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Reeder: Illinois pension funds are raising their investment risks

Updated: March 10, 2013 6:10AM



Years ago, when I was a reporter for a newspaper in Las Vegas, I encountered a family living in a homeless shelter.

The family — a husband, wife and their four children — had lost everything because of the husband’s gambling habit.

“When I lost the rent money, I decided it was time to go back to the casino and win it back,” the father explained.

The parents took more risks in trying to win their money back, but instead they became destitute.

That’s increasingly the mind-set that officials of Illinois’ five public pension funds have in investing their members’ pension money. They are turning more to risky investments in an effort to achieve higher returns and boost the funds.

For example, the Teachers’ Retirement System, the largest of the five funds, holds more than $1 billion in junk bonds, formally known as sub-investment grade securities.

More than 14 percent of the TRS bond portfolio is tied up in junk bonds, according to its comprehensive annual financial report for 2012.

Companies in financial distress issue these types of bonds and try to lure investors by offering the higher interest rates that go along with higher risk. Of course, if the company goes bust, investors lose everything.

I don’t know about you, but I wouldn’t want to put any of my retirement savings in this type of investment vehicle. But apparently the folks who oversee TRS and the other state pension funds think it’s a perfectly fine place to assign their members’ retirement savings.

The real problem is that Illinois’ pension systems are severely underfunded, the result of the Legislature not making the state’s required annual pension contribution for many years.

The numbers vary regarding the state’s long-term, unfunded pension liability but they are staggering — more than $200 billion, according to new accounting standards.

So those handling investments for the pension funds are feeling greater pressure to get higher returns. And if those riskier investments go south, Illinois taxpayers will be asked to make up the difference by the state contributing more from its budget toward pensions.

Investment losses are one factor in a complex formula that pension funds use when determining how much tax money to request from the Legislature each year.

It should frustrate not just teachers but all state workers and Illinois taxpayers as well that their money is being placed in high-risk investments.

Even more frightening is that legislation has been introduced to make state taxpayers explicitly responsible for pension systems’ shortfalls. Do taxpayers really want to be guaranteeing junk bonds?

So who can be trusted? I, for one, believe in the individual.

Eighty-five percent of private-sector workers don’t have traditional pensions (known as defined-benefit plans) that state employees enjoy.

They use IRAs, 401(k) plans and other defined-contribution plans to make investment decisions for themselves.

Why not government workers as well?

Scott Reeder is a veteran statehouse reporter and the journalist-in-residence at the Illinois Policy Institute, a nonprofit research group that supports the free market and limited government.



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