* Amanda Kass and Andrew Crosby of the UIC’s Government Finance Research Center have published a white paper about local first responder pension funds. They examined 336 municipalities which have 516 police or fire pension funds - about 80 percent of all non-Chicago funds.
They were looking to see if any municipalities were getting around the state “pension intercept” law. From their white paper…
Starting in fiscal year (FY) 2016, the enforcement mechanism allows the State Comptroller to intercept state- sharing revenue if municipalities’ contributions to their police and fire pension funds fall short of what their contributions are supposed to be under state law. That intercepted revenue is then re-directed to the pension systems to make up for the shortfall in governments’ contributions. A premise of the pension intercept is that state intervention can help ensure the fiscal sustainability of local governments and their retirement funds.
They found that most municipalities appeared to be making their statutorily required pension payments. But they found 22 which looked hinky. After obtaining information from those municipalities, they came to this conclusion…
We found that while the majority (14 municipalities) were indeed shorting their pension funds, only two municipalities had state-sharing revenue intercepted: Harvey and North Chicago.
Not good. If the state takes no action, the problems in those municipalities are going to only get worse.
* I followed up with Ms. Kass to ask if there could be more than 14 municipalities shorting their pension funds…
Shorter answer: There could be more, but it’s really difficult to determine without collecting data from all municipalities. I don’t have confidence is coming up with a specific estimate. I would say that for 2016 there were 163 municipalities whose actual contributions look like they were less than 100% than the IDOI recommendation. That alone, however, does not indicate those municipalities shorted their pension funds, but that is the number of places I’d examine to see if they did short. I just want to be careful about the language.
Long explanation: We compared municipalities actual contributions to IDOI’s recommended contribution, which we defined as a “payment ratio.” A payment ratio of 1 means that a municipality’s actual contribution equaled the IDOI recommendation; less than 1 means the contribution was less than the IDOI recommendation. The 22 we looked at had average payment ratios below 0.5 for some time between 2005 and 2016, so these seemed like the most extreme cases of shorting.
Out of the 336 municipalities, there are 163 municipalities that had a payment ratio of less than 1 for 2016; however, I can’t provide a good estimate of how many of those shorted. Out of that pool of 163, 60 have payment ratios of 0.9 or above. The payment ratio being below 1 could be because the municipality hired an actuary and that actuary’s recommended contribution was less than IDOI; it could be because the municipality’s actual payment is not aligned with the correct IDOI recommendation; or it could be because the municipality shorted. Many may have hired their own actuary and not used IDOI, but information about whether a municipality or pension fund hires its own actuary doesn’t seem to be collected by IDOI (at least not in a spreadsheet or easy to use way). For the 22 municipalities we looked at, only five used IDOI’s recommendation.
The 3rd party actuaries’ figures varied widely from the IDOI recommendations, and the difference between IDOI and the 3rd party actuary was not consistent over time even for the same municipality. Because of this we couldn’t even identify a likely lower boundary for the payment ratio–meaning coming up with a cutoff point for payment ratios less than 1 to distinguish between likely shorting and just difference between 3rd party actuary and IDOI). This is why we limited to just looking at the most extreme cases (the 22 municipalities).
Pension funds can trigger the intercept for any shortfall in the actual contribution. Chicago’s contributions to its pension systems for 2018 (per the information in its CAFR) were only about 2% less than required, but the systems have still triggered the intercept against the City.