Illinois lawmakers approve Pritzker's pension fund asset merger

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Illinois lawmakers signed off on Gov. J.B. Pritzker’s plan to merge the assets of 650 pension funds that cover firefighters and police outside of Chicago into two systems with the goal of cutting administrative costs and raising investment returns.

The House voted Wednesday 96-14 with three voting present to approve the legislation laid out in amendments to Senate Bill 1300. The Senate had voted Thursday 42-12 to adopt it. Democrats hold supermajorities in both chambers but the plan cleared with Republican votes.

“We have put hundreds of cities on a path to alleviating their massive property tax burden and just as importantly we’ve begun to show Illinois can tackle its most intractable problems,” Pritzker said at a news conference Thursday after the Senate vote. “In passing this bipartisan legislation, the General Assembly has demonstrated a historic commitment to responsible and sustainable fiscal management.”

The legislation represented a key agenda item for the governor during the brief annual fall veto session that ended Thursday and followed the recommendation a Pritzker-appointed pension consolidation task force released in October.

The task force believes the consolidation can generate between $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 scheduled ramp up to a 90% funded mandate in 2040 by pooling assets.

The state has not produced any actuarial review to support the statement. About $160 million of savings are expected by trimming administrative costs, according to the state budget office.

Market participants who follow local Illinois government credits and the state see the change as a having a modest improvement with an impact limited by the weak funded ratios of many of the state’s public safety funds.

It also does nothing to address Chicago’s $30 billion of net pension liabilities and the state’s $137 billion unfunded pension tab. Benefit cuts are not an option as they violate the Illinois constitution.

Pritzker acknowledged those concerns.

“It’s not clear yet what all of the issues are” besides addressing the need on benefits changes for more recent employees to meet federal law as the legislation does for the 650 funds, Pritzker said of Chicago. “That’s going to be addressed by this pension task force.”

About $1 million in potential earnings is currently lost daily and funds fall about 2% short annually of what larger state funds earn, according to task force’s 22-page report. The legislation also increases benefits for employees that fall under the Tier Two benefit system adopted in 2010. The state has been concerned that benefits violate Social Security Administration and Internal Revenue Code rules require benefits to be at least what retirees would receive from Social Security.

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.

The low funded ratios and a mandate to make actuarial contributions has strained some local government coffers, driving rating downgrades and steep property tax hikes. The city of Alton sold off a utility system to boost pension funds.

Some governments have failed to make actuarial contributions and since last year have faced state funding garnishments under a law that allows funds to intercept the revenue. Chicago, Harvey, North Chicago, and most recently East St. Louis have faced such diversions.

The intercept law remains intact and local pension boards that will remain in place retain the power to seek intercepts. That’s viewed as a plus for local governments, as their local pension boards have a greater incentive to negotiate over contribution shortfalls.

Passage came after a tense two days during which language changes in the bill designed to win over the support of police labor groups nearly derailed the legislation as the Illinois Municipal League pulled its support.

The original legislation won the support of the league and a key firefighters’ labor group, with the police holding out. Shifting the board makeup to give fund members greater representation cleared the police opposition. A supermajority vote, however, will be needed to adopt actuarial changes.

The insertion of language that appeared to ban local governments or any third party from having input to review or question the funds’ decisions prompted the ire of the league. That language was removed, paving the way for a legislative vote.

Critics remain, including some lawmakers who voted for the bill. Community bankers voiced concerns during committee hearings that the two large funds will forgo the use of local investment advisors geared toward investing locally.

Others questioned the rush on addressing Tier Two benefits as the federal government has not yet said the state fails to meet the safe harbor standard. “Must we do it now?” Sen. Jason Barickman, R-Bloomington, said during Senate debate. “Does this fix the problem?”

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.

The Chicago Civic Federation supports consolidation but it also raised questions over the cost and questioned the urgency to act without additional actuarial analysis.

Each fund will be governed by a board with equal representation of employees and employers. Each local pension plan will 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.

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Pension funds Public pensions J. B. Pritzker State of Illinois Illinois