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Civic Federation urges caution on pension consolidation plan

Friday, Nov 8, 2019

* Short version…

The Tier 2 fix is what convinced the Associated Fire Fighters of Illinois to sign on to the plan. So, any changes to that could imperil the whole thing.

* Excerpt from long version

As indicated by the discussion above, determining when or if Tier 2 benefits will violate IRS rules is not simple. The analysis must consider the pension multiplier as well as the growth in the pensionable salary cap. Supporters of Senate Bill 616 have not as yet shown whether the proposed changes are needed to satisfy legal requirements and, if they are needed, whether they must be implemented immediately.

To the extent that growth in the pensionable salary cap is an issue, it remains to be seen whether Senate Bill 616 solves the problem. The legislation proposes that the salary cap grow by 3% or the inflation rate, whichever is less. This is clearly a faster rate than the current formula of the lesser of 3% of one-half of the inflation rate, but it does not match the national average wage index used to calculate growth in the Social Security wage base. The difference might be accounted for by the proposed change in the calculation of final average salary, which lowers the required multiplier under IRS rules.

Up to now, neither the Governor’s task force nor supporters of Senate Bill 616 have publicly provided actuarial reviews showing the cost of the Tier 2 changes for the affected police and fire funds. In the task force report, the cost is estimated at $70 million to $95 million over five years, or $14 million to $19 million per year, but there is no supporting documentation for the estimate.

The task force also noted that these estimated costs are minor compared to increases in investment returns projected to be earned by the consolidated funds compared with the 649 existing police and fire funds. The task force estimated that the consolidated funds could generate an additional $820 million to $2.5 billion in investment returns over five years, or $164 million to $500 million per year.

However, it should be noted that these increased returns are not guaranteed. Any increase in actual returns will be partly due to the consolidated funds’ ability to invest in riskier investments. State law restricts the securities that the existing police and fire funds are allowed to hold. In addition, because the assumed rate of return is used as the discount rate for pension liabilities, an increase in the expected return rate by the consolidated funds would also reduce statutorily required annual pension contributions. Senate Bill 616 requires that contribution changes due to changes in actuarial assumptions be phased in over three years.

Since Tier 2 applies to nearly all pension funds across the State, there could be a move to simply apply the same changes to all funds statewide, also without first determining whether the changes are the minimum necessary so as not to impose additional fiscal hardship on already struggling governments.

In recent years, the State has frequently rushed to enact pension changes without actuarial evaluation and public disclosure of their financial impact. The latest example involved pension buyouts, which were budgeted to reduce General Funds contributions by more than $400 million in FY2019 but ended up saving about $13 million that year. The original savings estimate was based largely on a different buyout plan; the enacted plan surfaced in the last days of the spring 2018 legislative session and was not vetted by pension actuaries before being approved by lawmakers.

The Civic Federation urges the Governor’s Office and sponsors of Senate Bill 616 to demonstrate the need for the specific Tier 2 enhancements in the legislation. In addition, they must ensure that the financial impact of any proposed Tier 2 changes is fully evaluated by pension actuaries and publicly disclosed before any action is taken by the General Assembly.

I’m hearing there could be an announcement this afternoon about the consolidation bill. Stay tuned.

- Posted by Rich Miller        

  1. - thechampaignlife - Friday, Nov 8, 19 @ 2:27 pm:

    Can we just add language to the statute saying you get the higher of: our formulas or the minimum required by IRS/SS? And then call it a day on this issue?

  2. - City Zen - Friday, Nov 8, 19 @ 2:47 pm:

    In the pension world, what’s given cannot be taken back. Take your time.

  3. - RankandFile - Friday, Nov 8, 19 @ 3:00 pm:

    While we are at it, can we get some more independent information on transition costs regarding forced consolidation and arbitrary sale of existing assets? Also, why is consolidation mandatory? Why the effort to ram this thru in veto? What about local funds that are performing well? What about local control?

  4. - revvedup - Friday, Nov 8, 19 @ 3:17 pm:

    There is a false urgency to ramrod this through in the veto session, merely so some electeds can “Look, we fixed the police/fire pension issue”, while ignoring the points raised above and in the Federation’s comments. Maybe “Leap before Looking” should be the State’s new motto.

  5. - Davos - Friday, Nov 8, 19 @ 3:19 pm:

    Maybe “Leap before Looking” should be the State’s new motto.

    Such is life in the “pension reform” arena.

  6. - the Edge - Friday, Nov 8, 19 @ 3:26 pm:

    The Civic Federation again can’t see the trees in the forest. This is such a big development get over it and support the consolidation.

  7. - LocalGovGuy - Friday, Nov 8, 19 @ 3:31 pm:

    What about the 100 municipalities whose officers are in both a pension plan and social security? I don’t believe they need any Tier 2 pension enhancements to address the alleged issue.

  8. - Municipal CPA - Friday, Nov 8, 19 @ 3:56 pm:

    I have said it before, this is a gift to the Police and Fire unions. It is not saving Tier 2. Raising their retirement pay and doubling the COLA is not necessary. Even the IML’s legal says so itself in footnote 14. This will only drive up the pensions costs for municipalities that already cant afford the pensions granted by the legislature.

  9. - Sue - Friday, Nov 8, 19 @ 4:34 pm:

    Just what we all need- higher pension costs. These Dem legislators and their new Governor never learn- promise an additional benefit to get union by in and years later someone recognizes the additional cost. A substantial number of townships already are near bankruptcy due to pension costs so why not increase their burden

  10. - Buford - Friday, Nov 8, 19 @ 4:48 pm:

    Anybody know where Sheriff’s employee pensions fit into all this? I understand from speaking to county board members that Sheriff employee plans are more expensive to taxpayers, but I don’t know if that’s accurate.

    When Whiteside county consolidated 911 centers from three to two in 2017, all Sterling and Rock Falls dispatchers became Sheriff’s employees, which was a major mistake as far as good old boy and political hiring under Kelly Wilhelmi IMO.

Sorry, comments for this post are now closed.

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