As usual, the State of Illinois pension systems present good news and bad news.
The good news – the State retirement systems had stellar investment returns in the past fiscal year. The five systems earned an estimated 17% to 18% in FY14, which ended June 30.
These investment earnings will help shrink the big hike Illinois is facing in its pension payment from this budget year (FY15) to next year (FY16) if benefit reforms are not upheld. With these high FY14 earnings, it is estimated that state General Funds payments will increase by $500 million to $600 million if benefit reforms are not upheld by the courts.
The FY14 returns are among the highest in Illinois history. The record high was over 20% in FY11, with the biggest losses (also around 20%) in FY09. By statute, payments are based in part on an average of the past five years of returns, so next year’s payment will be the first one calculated without including those big FY09 losses.
The bad news – in the spring there were initial projections that the state’s payment would increase by only $100 million from this budget year to the next year. However, Illinois’ projected FY16 payment has been driven up by the recent votes taken by the boards of the three major pension systems to lower their long-term investment assumptions. The assumptions were decreased from an average of 7.9% down to 7.3%.
The decrease in investment return assumptions was recommended by the State Actuary to bring the Illinois systems more in line with other systems nationwide. The assumptions are intended to cover the next 30 years, not reflect recent returns.
Still, with the latest returns and the new assumptions, Illinois is expected to save $100-$200 million on its mandated payments against what was projected before the latest earnings report.