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Costs building up as pension consolidation law is litigated

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Illinois

* In May, Pensions & Investments reported on the lawsuit challenging the state law consolidating pension funds…

The actual transfer of assets, however, has hit some roadblocks, one of which was a lawsuit filed shortly after the permanent investment fund boards began their work.

In February 2021, the boards of 16 municipal police pension funds and two firefighters pension funds, along with some participants from each fund, filed a lawsuit in Kane County Circuit Court against Mr. Pritzker, the consolidated police and fire pension fund boards and others, alleging the legislation consolidating the pension funds’ assets was unconstitutional.

The lawsuit said the law violated the state’s pension protection clause, the contracts clause and the takings clause of the Illinois Constitution by terminating “plaintiffs’ authority to exclusively manage and control their investment expenditures and income,” according to the original court filing.

Daniel F. Konicek of Konicek & Dillon PC, attorney for the plaintiffs, said in a phone interview the judge will rule May 20 on the constitutionality of the investment funds.

* The Kane County judge ruled in favor of consolidation. However, the local pension systems which filed the lawsuit appealed the decision. Jake Griffin on the delay’s cost…

[Bill Atwood, executive director of the new statewide Firefighters’ Pension Investment Fund] said the firefighters’ pension agency has paid nearly $140,000 to its own lawyers since the suit was filed in February 2021. Those costs are covered by the pension system, which is funded by employee contributions, investment income and municipal tax dollars. […]

Firefighters began the consolidation despite the lingering lawsuit. Only four of the 292 local firefighter pension plans have yet to transfer funds to the consolidated system; two are plaintiffs in the lawsuit.

But barely 60% of the 357 local police pension funds are consolidated so far, according to Richard White, executive director of the Illinois Police Officers’ Pension Investment Fund. Most of the fund transfers took place after the judge’s ruling in May. […]

“We anticipate a reduction of $34 million a year alone on investment fees,” Atwood said. “The bottom line is it’s much cheaper to manage a single $7.5 billion portfolio than 296 funds that add up to $7.5 billion.”

Experts say the savings ultimately will require less local property tax revenue to fund pensions and reduce pension debt. The longer the local pension systems hold out from consolidating, the longer it will take to reap those benefits.

* Background on the consolidation law from Bloomberg in April…

A 2019 law championed by Pritzker seeks to combine more than 600 local public safety pension funds into two funds — one for firefighters and another for police. Pritzker argues that doing so would increase the funds’ returns and contribute to fixing the problem of low funding levels that has weighed on budgets and dampened credit ratings. However, his plans are being delayed by a pending circuit court lawsuit and mistrust about shifting local funds to a state entity, particularly among the police pension plans. […]

The stakes are high for Illinois, the U.S. state with the lowest rating despite upgrades from S&P Global Ratings and Moody’s Investors Service. Moody’s bumped up the state’s rating in June and again on Thursday to Baa1, citing its “capacity to rebuild financial reserves and increase payments towards unfunded liabilities.”

While the state’s $130 billion unfunded pension liability weighs on its rating and finances, the same problem plagues towns and cities across Illinois. The collective unfunded liability of local public safety pension plans through the end of fiscal 2020 was $13.3 billion, according to state data compiled by the Illinois Municipal League.

The state isn’t obligated to find solutions for the local plans, but underfunded pensions weigh on budgets and soak up revenue that could be used for other services. It can also lead to higher property taxes and erode credit outlooks. And, if its municipal governments struggle, the state’s economic rebound that already lags the national average could fall further behind.

posted by Isabel Miller
Tuesday, Sep 27, 22 @ 12:32 pm

Comments

every time someone complains about what Springfield is going to do about local property taxes, despite it being a local issue should remember this. JB didn’t have to fight for this and litigate it to save local governments money, but he understands the impact this can have. so when people complain that lawmakers in springfield aren’t doing anything to lower property taxes just remember the special interests that benefit from that.

Comment by oops Tuesday, Sep 27, 22 @ 12:37 pm
A 2019 law championed… herein lies the problem. Consolidation was thought to be the easiest of the pension reforms that were possible and the process to get it done is nearly 3 years along.

Comment by Annonin' Tuesday, Sep 27, 22 @ 12:47 pm
@Anonnin’

It wouldn’t have taken anywhere near this long if the police just *checks notes* complied with the law.

Comment by Commissar Gritty Tuesday, Sep 27, 22 @ 1:11 pm
The legal system continues to slow to worse than a crawl. Will soon get to the point where the estates of your estate beneficiaries will see a resolution to your lawsuits.

Comment by Norseman Tuesday, Sep 27, 22 @ 1:15 pm
Strange thing is, Commissar Gritty, the police believe they are complying with the highest law in the State, which is the Constitution. So there’s two sides to this “obey the law” discussion. And as usual, Illinois rushed pell-mell into something never dreaming everybody wouldn’t be okay with the end results. Local pensions aren’t the problem; politicians that didn’t fund them properly are by far the biggest problem.

Comment by thisjustiinagain Tuesday, Sep 27, 22 @ 1:20 pm
==Local pensions aren’t the problem; **local** politicians that didn’t fund them properly are by far the biggest problem.==

There, fixed it for you.

Comment by Sangamo Girl Tuesday, Sep 27, 22 @ 1:30 pm
“Local pensions aren’t the problem; politicians that didn’t fund them properly are by far the biggest problem.”

Yes, and best way to get yourself out of a hole is to stop digging. Those who are opposing this consolidation are doing so because they don’t want to lose their fiefdoms and fees. Eventually they will have to comply but not before they cost taxpayers and pensioners millions in stupid, unnecessary legal fees. And yea, at the time it was obvious that those protecting their fees would fight back but they will lose because the law is not on their side and they’re protecting nobody’s interests but their own.

Comment by New Day Tuesday, Sep 27, 22 @ 1:40 pm
What New Day said. This is strictly about protecting their personal revenue streams.

@as usual, Illinois rushed pell-mell into something never dreaming everybody wouldn’t be okay with the end results.

The underworld will freeze over before anyone, anywhere proposes anything that some grifter won’t complain about.

Comment by froganon Tuesday, Sep 27, 22 @ 2:40 pm
==And as usual, Illinois rushed pell-mell into something never dreaming everybody wouldn’t be okay with the end results.==
The Illinois Pension Consolidation Feasibility Task Force was established and came to the conclusion consolidation was necessary. Legislation that would become Public Act 101-0610 was introduced. It passed 96-14 in the Illinois House and 46-0 in the Illinois Senate. No one ever said that it was unanimous, but this was not parachuted out of nowhere. This was supported by both labor unions and their usual Springfield opponents, the Illinois Municipal League and Illinois Chamber of Commerce. The opponents of the bill were a small number of municipalities and the bankers who stand to lose fees. So now, that small group against it pursuing a judicial remedy.

Comment by Nuke The Whales Tuesday, Sep 27, 22 @ 2:40 pm
Those fighting the consolidation are the investment and other advisors who have been milking the local pension funds for years. They have collected huge fees for mostly mediocre or below market returns. Most funds would have been better off investing in no-load index funds.

The consolidation bill was a good first step, and the only one politically viable at the time. It will provide better investment returns, which will lower required municipal contributions, therefore reducing their tax levy. However, the greater savings would come from true consolidation into state-wide funds similar to IMRF. Local pension boards still have the ability to award duty disability benefits to their friends, which costs municipalities millions in pension and PSEBA benefits.

Comment by Vader Tuesday, Sep 27, 22 @ 2:45 pm
What Vader said. Although it should be noted that some of these managers were taking hefty fees for investing these pensions IN index funds.

These individual pension funds are all about the grift.

Comment by Soccermom Tuesday, Sep 27, 22 @ 2:59 pm
This was a gift to Wall Street investment firms. Take pension money away from local control and make sure it doesn’t get invested in local communities. All so some fat cat New York finance buddies can rake in the fees.

TLDR: the Governor believes local tax money is better in the hands of wall street bankers than being invested in the Illinois towns and villages it came from.

Comment by Franklin Tuesday, Sep 27, 22 @ 3:15 pm
@Franklin:

The law passed 96-14 in the House and 42-12 in the Senate. This was bipartisan.

Comment by Demoralized Tuesday, Sep 27, 22 @ 3:31 pm
==A 2019 law championed by Pritzker seeks to combine more than 600 local public safety pension funds into two funds==

Didn’t that same law enhance Tier 2 benefits for fire fighters? I assume no objections there.

Comment by City Zen Tuesday, Sep 27, 22 @ 3:47 pm
Franklin — “invested in local communities”? what exactly does that mean? Is your local fire department pension fund running a corner bar?

Comment by Soccermom Tuesday, Sep 27, 22 @ 4:35 pm
Soccermom: Yes. Indirectly but yes. Local pension boards tend to hold and invest funds with local financial institutions. Those banks make loans to small business, farmers and home buyers. They also employ people and sponsor little league teams.

Go watch It’s a Wonderful Life again. This law essentially pulls money out of George Bailey’s savings and loan and sends it to the Wall Street version of Mr. Potters bank.

Let me know the next time a hedge fund throws out candy at the small town homecoming parade.

Comment by Franklin Tuesday, Sep 27, 22 @ 5:05 pm
How many other badly-drafted laws later found unconstitutional in whole or in part were “bipartisan approved” and yet the courts tossed them? If a bunch of people pass an illegal law, it is still illegal. See also multiple attempts to get around the Pension Clause, and how well THOSE ‘bipartisan efforts’ went.

Comment by thisjustinagain Tuesday, Sep 27, 22 @ 5:35 pm