This Can't End Well
The Illinois Teachers' Retirement System — the worst-funded major pension plan in the U.S. — is pumping more of its assets into higher-risk investments while using accounting methods that some pension experts say understate its funding shortfall.
Springfield-based TRS, the state's largest pension provider, plans to allocate about a third of its $37.8-billion portfolio to alternative investments such as private-equity and hedge funds, a four-month Crain's investigation of TRS holdings and practices finds. These unconventional assets typically dangle the potential for higher returns, but only because they also carry greater risks and fees. TRS is shifting its portfolio while it's still developing an in-house risk-management system.
Gunning for bigger returns exposes the plan to the possibility of bigger losses, further jeopardizing the pensions of 362,121 former and current teachers. The system, which has just 46.5% of the assets it needs to cover promised payments to retirees, is counting on an 8.5% annual return, which many portfolio managers and investors, including Berkshire Hathaway Inc.'s Warren Buffett, say is unrealistically high. If TRS banked on a 7.75% return — the rate that two other Illinois public pensions lowered their forecasts to this year — its assets would equal only 43% of obligations. That would swell its shortfall to $50.1 billion from $43.5 billion.