Illinois Teachers’ Lower Rate A “Positive”, Says Moody’s

Credit rating agency Moody’s said on Wednesday it positively viewed the Illinois Teachers’ Retirement System’s decision to lower its assumed rate of return from 7.5 percent to 7 percent.

The lower rate will be tough for the state to stomach in the near-term as it raises annual contributions by hundreds of millions of dollars. But it also forces the state to pay up, and makes the System less reliant on out-sized investment returns.

From the Chicago Tribune:

A key ratings agency said the decision by the Illinois Teachers’ Retirement System to lower its expected rate of return was “a positive,” even though it means the cash-strapped state will have to find hundreds of millions of dollars more to pay into the pension program for teachers who live outside of Chicago.

The decision by the system’s board to alter the rate of return on investments from 7.5 percent to 7 percent was made despite opposition from Gov. Bruce Rauner, who characterized it as a rushed decision that puts taxpayers on the hook. It was an odd position for the Republican governor, who has long criticized state and city government for kicking the can down the road on financial issues.

But Moody’s Investors Service said the change was “a positive” despite increasing financial pressure on the state in the near term, saying the move would “lower exposure to volatile investment performance.” Moody’s estimated that if the new, lower rate had been in effect for the budget year that began July 1, the state’s required employer contribution would have been $4.3 billion, roughly $421 million more than if the assumed rate of return stayed at 7.5 percent.

Still, Moody’s said even under the lower rate the state remains roughly $1.5 billion below their “tread water indicator,” meaning the system’s unfunded liabilities will continue to grow.