From 650 into two: Illinois governor's pension plan consolidation bid

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Illinois Gov. J.B. Pritzker wants to pool into two statewide funds the assets of the nearly 650 public safety pension funds that cover firefighters and police officers outside Chicago.

The proposal follows the recommendation of a report released Thursday by Pritzker and members of a task force on pension consolidation that he named in February.

“One of the most critical long-term fiscal challenges is the need to address unfunded pension liabilities for local governments and the surging property tax burdens they create,” Pritzker said at a news conference, adding that the consolidation marks a first but “significant” step and “momentous achievement” if adopted.

He wants lawmakers to act during the fall veto session, which begins late this month.

Pritzker said the plan could generate $850 million to $2.5 billion in additional investment returns over the first five years and $3.6 billion to $12.7 billion through the 20-year ramp to a 90% funded mandate in 2040, because the available assets would be pooled allowing for better investment opportunities a lower percentage lost to fees, Pritzker said.

About $1 million in potential earnings is currently lost daily and funds fall about 2% short annually of what larger state funds earn, the 22-page report contends.

"The current system is failing and taxpayers are paying a high price,” Pritzker said. “By pooling their investment dollars, the individual plans will improve their funding levels and reduce their net liabilities ... this consolidation will improve the financial health of the plans and secure the future of the retired workers that rely on them and it will alleviate some of the property tax burden."

The roughly 650 systems that are referred to as “downstate and suburban public safety pension funds” carried $11 billion of unfunded liabilities in 2017 — up from $10 billion a year earlier — with an average funded ratio of just 55%, according to a report this year from the Illinois Department of Insurance.

The new police fund would have more than $8 billion assets to invest and the firefighter fund more than $6 billion.

Local governments have been slapped with downgrades as they grapple with rising pension contributions and since last year have faced the threat of state funding garnishments under a law that allows funds to intercept the revenue to cover actuarial contribution shortfalls.

Pritzker had warned that the task force’s initial work would be focused on downstate and public safety funds despite new Chicago Mayor Lori Lightfoot’s pleas that Chicago be included the mix.

“The subject of Chicago pensions as well as the statewide pension” funds “will be taken up by the task force going forward,” Pritzker said. He had previously rejected Lightfoot’s pitch that the state take over the city and other local government pensions.

The report specifically notes that the other 15 pension systems in Illinois outside of suburban and downstate police and fire, which cover state employees and Chicago, Cook County, and its sister agencies, are larger funds that already enjoy economies of scale. "Consolidation would not achieve material improvement of their investment returns," the report said.

“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,” the report said.

Market participants who follow the credits of local Illinois governments and the state have suggested a consolidation is a good idea, but it’s benefits are limited given the poor funded ratios of many funds and growing strains on local governments to adhere to a contribution schedule that is supposed to get funds to a 90% funded ratio by 2040. Illinois can't cut benefits under its constitution.

Support and Opposition
The Illinois Municipal League, which represents many local governments, endorsed the proposal.

"This is a win-win-win situation” and a “significant first step forward,” although much work remains to be done to ease pressures on local governments, IML president Brad Cole said at the governor’s news conference.

The Associated Fire Fighters of Illinois, which represents firefighters, supports the deal. It faces opposition from the Illinois Fraternal Order of Police and possibly local funds with better funded ratios.

“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,” FOP Labor Council Executive Director Shawn Roselieb said in a statement. The group believes the proposed governance board should include more fund members.

The Illinois Pension Fund Association, which counts a majority of both firefighter and police pension funds as members, previously warned against a rush to consolidation and said many of its member funds oppose it. It did not issue a statement Thursday.

Some lawmakers said clearing the General Assembly is tougher without all factions on board and without Chicago in the mix it could prove a tougher sell for Chicago lawmakers.

Pritzker acknowledged those headwinds and sought to cast opponents like the pension fund association, which might seek to “derail” the legislation as representative of “special interests” who use taxpayer dollars to fund pension “junkets.” That’s a reference to the association’s annual meeting in the Wisconsin resort town of Lake Geneva.

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 would be held in independent trusts, separate from the State Treasury, with sole governance provided by their respective boards.

The task force stops short of suggesting consolidation in the administration of benefits but recommends the issue be studied for its potential savings.

The smallest and the largest suburban and downstate plan assets held $2,000 and $250 million, respectively, with only 3% of the plans having assets exceeding $100 million. “Due to liquidity concerns around smaller plans bearing larger risk, plans with smaller size generally achieve substantially lower investment returns,” the report said.

The task force considered various consolidation scenarios, including merging funds under the Illinois State Board of Investment, which manages several state funds, but scrapped that option because of concerns about conflicts between the mix of state and local employees.

It looked at a consolidation with the Illinois Municipal Retirement Fund, which covers general employees outside Cook County and enjoys a 90% funded ratio, but its investment strategies complicated such a move and the task force was concerned over pushback in the governance structure required to add police and fire representatives.

The timeline calls for an effective date of the legislation of July 1, 2020, with the new funds being fully operational by July 1, 2023.

As part of the overhaul, the state would also address a long-warned-about shortfall in the Tier 2 pension benefit system adopted for employees hired after 2010. Those concerns stem from the potential failure of the benefits to meet the safe harbor standard of the Social Security Administration and Internal Revenue Code that require benefits to be at least what retirees would receive from Social Security.

On average and over a five-year period, the recommended benefit fixes to Tier 2 benefits are estimated to offset between $70 million and $95 million of the $820 million to $2.5 billion in investment return gains, according to the report.

Former Chicago Board Options Exchange chairman William Brodsky, Associated Fire Fighters of Illinois President Pat Devaney and former Illinois Senate Minority Leader Christine Radogno co-chaired the 10-member committee.

A separate task force on the use of asset transfers or sales to shore up the state’s five fund system is still exploring options.

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Public pensions Pension reform Pension funds Budgets J. B. Pritzker Illinois