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PLAN FOR
OVER 640 POLICE, FIRE PENSIONS BARELY TOUCHES ILLINOIS’ $200B PROBLEM
Illinois Policy Institute/
Adam Schuster
Consolidating downstate and suburban police
and fire pension systems is a start, but both fixes and Illinois’
pension problems go much deeper.
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 Consolidating investments of over 640 of 667 Illinois public
pension funds sounds like major progress, but a closer look shows a new report’s
recommendations touch only about 5.5% of the state’s nearly $200 billion pension
debt.
Plus, that false perception of progress could be used to smother efforts to fix
the remaining 94.5% of Illinois’ pension problem.
Gov. J.B. Pritzker’s task force on pension consolidation issued the report that
recommends merging assets of over 640 police and fire pension funds outside of
Chicago that hold a little more than $11 billion in pension debt. One fund for
police and another for firefighters would be created, but more than 640 systems’
overhead and administrative functions would remain.
While the proposal is a step in the right direction, it targets just a small
fraction of the problem and falls far short of fully solving it. Plus, the
greater risk to taxpayers would be for the consolidation proposal to pass and be
used as an excuse for Springfield to wash its hands of the pension problem and
pretend they’d fixed it.
In reality, Illinois would be only slightly better off if this plan were
enacted.
What to know about consolidation
Consolidation of pension funds has two main upsides. First, larger pools of
assets – money held in the fund and invested to generate income – can achieve
greater returns by attracting more professional investment managers and leaving
more room to diversify investment portfolios. Second, consolidating the boards
and administrative functions of the various pension systems could reduce costs
through economies of scale. Having over 640 different funds leads to duplication
in accounting, legal and other functions because each system has its own board
of trustees and separate support staff.
Unfortunately, Pritzker’s report stops short of recommending consolidation of
benefit administration. It focuses only on the first benefit: investment pools.
An independent analysis from the Anderson Economic Group in 2018 found that
administrative savings could be as much as $21 million annually under full
consolidation. Pritzker’s plan gives up much of those potential savings.
The task force estimates that higher investment returns could bring in an
additional $160 million to $288 million in annual investment revenue. If true,
this would reduce pressure on taxpayer contributions because local systems are
mostly funded though property taxes.
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However, it’s unclear whether such a significant
jump in returns could actually be realized. The report compares
average investment returns from fiscal year 2004 to fiscal year 2013
among downstate police and fire funds, the Illinois Municipal
Retirement Fund (IMRF), and Illinois statewide systems. The police
and fire funds achieved an average return of just 5.61% over those
years. By comparison, IMRF achieved 7.62% and the state systems
achieved 6.73%, which the report used as the basis for the high-end
and low-end estimates of what the police and fire systems could have
potentially achieved.
Comparisons to IMRF are overly optimistic. While IMRF is a
consolidated system for all municipal employees other than public
safety workers, it is different in other ways that are significant
for its investment returns. IMRF is significantly better funded than
either the state systems or the police and fire systems, with a 93%
funded ratio – the amount of money on hand to cover current and
expected future benefits – and nearly $40 billion in assets. For
comparison, the collective funding ratio for downstate police and
fire is just 55% with just under $14 billion in assets. A smaller
asset pool and a lower funding ratio impair a fund’s ability to
achieve high returns by limiting diversification and risk exposure.
Experts generally recognize that a funding ratio of less than 60%
means a plan is “deeply troubled” while 40% may be a point of no
return, meaning funds with such low ratios might never be able to
pay off their debts without structural changes.
The state systems have similarly bad funding ratios to the public
safety systems, though they still have much more in asset value,
making the low-end $160 million figure the more probable outcome.
However, even this target is uncertain. Experts warn of slowing
investment returns and economic growth in the U.S. and globally over
the coming decades.
The only real answer to Illinois’ pension crisis is a constitutional
amendment that protects earned benefits but allows for changes to
future benefit growth. Without such a change, Illinoisans face a
future in which they are asked to pay more to receive less in
services
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