AAA-AA paper were 7%, a .25 basis point swing in rates did not have a great effect on the bonds price. However, when nominal yields are at 2-3%, the price depreciation is amplified with only a 25 basis point hike.

RafterManFMJ's picture
Illinois is burning!! GET OUT NOW!!
Folkvar's picture

Coming to a pension fund near you, and much more besides...

jcaz's picture

This pension can fuck off.

Typical mis-direction, as usual.

7%?  Let's get real- try 3%.  The  current assumption should never be more than the 30-yr Treasury, because that's all a pension with fiduciary responsibility should be buying.

Solution for today?  Raise the age that pensioners can retire.   Reduce their payouts.  And never,  NEVER mention "raise taxes" as a solution, because that isn't a solution- it's the means to the end.

philipat's picture

7%? Forget it! And this being Gubmin, terms such as :Benefits reductions" and "Defined contributions" will never utter forth. As with the general economy, it's going to require a complete collapse before anything gets changed. Reform simply will not happen.

auricle's picture

Only a matter of time before they will need to 'revise' down from 7%. Will they make it to NIRP for pensions before system failure? 

Doom Porn Star's picture

1. I don't wanna pay my bills.

'Crippling Tax Increase' = long overdue/deferred payments.

This is why .gov should be precluded from issuing debt in any fashion.

All manner of spending one would never consider if the costs were paid on an immediate and ongoing basis are undertaken.   At essence it is spending without intention of paying.

IF one intends to pay one simply pays.


2. Management of defined benefits plans under the current cartel imposed low/no/negative interest rate regimes is not possible.  

Various pyramided interest rate oriented oppressions, taxation and regulatory rackets, medical/educational/etc. price fixings/rackets, etc., only result in misallocations and expropriations.

Nothing new is generated and no market forces are allowed to curate/prioritize natural resources and/or human capital...

You are either in on the rackets in one way or another or you are at the whim of those that are; or you are competing with capital, access, acreditation, sanction, permit, etc.. that are simply withheld for political and/or ideological reasons..

Casino investing for pensions?

IMHO, one cannot define minimums of ROI in such an environment on an ongoing basis.


3.Deflation and bezzle destroy capital and strand debts without collaterals.

-Way too much paper -and not enough collateral of value.    

-Collateral falling in value as well.

When your house and your pension were both hung out to dry in the housing (fraud) bubble: both were left 'underwater'; but, the houses didn't merit the prices of the mortgages and thus the pensions full of mortgages are likewise 'underwater'.

You can't buy your own house from yourself with ever larger cash out refinancings and never expect to pay for where you live.   Conceiving of basing an economy around such round-robin underwear swapping is insane..

See: #1. I don't wanna pay my bills.

The homeowner/mortgage bezzle is just the private/individual version of the same old .gov not wanting to pay for things, not now, not ever: roll the debt forever...


wwxx's picture

alericbalath "Think about it...when nominal yields on AAA-AA paper were 7%, a .25 basis"  assuming the rating remains AAA-AA....which it shant, I think that is why the governor is pissing down his leg.


Nicholl said that "at some point, it starts to come down. But it would be like taking out a 30-year mortgage on your home and then not paying your..."   some of these economic guru just make stuff sound so complicated, when the reality is as it has always been,-- not that complicated.



AlaricBalth's picture

As of June 30, 2015, TRS held the following fixed income investments with respective Moody’s quality ratings or equivalent rating. Obligations of the U.S. government or obligations explicitly guaranteed by the U.S. government are not considered to have credit risk.

(See page 36)

"TRS, with the assistance of the actuary, projected that the Plan’s fiduciary net position will not be sufficient to provide for all benefit payments to current plan members."

Fascinating read.

PTR's picture

Half-billion here, half-billion there.  Once it defaults it's gone anyway.  IT WAS JUST IMAGINARY NUMBERS ON A SCREEN TO BEGIN WITH, FOR CHRISSAKE.


Chupacabra-322's picture

The Criminal Fraud System / s are based on IOU's. Doomed to Collapse. Its Collapsimg now. Some have coined the term "Slow Collapse."

Whoa Dammit's picture

Local school taxes are becoming a problem in areas with a lot of H1B Visa residents. Not only do they take your jobs, they buy a house, bring grandpa & grandma over here, then put the house in the name of the grandparents so as to get the senior school tax exemption. Meanwhile they have about 6 kids attending school.

noguano's picture

You just described many of the subdivisions in and around where I live.  The classes are getting packed.  Good schools, but overcrowding is becoming common.

JohninMK's picture

Sounds like one of the reasons we voted for Brexit.

More Trump voters?

PTR's picture

I work in IT.  That sounds like the wing of the building we're housed in.  I keep telling people "if they (H1Bs) realized that there were more of them than us (full-time hires) they'd revolt and take over everything."

B1G mNy's picture

Damn Whoa Dammit you speak the truth. I pay $10K taxes on my home, while my senior neighbors pay $8K for a home almost twice the size of mine!

MalteseFalcon's picture

""unforeseen and unknown automatic cost increases will have a devastating impact on the state’s ability to provide adequate resources to social service programs and education,” and would lead to "crippling" tax hikes."


ACES FULL's picture

There will be massive pain,that is a foregone conclusion. As of now,timing is the question.

DocBerg's picture

One of my friends, who is an expert in Illinois government finance, and is retired on a State University Retirement System pension, told me some years ago that he fully expects to get IOUs instead of payments in a few years.

ebworthen's picture

The corporations already get free money from the FED/Treasury along with the insurers, and banks.

The FED/Treasury has plenty of money to bail out every pension in the land; just look at the $11+ Trillion they gave to Wall Street in the past 10 years.

There is no such thing as money, or a "shortfall" or "returns" - it can be 8% every year without fail if they want it to be - unless of course they need to deceive and delude us Serfs into spending 30 years teaching their bratty kids and protecting their trophy wives.

Theosebes Goodfellow's picture

~"Bruce Rauner’s wife looks like Bruce Jenner.   ;-) "~

Yeah, but I'd hit that blond daughter like an ugly step-child. Seriously, what did they expect? When has "government employee union" been a good thing for the American taxpayer? What is the state or the feds doing in the education business save to regulate standards? Serves the Illini right. This is just another reason to leave Illinois.

JackT's picture

So 0.5% = $500mil
If a true gain is, let's say, 3%
Then taxpayers are looking at something like: $4.5bn
At least it's not the scale of Puerto Rico (which we no longer hear anything about) other than its citizens leaving

My question is, will state workers who are already the "victims" also have to bail in or do they get a pass?

Serfs Up's picture

I agree.  7% is still at least 5% too high.  

Calpers turned in 2.4%, and I see no reason why Illinois is going to beat their footrace partners in state fueled pension corruption by 460 bp.

onewayticket2's picture



it's FAR worse than they admit.  




KickIce's picture

I hear Epipens have a nice ROI.

Hulk's picture

I'm also long africanized Honey Bees. The combination gives a killer return !!!

PTR's picture

So are popcorn futures.  When this bastard blows up, its going to set a new standard for "epic."

Beowulf55's picture

Hell, they don't hold a candle to Kansas..........$9 billion short fall and the State floats a $1 billion bond (at a cost of $1.88 billion over 30 years).  But the pension fund is now solvent until 2020.  With a pop of 2.8 million that has to cough up the dough, wonder how they are going to cover the balance?

Farmland taxes already up 62% since 2011.  Grain prices are at 1960 levels........yields have not gone up even with miracle Monsanto GMO crap seeds.  What could go wrong?  FUCKING TEACHER UNIONS........    why am I paying for someone elses retirement?  FUCK 'EM.......LET THEM EAT DIRT LIKE ME.

steelhead23's picture

Public pensions are NOT the problem.  The real problem is the myopic willingness of today's politicians to offer overly generous retirement benefits and let their successors deal with any problens - LATER.  Think about it.  If a decision maker stands firm, offering reasonable benefits (and yes, a modest pension) and the public employees reject the deal and strike, the public gets pissed about the loss of services, reducing the pols popularity.  So, he/she constrains pay (which he/she would have to raise revenues to pay for) and offers a generous pension (which he/she doesn't).  And of course, once a public employee union gets that overly generous pension, it becomes the norm - they only go up from there.  This ability to defer costs in order to maintain political popularity and power is a problem in many areas, but has become acute in our public employee pension programs.  Also, were the Fed to substantially raise rates, this problem would be more manageable.   As Yves Smith has shown over at Naked Capitalism, large public pension funds have been playing in the private equity arena, doing poorly, and deceiving themselves and others.  But it all starts with overly generous retirement benefits to maintain political popularity.

JackT's picture

It all has to do with elections. No one wants to be the bad guy/gal and lower benefits that have been around for decades. Meanwhile private pensions that use to be some of the most successful and reliable are looted to a general fund that ultimately is used to buy shares and pay executive bonuses because the share price was miraculously increased.

wholy1's picture

For the banksters/WS brokers, it's all about FEES TAKEN IMMEDIATELY.  Such slimers could care less about "future returns".

Blankenstein's picture

Private sector employees, who no longer have pensions, should NOT be footing the bill for public sector pensions.  Period.

Jacksons Ghost's picture

Look!   Over there!  Fucking Russia!  Attack!

Paul Kersey's picture


Pension Fund Cuts Returns Forecast To 7%, Sticking Taxpayers With $500 Million Bill"


So what happens when a state government robs Peter to pay Paul, after already robbing Paul?   It's an interesting question, because, unlike the Federal Government and the Federal Reserve Bank, the Illinois State Government doesn't have the ability to create unlimited amounts of money out of thin air.

Id fight Gandhi's picture

Well at some point they'll just have to fire all teachers and take the collected tax money to pay pensions of retired teachers. Problem solved.



mkkby's picture

But, but - the poor kids don't have pencils and books.  We HAVE to raise taxes!

That's right.  They spent those enormous taxes on pensions and administrators, until there was nothing left for the class rooms.  Public schools are about adult employment.  Teaching kids is an after thought.

t0mmyBerg's picture

Right!.  And if they had put it down to 5% or even 3% where it probably should be, what would the hit to the state have been then!  God help them.  I  cannot say it often enough.  This is why we moved out of that city.  And now that the whole culture at the CBOT and CME is flushed away by trade going all electronic, a huge part of their wealthy tax base will be moving out or dying over coming years.  They are truly fucked.  Back to the 1970s hell hole.  After a nice long period of gentrifification, comes the inevitable cycle of de-gentrification

mkkby's picture

You boil the frog by heating the water VERY SLOWLY.

If they did it all on one fell swoop, it would trigger a tax revolt.  Maybe even a detroit-style insolvency, where the pensions are taken over by the court and cut 70%.  Can't have that.

They'll wait until the $500 million is raised.  Then they'll let the next shoe fall.  Rinse, repeat.

The smart folks have been gone for decades.  Only low IQ sheep remain.  They voted for progressives, so they deserve their ass raping.

bobert727's picture

probably some "yield enhancement" via put writing.........

Yancey Ward's picture

And exactly which of their existing investments are they counting on to earn MORE THAN 7% THIS YEAR,


The investments in Tesla, Amazon, and The Clinton Foundation are expected to give triple returns.

post turtle saver's picture

no kidding... they're expecting their existing portfolio to roughly double in value every 10 years at that rate... good luck with that, you're gonna need it...