The Illinois pension system is about to receive a boost, thanks to a court settlement from one of the nation’s leading bank conglomerates.
On Nov. 19, Illinois Attorney General Lisa Madigan announced a $100 million settlement with J.P. Morgan Chase & Company to receive reimbursement for the bank’s misconduct leading up to the 2008 economic collapse.
The announcement is part of a national settlement involving the U.S. Department of Justice and attorney generals from California, Delaware, Massachusetts and New York addressing the bank’s violation of federal and state laws in its marketing and sale of risky residential mortgage-backed securities.
“We are still cleaning up the mess that Wall Street made with its reckless investment schemes and fraudulent conduct,” Madigan said in a press release after announcing the settlement. “Today’s settlement with Chase will assist Illinois to recover its losses from the dangerous and deceptive securities that put our economy on the path to destruction.”
Maura Possley, Madigan’s press secretary, said an investigation by Madigan’s office found that between 2005 and 2008, J.P. Morgan Chase failed to disclose the true risk of investments to Illinois’ pension systems and misled the systems when they invested in residential mortgage-backed security markets.
Possley said the settlement would pay $72.4 million to the Illinois Teachers Retirement System, $16.2 million to the State Universities Retirement System and $11.4 million to the Illinois State Board of Investment, which makes investments for the State Employees’ Retirement System, General Assembly Retirement System and Judges Retirement System of Illinois.
Even with the relief money, the state may not feel much of an impact given the $100 billion in unfunded pensions across Illinois.
The problems with the Illinois pension system are long-term, issues that began in 1969 when state delegates came up with a plan to stiff-arm the Illinois General Assembly into providing sufficient funding for the pension system, which had been underfunded since the end of World War II. The plan was to prevent legislators from cutting pension benefits. Delegates hoped future legislators would not short the pension systems while raising benefits to the point that it threatened the state’s government.
Unfortunately, that’s exactly what happened.
Now Illinois has a $100 billion problem taking up the majority of the state’s budget. Almost every cent of 2011’s huge increase to state income tax goes directly to the pension system.
Beth Spencer, media contact for the State University Retirement System, said an underfunded pension system has posed a problem for SURS for some time now.
“As I am sure you are aware, the state’s public pension systems have been underfunded for quite some time,” she said. “SURS estimated liabilities as of June 30, 2013, stood at $34.4 billion, of which $19.3 billion are unfunded liabilities.”
Spencer said SURS receives money from their member’s contributions, employer contributions and investment returns. She said member contributions are automatically deducted from their paychecks and the return on investment over the past 30 years stands at 9.2 percent, well above the 7.75 percent assumed rate of return.
When the state fails to meet the annual required contribution, the system is forced to sell assets to meet liabilities, Spencer said. She said the past two years have been promising in that SURS has received full state appropriations.
The condition of pensions in the state will improve if the system continues to receive full funding, Spencer said.
“If the system continues to receive full state funding, along with member contributions and comparable investment returns, the financial health of the fund will continue to improve,” she said.
Even with the state’s pension problems, SURS has never missed funding benefit payments to its members nor have would-be retires realized any affect because they are not drawing an annuity.
University President Glenn Poshard said the settlement will have some short-term effects, but is far from a solution to the state’s pension woes.
“One hundred million is certainly something that we need and it will help to a certain extent, but when you’re talking about (a) $100 billion problem, it’s no more than a Band-Aid on fixing the pension system,” he said. “It’s not something that figures into the overall plan for solving the $100 billion we face in the state.”
Poshard said he does have faith in Illinois legislators to find a long-term solution for the pension problems in the state. He said a solution for the problem will likely involve employees coming into the system over the next 30 years, paying more, getting less out of pensions, extending the age pensions can be received at, tying the cost of living adjustment to a consumer price index and a cap on pensionable salaries.
Universities in the state are helpless until state legislators make a decision, Poshard said.
“We simply do what the law governing the pension systems tell us we have to do,” he said. “So the universities have carried on in the same fashion that we’ve been carrying on.”
State university officials have sent the governor and state legislation possible solutions to the pension problem, Poshard said. He said at this time, state legislators are considering ideas that have more severe outcomes to universities than what was recommended and all that can be done now is waiting for state officials to agree on a solution.