Illinois Math

For a while Buck Consultants, LLC (Buck) included in actuarial reports for their New Jersey plans a warning in the comments section that these plans were going to run out of money very soon (though nobody but me seemed to have noticed) just so that when these plans do run out of money Buck’s malpractice lawyers would have Defense Exhibit A.  In Illinois Buck actuaries went a step further this week.

The June 30, 2014 actuarial report for the Teachers’ Retirement System for the State of Illinois included these comments from Buck:

Cover Letter

The funding objective under the Illinois Pension Code is to achieve 90% funding by 2045. The 2045 objective was set in 1994 as a 50 year objective. While TRS members have always contributed their share, the State funding has been inadequate. This inadequate funding has resulted in TRS being among the worst funded public employee retirements systems (PERS) in the United States.

The methods mandated by the Illinois Pension Code are inadequate to appropriately fund TRS.

Executive Summary

The contribution made by the State of Illinois to TRS under the Illinois Pension Code was insufficient to keep the unfunded actuarial accrued liability from growing; while this was expected in our projections, it is worthwhile to note that this practice continues.

The funded ratio for TRS is among the worst in the United States. This is due to:

  •  A lack of commitment  from policy makers to keep the Retirement System well-funded
  •  A history of appropriating and contributing amounts far below that which a prudent actuary would recommend
  •  A funding policy that systematically underfunds TRS
  •  Changes in benefits that were unfunded and granted when the funded ratio of TRS is quite low

Funding reform needs to occur for TRS or the benefits of its membership could be compromised.

Funding Methodology

The funding of TRS by the State of Illinois does not follow even the minimum Actuarial Math. The State has systematically underfunded TRS using Illinois Math, which has systematically underfunded TRS by:

  • Initially selecting a 50 year period over which to pay down unfunded actuarial accrued liability
  • Back loading the 50 year plan by using a 15 year period to ramp up contributions to the ultimate level
  • Establishing 90% of the actuarial accrued liability as the funding target
  • Using the projected unit credit cost method which understates the funding target compared to the more common entry age normal cost method
  • Imposing a maximum contribution based on POB debt payments; while contributions are potentially reduced by the full value of the debt payments, not all of the POB proceeds were directly deposited
  • Reducing contributions for fiscal year ended June 30, 2006 and 2007
  • Reducing contributions in fiscal year ended June 30, 2011 by introducing an actuarial value of assets
  • Reducing contributions to fully reflect the impact of Tier II provisions before the reduction in benefit accruals occurred

When compared to other public sector retirement systems in the United States, the funding policy for TRS has resulted in TRS being regarded by its peers as among the worst funded in the United States.

Glossary of Actuarial Terms

Illinois Math. The term given to the various schemes in the Illinois Pension Code designed to systematically underfund public employee retirement systems in the state of Illinois. Refer to the executive summary for more details. (page 103)

Which makes me wonder if Buck actuaries in their June 30, 2014 valuation reports for the New Jersey plans will have a definition of ‘New Jersey Math’ for methods like:

I doubt it since if they were to try anything that honest here they are likely to get one of these:

9 responses to this post.

  1. Posted by Tough Love on November 2, 2014 at 1:18 am

    I’ll bet NJ get a very similar Report as Illinois.


  2. Posted by skip3house on November 2, 2014 at 8:57 am

    Didn’t Illinois once set the value of ‘pi’ as an exact value, 3.1416?


  3. John, this has been brought up many times but is it possible that the promised pensions, healthcare, etc. is so far out of touch with reality due to the lucrative formulas and longevity of reitriees that there is no acutuaril sound way to fund them?
    Hence, the gimmicks, one shot deals, kick the can down the road mentality. It just seems to me to beg the question, why wouldn’t the pensions be fully funded if indeed the politicians had any intention of keeping these contracted promises? It doesn’t make any sense.


    • It’s like the frog in ever hotter water. Most people don’t notice if they go in steps except for those of us who recognize the tricks.

      New York and California are more in the category of trying to pay for these benefits (though they also throw their politician employers a few crumbs with gimmicks to keep contributions down) but Illinois and New Jersey are flat out turning up the heat with the actuaries barely raise a whimper in the corner. Maybe lawsuits will wake them up but it would have been nice if a sense of professional responsibility did the trick.


    • Posted by Tough Love on November 2, 2014 at 2:28 pm

      Quoting …”this has been brought up many times but is it possible that the promised pensions, healthcare, etc. is so far out of touch with reality due to the lucrative formulas and longevity of retirees that there is no actuarially sound way to fund them?”

      Sure there is, but with JUST the “normal cost” (of annual pension accruals) being a level annual 50+% of pay …… 10 times what Private Sector workers typically get as employer contributions into THEIR 401K accounts.

      And that’s the REAL cost of many Safety-worker pensions once all the BS trickery is removed.

      As I’ve stated many times, the ROOT CAUSE of the problem (of which “funding” is a CONSEQUENCE, NOT a “cause”) is grossly excessive pension (AND benefit) GENEROSITY,.


  4. What will also be interesting to see in Illinois is how they deal with the recent Kanerva decision that said unfunded healthcare liabilities are constitutionally protected as part of the pension benefit. The decision was rendered in July so it’s not discussed in any FY 2014 reports. But it alone adds some $50 billion to the previous official UAAL of $97B.


  5. In New Jersey, it is the employees who will end up screwed. In New York, public services will collapse at high tax rates.

    How about Illinois?


    • Posted by Tough Love on November 3, 2014 at 1:08 pm

      My guess is that …. with a VERY clear inability to increase revenue sufficiently to pay anywhere near the promised pensions & benefits …… the workers/retirees are in for a rude awakening. Yet they still believe the State’s constitutional protections from reduction will magically create the necessary funds. “Denial” can be a very destructive behavioral trait………


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