Funded ratios erode for downstate and suburban Illinois pension funds

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The collective unfunded pension tab for more than 600 downstate and suburban Illinois public safety funds grew by $1 billion to $11 billion, with the funded ratio recording its first decline since 2010, according to the latest figures submitted by the funds.

Unfunded liabilities rose to $11 billion from $9.9 billion in 2016, with the police and firefighters outside of Chicago now funded at a collective ratio of 55.47%, down from 57.58% in 2016. Police funds account for $6.3 billion and firefighters for $4.7 billion of unfunded liabilities, according to the 2019 report published last month by the non-partisan Commission on Government Forecasting and Accountability, based on 2017 results.

The numbers show that the public safety funds account for just a small piece of the statewide pension quagmire, but the funding pressures — especially given a state mandate to reach a 90% funded ratio in coming years — has driven downgrades and taken an impact on services and local taxes.

Illinois is carrying a $133.7 billion unfunded burden among its five fund systems while Chicago has $30 billion of net liabilities for its municipal, laborers’, police, and firefighters funds. And that figure doesn’t include the Chicago teachers fund or other sister city agencies.

The report comes as lawmakers and municipal leaders are weighing options to ease the rising tide of unfunded liabilities and growing payments that weigh on the state and local government balance sheets.

The Illinois Municipal League, which represents many local governments, had lobbied for legislation that would have resulted in some form of consolidation to save on costs. That legislation stalled. First-year Gov. J.B. Pritzker formed a task force earlier this year to explore the benefits of consolidation of pension funds, with an eye on the public safety funds being first in-line, if recommended. That report is expected this summer.

The IML says the lack of state action to date is driving up local taxes. “The current public safety pension system is unsustainable for local taxpayers and future pension benefit recipients alike," IML executive director Brad Cole has said. "Local governments are responsible for the health, safety and welfare of residents, but they cannot fulfill that commitment if pension costs cut too deep into essential services.”

The governor acknowledges that consolidation is no panacea, though he says it could improve returns on investment and increase efficiencies by lowering overall investment and administrative fees.
Consolidation has its detractors. The Illinois Public Pension Fund Association says it could cause asset liquidation and reinvestment fees to spike, driving up the unfunded liability. The timing also poses risks if it occurs during a period of stock market growth and the local pension funds miss out on the resulting dividends. The group recommends easing investment guidelines for the state’s smallest funds.


Under a 2011 law, local governments have shifted from a statutorily based payment to an actuarially based contribution level that puts their funds on a path to a 90% funded ratio by 2040. The report underscores just how far off course the funds remain.

The report looks back to 1991 data when the police funds were 75% funded and the firefighter funds were at 76% for a combined ratio of 75.65%. In 1999, the aggregated ratios peaked at 76.37% for police and 78.57% for fire and 77.31% combined.

A steady decline then took hold with the funds bottoming out in 2009 when police and fire were collectively funded at 51.13%, as they felt the effects of the 2008 financial crisis and market downturn. They have gradually improved every year since 2009 — even as the unfunded tab grew each year — until 2017, when they slipped to 55.47% from 57.58%.

The unfunded liabilities dating back to 1991 were at just under $1 billion. The figure has risen annually since then, with just one dip in 2010, reaching $11 billion in 2017.

The report covers 641 funds that submit annual reports to the state Department of Insurance. The funds are then divided and reviewed by asset class based on whether they have more or less than $2.5 million in assets, more or less than $5 million, and more or less than $10 million.

The state imposes investment restrictions on funds by class, with those managing under $2.5 million able to invest up to 10% of their assets in equities through separate accounts managed by life insurance companies and qualified mutual funds. The other 90% of assets must be invested in fixed income and money market instruments.

Funds with assets between $2.5 million and $5 million are permitted to invest up to 45% of assets into selected equities such as mutual funds and separate accounts of insurance companies, but not common or preferred stock. Funds with assets between $5 million and $10 million may retain an investment advisor to invest up to 45% in qualified equities along with mutual funds and separate accounts of insurance companies. Funds with assets over $10 million can invest up to 65% of assets in qualified equities.

Under the 2011 law, beginning in fiscal 2016 pension funds could begin intercepting a portion of state-collected local funds if a municipality was delinquent in contributions. State Comptroller Susana Mendoza finalized the intercept in 2018 and so far a handful of public safety pension funds have moved to divert state funds.

While some market participants and watchdogs raised concerns that the state would see a flood of intercept requests, so far only the police and firefighter funds for North Chicago, Chicago and Harvey, in the Chicago suburbs, have filed.

The Illinois Municipal Retirement Fund, which is the statewide fund that covers most suburban and downstate general municipal employees, now can seek the diversion of tax funds that flow through the state, whereas previously it was limited to seeking the diversion of one specific revenue.

In Chicago’s case, all of its four funds can seek the diversion of state grant funds, not general tax collections from the state, under statutes specifically enacted for the city. Diversion efforts are currently the subject of a lawsuit filed by the city against three funds seeking to intercept city grants from the state.

The state's options on reforms are limited. Illinois' constitution restricts the state from taking any action that impairs or diminishes promised benefits, and the state's high court has affirmed that position. Pritzker opposes seeking a constitutional amendment that could ease the restriction.

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