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Amanda Kass’ take on the pension consolidation task force report

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Illinois

The [governor’s local first responder pension consolidation task force] estimated the costs of these changes at between $14 million and $19 million a year over five years. The estimated investment gains from consolidation are between $164 million and $500 million per year over five years.

But this is Illinois, and if I’ve learned anything in this job, it’s that estimated costs are almost always too low and estimated returns are almost always too high. I’ll believe those projections when I see them.

* Amanda Kass dug into the task force report and found it was a pretty light on details. As always when it comes to this particular Kass, you should read the whole thing. But here’s part of one section…

Consolidating assets has implications for actuarial assumptions, and assumptions play a vital role in determining a pension fund’s finances and municipalities’ annual payments. According to the Task Force, one of the benefits of consolidation is that it would, “Enhance uniformity in setting investment and other actuarial assumptions.” The report is thin on details about this aspect of consolidation, and it’s important to learn more about it to understand how municipalities will be impacted in both the short-term and long-term.

In determining the long-term finances of the pension systems, actuaries use an investment rate assumption. Right now each of the 600+ public safety funds have their own investment rate assumption, and the assumption rates vary from around 5% up to 8%. Moving to a single investment rate assumption will mean some funds’ assumptions will be lowered, while others will be increased.

Changing the investment rate assumption has an immediate and direct impact on unfunded liabilities. Increasing the assumption will decrease unfunded liabilities, while reducing the assumption increases unfunded liabilities. The Chicago Tribune highlighted that the biggest driver behind increases in Chicago’s unfunded pension liabilities in recent years has been actuarial assumption changes. Since municipalities’ annual pension payments are linked to the unfunded liabilities reducing the investment rate assumption increases the required contribution (and vice-versa). When the Teachers’ Retirement System lowered its investment rate assumption the state’s required pension contribution for one year increased by hundreds of millions of dollars. Lowering the investment rate assumption a quarter of a percentage point (from 6.75% to 6.5%) was estimated to increase municipalities’ contributions for representative public safety funds by between 16% and 22%

* There’s also this…

One issue is that there are transition costs to consolidating the assets. While the report acknowledges transition costs, no estimate was included. A 2012 report also evaluated the possibility of consolidating the public safety funds’ assets. That report discusses transition costs, and includes more detailed cost and saving estimates. Importantly, transition costs are immediate expenses, while savings occur over the long term. The analysis from 2012 found that under the most likely scenario, “it would take 11 years to break even and begin realizing any cost savings in excess of transition costs” from consolidating the assets of all public safety pension funds.

That 2012 report is here.

posted by Rich Miller
Wednesday, Oct 16, 19 @ 10:47 am

Comments

=== As always when it comes to this particular Kass, you should read the whole thing. ===

Agreed. No relation.

Comment by Thomas Paine Wednesday, Oct 16, 19 @ 10:55 am
“eleven years to break even and begin realizing any cost savings” is not a strong or convincing selling point–for almost anything.

Comment by Responsa Wednesday, Oct 16, 19 @ 11:12 am
One thing the BPIA Team always seems to misunderestimate is that when you pass a revenue enhancement (or a cost cut), there is an implementation period where the expected annual revenues might not come in right away, especially if you don’t do the leg-work at the agency level to get the program running properly and on time.

Comment by SAP Wednesday, Oct 16, 19 @ 11:16 am
Interesting read.
Amanda Kass does do good work.

Comment by Back to the Future Wednesday, Oct 16, 19 @ 11:21 am
There are potential issues when you propose such a momentous change. However, the mitigating “IMRF model” of success is compelling. If the Police/Fire groups aggregated into one fund, they would have economy of scale in terms of fees, and they would be free of legal limitations on how the funds are invested- both would likely result in better returns. The trick is finding the PR/political will to pull it off.

Comment by Donnie Elgin Wednesday, Oct 16, 19 @ 11:21 am
A typical police or fire pension fund may spend $20 to $25,000 annually for investment consulting, and the same for accounting and legal advice. That is a savings of over $15 million. Of course, there will be investment consultants crying foul, as well as attorneys and a couple of auditing firms. But, this is a must and should go forward. Eliminating other forms of “local government” should also be a priority.

Comment by the Edge Wednesday, Oct 16, 19 @ 11:23 am
some of the things don’t mandate consolodationn. common actuarial assumptions would be something that could be mandated by the state.

but there’s no doubt the current low-interest-rate environment is putting the pain on all pension.

Comment by Fav human Wednesday, Oct 16, 19 @ 11:25 am
==“it would take 11 years to break even and begin realizing any cost savings in excess of transition costs”==

If this is true so be it. We’re talking 30, 40 , 50 year ramps and full funding levels. We are in a lot of our government crises because we don’t look to the long term, to the permanent fix. Big money problems take a long time to fix.

Comment by don the legend Wednesday, Oct 16, 19 @ 11:27 am
All the more reason to make sure that the population that these funds are responsible to (firefighters, police) have a majority representation on these boards. Too many appointed members with unknown agendas could create even bigger problems.

Comment by Obama’s Puppy Wednesday, Oct 16, 19 @ 11:36 am
The trick is finding ethical folks to run the new consolidated fund. Lou Kosciba at IMRF ran a great shop for many years. The trick will be avoiding the political chicanery sometimes plaguing the Chicago funds and State Board investment decisions. This will create a massive new investment pool and the pols will be salivating at steering investments in exchange for donations

Comment by Sue Wednesday, Oct 16, 19 @ 11:40 am
The most compelling argument for consolidating. The local pension funds is probably the federal investigation into Sandoval.

If these local mayors are (allegedly) monkeying with red light cameras and paving companies, just imagine the temptation of the pension funds sitting right there in front of them.

Comment by Thomas Paine Wednesday, Oct 16, 19 @ 11:44 am
==“eleven years to break even and begin realizing any cost savings” is not a strong or convincing selling point–for almost anything.==

Most things worth doing have some sort of payback period. In the world of pensions, 11 years seems like a moderate length of time for what could be a positive impact decades down the line.

Comment by City Zen Wednesday, Oct 16, 19 @ 11:46 am
So consolidating assets: wasteful. Changing assumptions: good if they’re higher, bad if they’re not.

Comment by Anonymous Wednesday, Oct 16, 19 @ 12:06 pm
simply JB’s turn to attempt to show pension fix heroism with a band aid when stitches are needed- gotta are the payment and take a good look at Martire’s CTBA plan. This is actually an issue for experts not another political task force.

Comment by Elliott Ness Wednesday, Oct 16, 19 @ 12:20 pm
Question, this is going to be a pretty sweet account for whoever gets this right? Who gets to appoint the board overseeing the consolidated funds? A lot of small town patronage will get kicked up to the Governor’s level.

I’m not accusing Pritzker and I may be wrong but if this was Ryan or Blago we’d all be skeptical, no?

Comment by Mason born Wednesday, Oct 16, 19 @ 12:35 pm
Oh man, the IPPFA is screaming that their sweetheart deal will be gone. No more Lake Geneva junkets.

Comment by the Edge Wednesday, Oct 16, 19 @ 12:54 pm
This incredibly insightful analysis by Kass shows the need for a full financial and actuarial study of the proposal. I fail to understand why there would be a rush to do anything during veto while prohibiting this study for what is inherently a long term solution. We have one chance to do this right. We should avail ourselves of that chance. At least one of the members of the committee was not allowed to vote on the findings or submit his dissenting report. At least some of the Committee meetings were held behind closed doors at a hedge fund managers offices. I think the ideas behind consolidation are sound, but why couldn’t they be improved through public discourse and study by actuaries and financial experts?

Comment by Polpen Wednesday, Oct 16, 19 @ 12:54 pm
- Donnie Elgin - Wednesday, Oct 16, 19 @ 11:21 am:

===There are potential issues when you propose such a momentous change. However, the mitigating “IMRF model” of success is compelling.===

The reason the “IMRF model” is doing so well is because the employer contributions were made in full on time, every year. If the police and fire departments had made their employer contributions when they were supposed to, their retirement systems would be in good shape today.

Comment by DuPage Wednesday, Oct 16, 19 @ 2:04 pm
My guess is that the new pension funds, if modeled after the IMRF, will have elected trustee positions, not appointed ones.

Comment by the Edge Wednesday, Oct 16, 19 @ 2:18 pm
Dear DuPage, Cities are responsible for employer contributions in Article 3 and 4 pensions, not police and fire departments. Mayors, aldermen, commissioners etc. are responsible for making the employer contributions.

Some city officials across Illinois have done a terrible job and disservice to local police and fire pensions with no accountability. Employer contributions must be addressed. Also, this proposal should not be rammed thru in veto session.

Comment by Former Trustee Wednesday, Oct 16, 19 @ 2:49 pm
The point about actuarial assumptions is correct. Many of the fire and police funds have deliberately hired advisers who use an out of date actuarial table that has the average person dying much younger than commonly accepted by reputable actuaries today. That means that some funds are knowingly skewing their data to make their fund look less underfunded and continue grossly unsustainable spending and payouts. And that, my friends, helps keep our property taxes high and our schools poor.

Comment by sunshine state Wednesday, Oct 16, 19 @ 3:01 pm
DuPage and Former Trustee - Many of the police and fire pension funds were in great shape two decades ago. Then came the sweeteners passed by the General Assembly in the late 1990s and early 2000s. Local officials couldn’t keep up with the rapidly escalating taxpayer contributions these sweeteners required. Add in two recessions and here we are.

Comment by Dance Band on the Titanic Wednesday, Oct 16, 19 @ 3:06 pm
Interestingly enough the report recommends appointed trustees and an appointed executive director. This is the only board of its kind in Illinois. It does transition to an elected board, but allows essentially complete control by the Governor for the first 8 years and substantial control for the first 18 years.

Comment by Polpen Wednesday, Oct 16, 19 @ 3:06 pm
sunshine state - The Boards do not determine the benefits for these plans. If they use old mortality rates, the effect is that they lower the amount the town or village would be required to contribute because they would be understating their fund’s liability.

Comment by The Original Name/Nickname/Anon Wednesday, Oct 16, 19 @ 3:12 pm
== Many of the fire and police funds have deliberately hired advisers who use an out of date actuarial table that has the average person dying much younger than commonly accepted by reputable actuaries today.==

In 35 years the average mortality age moved up only five years(1980 to 2015). It has begun declining since 2015. So that actuarial table is either from 1979 or from 2016 and later.

Comment by Anonymous Wednesday, Oct 16, 19 @ 4:59 pm
that is absolutely false Anonymous. People are living longer than ever. If a pension fund actuary is not taking into account they should be fired and black balled.

Comment by Dybalaton Wednesday, Oct 16, 19 @ 5:47 pm
One way to phase this in would be for new members to go into the consolidated plan.

Comment by thechampaignlife Wednesday, Oct 16, 19 @ 6:59 pm
What a strang statistic. Of course if you kill yourself life ends before it should.

Comment by Dybalaton Wednesday, Oct 16, 19 @ 9:53 pm
Great read.

It’s interesting when task forces, blue ribbon panels, and working groups put out reports with lofty ideas and present what they believe are solutions, only to find out someone said the same or similar thing previously. Dozens of former members and legislative and executive staffers have worked on this issues over the decades. It took years to draft and debate Tier 2, and that law has many problems.

It would be a colossal mistake for the Governor to attempt to take on a consolidation bill in veto without learning from those worked on this previously or having true experts weigh in.

Comment by True story Wednesday, Oct 16, 19 @ 11:52 pm
The true experts say defined benefit plans don’t work, but that is consistently ignored too.

Comment by Dybalaton Thursday, Oct 17, 19 @ 8:39 am
“That is absolutely false Anonymous. People are living longer than ever.”
A bit aggressive statement for something that can be looked up in a manner of seconds. People lost two months of life between 2016 and 2017. There has been a three year trend down. That doesn’t mean it will trend down or up in the future.
“Of course if you kill yourself life ends before it should.” Actuaries look at the aggregate not individuals.

Comment by Anonymous Thursday, Oct 17, 19 @ 10:32 am
The 14 billion in funds will be used to make less than ideal investments in Illinois. This isn’t about fixing pensions. This is about massive capital flight from the State and the ever higher cost of borrowing. Read the bill. And for the record, the fire pension isn’t ‘on board’. Many members, like myself, side with the FOP (police). This kicks the can and centralizes power. Why would anyone let the State with the worst credit rating manage more money?

Comment by John Halgren Monday, Nov 4, 19 @ 4:18 pm