A smart way to grow police and fire pensions across Illinois

A state mired in pension debt at all levels can’t miss a chance to fix at least part of the problem.

Consolidating downstate and suburban police and firefighter pensions - an idea supported by Gov. J.B. Pritzker - could do just that. But the Illinois General Assembly must step carefully.

Illinois has about 650 police and firefighter pension funds outside the city of Chicago. If you’re counting, that’s the second highest number of public pension funds in the country. But our high ranking in quantity is not matched in quality — Illinois has the ninth-lowest assets per system of any state.

In fact, Illinois’ assorted police and fire funds, which are required even if a community of 5,000 or more has just one police officer or firefighter, together have gotten themselves into the red by $12.4 billion, or $294,462 per pension fund participant, according to the Illinois Municipal League.

Chicago Sun-Times. SOURCE: Illinois Municipal League

Partly, that’s due to mismanagement.

The Better Government Association in 2014, for example, found that south suburban Harvey — which had annual required contributions for its police and fire funds of $10.1 million — had in fact from 2010 to 2013 contributed just $140.

Part of the problem is also that the Illinois Legislature has added sweeteners to downstate and suburban pensions over the years without paying for them. Another problem is rules that limit smaller funds to low-risk, low-yield investments. Over the past 10 years, the unconsolidated police and fire funds have had returns that are 2% less on average than the statewide Illinois Municipal Retirement Fund, which consolidates investments for other municipal workers.

Like the successful IMRF, the consolidated funds would be managed independent of state government, which should offer some reassurance to critics such as the Illinois Fraternal Order of Police, who understandably worry about Springfield’s abysmal record of handling pensions.

The state doesn’t have $12.4 billion to fix this problem nor do local municipalities. But what they can do is let two professional statewide boards — one for police and one for fire — manage the investments for each individual fund to get better returns and reduce costs. That’s the recommendation of a task force report last week, and it makes sense.

The Illinois Pension Consolidation Feasibility Task Force estimates net gains could reach from $164 million to $500 million a year. According to the Illinois Department of Insurance, that could lead to as much as $12.7 billion in higher investment returns over 20 years, an amount roughly similar to the level of underfunding now.

The task force reports that a 1967 consolidation in Ohio of funds that had only $75 million in assets and $490 million in liabilities created a single police and fire pension fund that today has a portfolio of $15.7 billion.

Skeptics aren’t betting on hefty higher returns on investments after consolidation, but even they admit a larger diversified portfolio with lower fees, along with far fewer investment advisers and lawyers than are need for 650-plus funds, should result in significant cost savings.

Chicago Sun-Times. SOURCE: Illinois Pension Consolidation Feasibility Task Force

But here is where the Legislature must be careful:

The committee also is recommending pension improvements, such as better survivor benefits and an increase in annual cost-of-living increases for newer workers in Tier 2, who currently get lower benefits than those in Tier 1. Those are laudable goals, but lawmakers had better get their calculators out first. Springfield has a long history of overestimating savings and underestimating expenses when it enacts reforms.

Moreover, a study done for the Illinois Public Pension Fund Association — which opposes consolidation — concluded that transition costs could be as high as $155 million, a number disputed by supporters. And there is a risk that better-managed local plans will find a consolidated statewide plan doesn’t achieve the returns they are used to, forcing local taxpayers to chip in to make up the difference.

The consolidation task force recommends the Legislature act in the veto session, which starts later this month, because in the task force’s judgment, the current system is unnecessarily costing us $1 million a day.

Many other bills and concerns will compete for the Legislature’s attention. If it does decide to act on consolidation now, it had better do so thoughtfully and comprehensively so that unexpected problems don’t crop up later, as has happened so often in the past.

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