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 It’s interesting to see a pension fund consolidation plan
finding favor among bipartisan lawmakers, think tanks and financial experts.
There’s no question unfunded pension liabilities is Illinois’ most pressing
public policy issue.
But the current proposal to merge assets of more than 640 downstate and suburban
police and fire funds is a small step for a small piece of the pension pie. It
falls far short of solving the state’s $200 billion pension crisis.
While the Illinois Policy Institute is often in the position of criticizing
politicians’ actions on pensions — or lack thereof — I want to be clear; we,
too, are on board for merging the police and fire retirement funds.
However, that endorsement comes with a few words of caution.
Earlier this month, Gov. J.B. Pritzker’s Pension Consolidation Feasibility Task
Force issued recommendations for how to merge assets in Illinois’ more than 640
police and fire public pension funds outside the city of Chicago. By creating
one combined fund for police and another for fire, the pooled assets in the
funds can get better returns. According to the estimates in the report, this
could bring in as much as $160 to $288 million in additional annual revenue. If
true, this would amount to between 8% and 15% of total annual taxpayer
contributions to the systems.
Better investment returns would reduce pressure on taxpayers. That’s a good
thing.
But there’s no guarantee savings of this magnitude would actually materialize.
The report compares the police and fire funds with the Illinois Municipal
Retirement Fund and Illinois statewide systems, whose assets have historically
grown 1% to 2% faster than the police and fire pension funds. IMRF has about 93%
of the money it needs to meet pension demands compared to the local funds having
only about 55% of what they need. Plus, IMRF has a much bigger pool of assets,
enabling more risk taking and diversification. This means the high-end estimate
of $288 million is almost certainly overly optimistic.
Plus, with financial experts warning of investment returns and economic growth
slowing globally, there’s big doubt about achieving even the lower $160 million
figure.
Moreover, even the top projections wouldn’t be enough. Pension consolidation
only touches 5.5% of the problem in the first place.
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Downstate and suburban police and fire funds only
hold about $11 billion in pension debt. We shouldn’t minimize the
magnitude of Illinois’ $200 billion pension problem by letting the
state hold up this tiny solution as evidence of action and an excuse
to ignore the bigger threat. Others already share that worry, fanned
by Pritzker’s hyperbole in describing this plan as “monumental” and
“dramatic.”
Pritzker’s recommendation also stops short of
pursuing the full savings from consolidation. Because it
consolidates assets but not benefit administration, much of the
overlapping accounting, legal, support staff and administrative
functions from the 640-plus funds will remain. By only ordering
partial consolidation, the state leaves as much as $21 million a
year on the table.
Worse still, consolidation could lead to the state bailing out the
poorly funded pension funds, triggering tax hikes just to pay down
pension debt.
The bottom line is this fix looks only at bringing in more revenue
when revenue has never been the sticking point. Just as repeated,
economically damaging tax hikes have failed to fix the pension
crisis, chasing better investment returns will not work.
The problem is simple: The expected future growth rate of pension
benefits has skyrocketed past what Illinois taxpayers can afford. By
every measure of ability to pay — including debt to GDP ratios, debt
to revenue ratios and pension spending as a percentage of revenue —
Illinois’ pension crisis is the worst in the nation. Without
structural changes, this liability cannot be paid off.
To truly fix it, Illinois must pursue a constitutional amendment
that allows for changes in future benefit growth, while still
protecting every dollar earned to date. This is the only approach
that balances the interests of both retirees and taxpayers.
If Illinois groups could come together to bring the same enthusiasm
and support to a constitutional amendment, the state could fix its
pension problem once and for all.
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