* The full study is here, but this is the executive summary…
Of the financial challenges facing the State of Illinois, perhaps the most critical to state and local governments’ overall long-term financial health is the long-standing challenge of our unfunded pension liabilities and the ever-increasing burdens that places on local property taxes. Illinois has more than 660 funds, the second-highest number of pension plans of any state in the country.
Within the constellation of pensions in Illinois, roughly 650 of them are suburban and downstate police and fire plans, most of which face headwinds in large part caused by the relatively small size of each plan. Because many are so small, they are unable to gain access to investment opportunities that provide the highest returns and competitive investment fees. Collectively these pension plans today earn significantly lower investment returns than larger pension plans. For example, suburban and downstate police and fire plans generated on average 2 percentage points less annually over the past 10 years than the statewide municipal employees’ fund. In addition, these numerous small funds pay substantially higher expenses to manage their assets and administer benefits. The sheer number of plans and the extraordinarily modest asset levels relative to other plans exacerbate both of these challenges.
Not only does this negatively impact the funding level of police and fire pension plans, but local taxpayers are left with the burden of paying taxes to make up for these lower investment returns, forcing most municipalities to rely on a never-ending cycle of increasing local property taxes or cutting services to meet their pension obligations.
To help solve the police and fire pension funding problem and relieve the burden on taxpayers, Governor Pritzker announced the creation of the Pension Consolidation Feasibility Task Force on February 11, 2019, to explore and make recommendations for consolidation of pension funds in order to achieve the greatest value for employees, retirees, and taxpayers. Members of the task force include municipalities, labor unions, former elected officials and financial experts.
After eight months of data collection, analysis, and many meetings, the Task Force recommends the State take the following actions:
STEP 1: Consolidate suburban & downstate police & fire pension plan assets.
The single most impactful step that the State can take to address the underfunding of downstate and suburban police and fire pension funds is to consolidate the plans’ investment assets. This step is immediately actionable and beneficial to the health of the plans, retirees, and taxpayers. Analysis by the Department of Insurance estimates that if the more than $14 billion of suburban and downstate police and fire plans were to achieve investment returns similar to the other larger Illinois plans over the next five years, they would collectively generate an additional $820 million to $2.5 billion in investment returns alone. If they were to achieve comparable returns over the remaining 20 years on their statutory ramp to 90% funded status, they would create an additional $3.6 to $12.7 billion in investment returns alone.
To achieve this consolidation, the Task Force recommends that the State create two new funds, one for municipal police beneficiaries and one for municipal fire beneficiaries, to pool the assets of the roughly 650 downstate and suburban police and fire funds and manage those assets. Each fund would be governed by a board with equal representation of employees and employers. Each local pension plan would maintain an individual and separate account within the new consolidated funds, such that no assets or liabilities are shifted from one plan to another. Each of the two consolidated funds will be held in independent trusts, separate from the State Treasury, with sole governance provided by their respective boards.
With up to $1 million a day in lost investment returns to the pension plans, the Task Force recommends there be legislation passed by the General Assembly in the fall of 2019 that will achieve this consolidation.
In addition, the Task Force recommends other statutory changes to ensure the State is compliant with the safe harbor standard of the Social Security Administration and Internal Revenue Code, thereby avoiding substantial and sudden future costs to municipalities resulting from non-compliance.
STEP 2: Review consolidation of suburban/downstate police & fire pension plan benefit administration; review of other state and local plans to determine advantages of consolidation
Downstate and suburban police and fire funds face further financial challenges beyond just the underperformance of investment returns and high cost of administering assets of these systems that consolidation will address. Therefore, the Task Force recognizes there may be additional advantages to consolidating the benefit administration of these plans. However, because such action requires further discussion with those who would be affected by such a change, it is the recommendation of the Task Force that it should continue to review the advantages and challenges of consolidating benefit administration, and to make potential recommendations to the Governor on this issue.
Additionally, there are 15 other pension systems in Illinois outside of suburban and downstate police and fire that bear significant financial burdens. Unlike suburban and downstate police and fire plans these funds are larger funds, and consolidation would not achieve material improvement of their investment returns. Because the current financial pressures on these systems are so significant, especially for the City of Chicago, it is recommended that the Task Force to continue to review the potential advantages of consolidation of these larger systems and to make recommendations to the Governor on this issue.
Remember, the end game here is 60-30-1. The firefighters in particular have a huge amount of Statehouse clout, but so do other players. One step at a time.
I’ll post react if it comes in.
…Adding… From the governor’s office…
“Under the current arrangement, Illinois’ suburban and downstate police and firefighter pension funds are underperforming by nearly one million dollars per day. That’s not just a missed opportunity – that’s a hole these funds are digging deeper every year – and then municipalities have to ask taxpayers to fill the hole,” said Governor JB Pritzker. “We’ll be proposing legislation this fall to consolidate the assets of the 649 suburban and downstate pension funds into two statewide funds. This consolidation will improve the financial health of the plans and help secure the future for the retired workers who rely on them – and it will alleviate some of the property tax burden plaguing homeowners and renters across our state.”
*** UPDATE 1 *** ILFOP…
The Illinois Fraternal Order of Police (FOP) today expressed strong concerns about the recommendations contained within the Governor’s Committee on Pension Consolidation Report. FOP members had initially been optimistic that the committee would propose a process that would reduce fees, increase investment returns and better guarantee retirement security for law enforcement officers, their widows and orphans. However, the committee’s recommendations fail to accomplish these critical things.
“Law enforcement officers were not allowed to participate, provide feedback or be shown that this was anything other than an attempt to grab officers’ money,” said FOP Labor Council Executive Director Shawn Roselieb,who noted that the committee’s meetings were not open to the public. “Officers have paid their own money into these police pension funds every working day of their lives.”
The report recommends that the consolidated police pension fund be governed by a board where only 50 percent of the trustees are law enforcement officers. Illinois’ 16 current public employee retirement funds, including the Illinois Municipal Retirement Fund, are constituted of governing boards with a majority of members of the fund.
“No one is more concerned with the proper administration of public safety pensions than our 36,000 members,” Roselieb said. “But this committee thinks downstate police officers are the only public employees who are just not smart or sophisticated enough to manage their own money.”
The State of Illinois’ “worst in the nation” track record of managing public pensions is also cause for concern among working and retired law enforcement officers.
“Illinois police officers are not inclined to believe the state when it says it’s going to responsibly manage their money,” said FOP State Lodge President Chris Southwood. “This problem is at the heart of the FOP’s concern. Any consolidation must contain a firewall between police officers’ money and the people responsible for the pension system debacle in this state.”
Roselieb and Southwood urged members of the Illinois General Assembly to actively seek input from law enforcement officers and the general public on any pension consolidation proposal, something that the Committee on Pension Consolidation did not do when formulating its report.
“We applaud Governor Pritzker for taking on this tough subject,” Southwood said. “But the committee’s secret deliberations and their attempt to diminish future public input on the pension fund’s governance are not the right way to reach a good solution.”
*** UPDATE 2 *** Gov. Pritzker was asked today about opposition from the Illinois Public Pension Fund Association, which represents the 600+ local pension fund administrators and conducts training sessions. His response…
These are the folks who run the junkets. The recent one cost about $8 million to the taxpayers to send people to Lake Geneva on a retreat.
I realize that this is going to disrupt their business model, but frankly we have to do better for the taxpayers of this state.
*** UPDATE 3 *** From Associated Fire Fighters of Illinois President Pat Devaney…
We support the recommendations of the task force.
Oh, man, that’s huge. That does more for the prospects of passing this thing than just about anything else.