The unfunded liabilities of local government public safety funds outside Chicago nearly doubled over the last decade, eroding funded ratios to below 60%.
The data is in a December report from the Illinois General Assembly’s Commission on Government Forecasting and Accountability that reviewed the status of the 653 police and firefighter funds that cover public safety workers in municipalities outside Chicago. For fiscal 2016, the report examined 356 police and 297 firefighter funds.
The report – along with one from the state auditor general’s office – underscores the sweeping pension burdens that are pressuring Chicago and Cook County area governments, the state, and downstate municipalities.
The COGFA public safety report offers a 26-year view of the funds. Combined, the police and firefighter funds “had $953 million in unfunded liabilities in fiscal year 1991. By fiscal year 2016, that figure had jumped to $9.93 billion,” it says.
Unfunded liabilities reached that peak of $9.93 billion in fiscal 2016 from $5.17 billion in fiscal 2007.
“Police and fire funds ended fiscal year 1991 with aggregate funded ratios of 75.09% and 76.40%, respectively,” the report says. In fiscal year 1999, the funded reached peaks of 76.37% and 78.57%, respectively, but then a year-over-year downward trend began. “Police and Fire pension funds bottomed out in the low 50’s in the wake of the 2008 stock market downturn, but have gradually increased each year since 2009.”
Combined, the funds were 57.58% funded in fiscal 2016, down from 62.55% in fiscal 2007, but up from the low of 51.13% in fiscal 2009 which reflected the market downtown during the financial crisis. Combined, they peaked at 77.31% in 1999.
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 previous COGFA review was published in May 2015 and was based on fiscal 2013 data. The December report adds three years of data.
Under the new law, beginning in fiscal 2016 pension funds could begin intercepting a portion of their local government’s state grants if a municipality was delinquent in contributions. This year, the amount that can be intercepted hits 100%. However, funding intercept rules have not yet been adopted that would allow such action.
The public safety funds outside Chicago account for just a small piece of the statewide pension quagmire, but the funding pressures -- especially given the state mandate -- have impacted the credit profile of some local governments.
“We’ve downgraded approximately 15% of our portfolio of Illinois cities in 2017,” said Moody’s Investors Service analyst David Levett. “Among cities we’ve downgraded, pensions have been the primary ratings driver.”
The collective funded ratios of all Illinois public pension funds falls under 50% with the collective liabilities of public pension funds statewide at $185.2 billion in fiscal 2016 compared to $168.2 billion in fiscal 2015.
The collective funded ratio deteriorated to 47.9% from 49.4%, according to the biennial report released in October by the Illinois Department of Insurance. It assessed the health of all 671 of the state’s public pension funds.
Of the $185.2 billion unfunded tab based on fiscal 2016 figures, large funds make up $175.3 billion. The state’s five funds alone account for $126.5 billion. The state has since disclosed its fiscal 2017 results which put its unfunded liabilities now at $128.9 billion.
The other large funds include Chicago’s four funds, the city’s sister agencies' and school district’s funds, Cook County’s two funds, the Chicago area water district, and the Illinois Municipal Retirement Fund which covers municipal employees outside Chicago.
The Dec. 28 report from Auditor General Frank Mautino offers the views of state actuary Cheiron which conducts an annual review of the state’s five funds. It found current investment returns “reasonable” but warned of solvency concerns in event of a market downturn. The actuary also now reviews the Chicago Teachers’ Pension Fund.
The funded ratio of the six ranged from the Chicago teachers' fund high of 51.3% to the General Assembly fund’s low of 14.9%.
“Cheiron has concerns about the solvency of the systems if there is a significant market downturn and recommended the systems include stress testing within the valuation reports,” the report said.
All systems are or will be experiencing negative cash flows -- measured by contributions after benefits and expenses are subtracted -- which may impact the interest rate returns that are realized, the report further warned.
Cheiron also recommended shifting the funding schedule, which now aims to reach a 90% funded ratio by 2045, to target 100%. “Continuing the practice of underfunding future accruals increases the risk of the systems becoming unsustainable,” the report said.
Such a move is unlikely. Gov. Bruce Rauner and lawmakers agree that further efforts are needed to solve the state’s pension mess, which along with the two-year budget impasse that ended in July dragged the state’s ratings down to lowest among states and to the verge of junk status. The courts have ruled that benefits are protected by the state constitution and other measures that would trim liabilities have stalled.
The Illinois Municipal League this year plans to press lawmakers to ease the path for consolidation to help ease strains with benefit cuts off the table.
“The General Assembly should reduce long-term pension costs by consolidating the administrative and/or investment functions of the over 660 municipal public safety pension funds to achieve greater administrative efficiency and investment return opportunities,” the league wrote in a report this month about its legislative agenda.
The Democratic legislative majorities and Rauner and his fellow Republicans did agree in the fiscal 2018 budget package to establish a new tier of pension benefits but that’s yet to come to fruition. Another measure that phases in the impact of actuarial assumption changes – such as a lowering of assumed investment return rates -- has trimmed near-term contributions but will add to long-term strains.
The actuary’s recertification of contributions to the funds trimmed $900 million off the original $8.8 billion figure for fiscal 2018. The actuary certified total payments of $8.67 billion for the next fiscal year that begins July 1. The state’s budget totals $36.1 billion.
With much attention being paid nationally to investment return rates used by public funds and other actuarial assumptions, Cheiron offered a generally positive assessment of the current status of the state and Chicago teachers’ funds.
Cheiron “reviewed the actuarial assumptions used in each of the six systems’ actuarial valuations for the year ended June 30, 2017, and concluded that they generally were reasonable with two exceptions, both of which applied to the Chicago Teachers’ Pension Fund,” the report said.
The Chicago teachers’ fund made the recommended changes in December.
Cheiron highlighted the national trend of lowering assumed return rates to reflect concerns over the low-interest-rate environment. In 2001, 105 of 127 major public funds surveyed assumed 8% return rates, according to data cited from the National Association of State Retirement Administrators. Only 17 funds used an 8% rate as of November with the median assumption now at 7.5%. Twenty-five plans use a rate of 7% or lower.
The actuary recommended that the Chicago teachers’ fund lower its assumed rate of return to no higher than 7.25% and its wage inflation assumption be lowered to 3.25% from 3.50%. The fund adopted the recommendations in December. The fund had previously lowered its rate to 7.5% from 7.75% investment return rate for calculations through fiscal 2016.
Over the last few years, all the Illinois funds have lowered their assumed rate of returns with TRS and the State Employees’ Retirement System now at 7%, the State Universities Retirement System now at 7.25%, and the Judges’ Retirement System and General Assembly Retirement System both at 6.75%.
Cheiron was selected to serve as state actuary under a 2012 law and is charged with reviewing state contribution requests from the various pension funds and identifying recommended changes to actuarial assumptions that the boards must consider before finalizing their certifications.
A sweeping overhaul of public school funding signed by Gov. Bruce Rauner on Aug. 31 added the Chicago Teachers’ Pension Fund to the list of five state funds that must submit information to the actuary as the legislation provided more state funding for the district.