These days, Illinois’ virtually-insolvent defined-benefit pensions — along with those of Chicago — have become as much a topic of conversation for taxpayers in the state as last night’s Bulls or Cubs game. From the lawsuit filed earlier this year by a group of unions (including the National Education Association affiliate and that of the American Federation of Teachers), to the move last week by state legislators to help the Second City address insolvencies in two of its pensions, to the declarations of pension reform by both Illinois Gov. Pat Quinn and Republican rival Bruce Rauner, there will be more talk about how the Land of Lincoln must pay down its $95 billion in long-term pension obligations, the nation’s second-largest after California, according to data from the Pew Charitable Trusts.

statelogoBut none of the discussions will matter unless the Land of Lincoln deals honestly with the level of insolvencies it faces. This is especially true when it comes to dealing with the Teachers’ Retirement System, which likely has the second-worst teachers’ pension deficit in the nation after that of the notoriously-underfunded California Teachers Retirement System. And based on TRS’ latest comprehensive annual financial report, the state is still refusing to deal candidly with reality.

The pension officially reports a deficit of $56 billion for 2012-2013. The problem is that the pension is understanding the level of its insolvency. For one, the underfunding only includes $1.6 billion in investment losses and not all of the losses (or gains) TRS has achieved over the past five years. This is because of an actuarial technique called smoothing, an actuarial trick the state forced the pension to adopt five years ago, which effectively allows the pension to effectively hide investment losses under the guise of keeping the volatility pensions experience with investments from wrecking havoc on state and district budgets. As a result, taxpayers and policymakers aren’t getting a full picture of the pension’s insolvency.

The bigger problem is that TRS is using overly inflated assumptions of investment growth over time. The pension assumes an eight percent rate of return even though it admits that its assets have only achieved a rate of return (net of investment fees) of just five percent between 2009 and 2013. In fact, TRS admits that its assets have only increased by 63 percent within the past 13 years (even as liabilities have increased by nearly a three-fold in that same period). What TRS should be doing is assuming a more-realistic actuarial rate of return, somewhere around 5.2 percent (or the five-year rate of return for investments, according to investment firm Wilshire Associates). This would then force politicians to deal more-honestly with the pension woes.

To get to the true level of TRS’ insolvency, Dropout Nation uses a version of a technique developed by Moody’s Investors Service, which assumes a more-realistic 5.5 percent rate of a return. [Moody’s bases its rate of return on the performance of a bond index, which can range between four and six percent.] Based on those numbers, TRS’ true insolvency is likely $76 billion, or 36 percent higher than officially reported. This means that TRS’ insolvency has increased by seven percent (or $5 billion) within the last year, based on an earlier Dropout Nation estimate of the pension’s unfunded liabilities. If Illinois state government was forced to pay down the insolvency over a 17-year period of amortization, it would cost taxpayers $4.5 billion, or more than double the $3.8 billion contributed to the pension this past fiscal year.

Getting to the heart of the numbers is particularly critical because TRS will face even more Baby Boomers heading into retirement over the coming years. On average, 6,140 teachers covered by TRS have retired every year over the past decade, based on a Dropout Nation analysis of the pension’s retirement data. Each retiree and their surviving spouse, on average, collects an annual annuity of $45,792. So TRS can easily expect to pay out at least an additional $293 million in annuities every year, and likely, even more than that; TRS reports that it paid out an additional $344 million in annuities in 2012-2013, higher than even Dropout Nation‘s estimate. Since the pension reform plan enacted last year, SB-1, still allows for teachers who joined payrolls before this coming June to cash in unused sick and vacation days in order to boost pension payouts — and still allows Baby Boomers to collect three percent annual cost-of-living raises for all but two of the first 1o years in retirement — this means that TRS will become even more insolvent than it currently is. And, in turn, estimates that the plan will reduce the state’s overall pension deficit by $24 billion over the next 30 years is likely an illusion.

With more-realistic numbers, state legislators and Gov. Quinn (or Rauner, if he beats Quinn in November) can deal with TRS’ woes more decisively. This should start with requiring teachers (and in many cases, thanks to collective bargaining agreements, the districts) to contribute even more than the 24 percent of annual contributions made to the pension every yearpercent of salary they currently pay toward retirement. It is increasingly clear that the state can no longer assume 71 percent of the burden. Addressing these issues will require Illinois officials to take bolder steps than they have been willing to do. This includes overhauling how TRS (along with other state pensions) are managed; as I noted today in this week’s column in Rare, the NEA’s and AFT’s state affiliates have long controlled pension operations and won’t give up that influence without a fight.

But addressing TRS’ insolvency isn’t just about the red ink. One of the problems with SB 1 (and similar pension reforms across the country) is that the brunt of the changes are borne not by Baby Boomers, but by younger workers, who are both forced to subsidize veteran colleagues (both in the form of contributions as well as taxes they also pay) and at the same time, lose out on opportunities to truly save for their own retirements. Under the pension reform plan, for example, younger Illinois teachers will lose out on five three-percent cost of living raises during the first 10 years of annuity payments. This means they lose money twice, both in the form of contributions (which are supposed to be savings, but actually goes to fund the retirements of others), and in money they expected to get in exchange for subsidizing other people’s pensions.

Moving away from defined-benefit pensions to hybrid pension plans that features defined-contribution accounts as well as cash-balanced accounts that guarantees an annual savings rate to actually save for their old age, would help younger teachers reap the rewards of their labors in their senior citizen years. This, along with overhauling the rest of traditional teacher compensation, would particularly benefit high-quality teachers in the first 15 years of their careers, who deserve reward for all they do to help children succeed.

But none of this is possible until Quinn and his colleagues get real about the true extent of TRS’ virtual insolvency as well as deal with the state’s other long-term debts. Until this happens, Illini will be merely toying with their problems.