Fixes sought as pension tab for Southern Illinois and suburban public safety pension funds rises

Unfunded liabilities for suburban and lower Illinois public safety pensions hit $13 billion in the latest year of compiled results reported to the state, continuing a 29-year rise that underscores high tensions on local government budgets.

The unfunded tab for the 295 fire funds and 352 police funds outside of Chicago rose to $13 billion in fiscal year 2019, from $12.3 billion in 2018 and $11.5 billion in in 2017. Police accounted for $7.5 billion of the total and firefighters accounted for $5.5 billion, according to a new report from the State Legislature’s Commission on Government Forecasting and Accountability.

The growing tab could help the case of the Municipal League of Illinois making the case for lawmakers in their 2022 session to relax funding requirements.

The League wants a re-amortization of the funding schedule that would extend the target date for reaching 90% funding beyond fiscal year 2040 and lower the funding goal from 90% to 80%. Although both ease the burden on governments, market players have warned that they are band-aid solutions that do not address underlying funding constraints.

Unfunded liabilities have climbed every year since at least 1991, when the collective unfunded tally was just $953 million. By 2000 they had risen to $2 billion and by 2010 to $7.6 billion.

“Over the 29-year period… the net assets of police and fire pension funds have essentially grown at a rate of 6.15% per year, while unfunded liabilities have increased by 9.80% per year,” the new report says.

The results represent actuarial reports for the 2019 financial year and therefore do not reflect the strong investment returns recorded in the 2021 financial year, but they do highlight the poor health of many funds, as the crowdfunding ratio is in the mid 50’s.

The increase in dues is straining the coffers of many local governments, leading to rating downgrades. Some local governments in Illinois have turned to pension bonds over the past two years, with state actions to help so far limited to legislation aimed at consolidating funds to save on the costs of management. While the consolidation is underway, it faces a legal challenge.

The public security pensions tab puts the state’s overall public pension fund tally at about $213 billion based on reports from COGFA and Chicago.

State government unfunded pension liabilities fell to $139.9 billion in fiscal year 2021 for the first time since 2017 after peaking at $141 billion in fiscal year 2020 and its funded health improved to 42.4% from 40.4%, propelled by investment returns that exceeded 20%.

Chicago wears a $33 billion tab based on 2020 results with its firefighter fund funded at 18.97%, police fund at 22.21%, city fund at 22.96% and laborers at 44.42%.

Statewide, only the Illinois Municipal Retirement Fund, which covers general local government employees outside of Chicago and Cook County, stands out as reasonably healthy with $4.4 billion in unpaid liabilities. financed in 2019 and a capitalization ratio of 91%.

The IMRF, Chicago Schools, Chicago Water Reclamation District, Chicago Transit Authority, and Chicago Park District together add an additional $27.1 billion to the statewide unfunded based 2019 results.

The financial health of public safety pension funds has deteriorated over the years. In 1991, the collective ratio was 75.65% and peaked at 77.31% in 1999.

Police funds ended 2019 at 54.98% and firefighters at 54.35%. The health of some individual funds, however, is much weaker with ratios only among teenagers.

“Police and fire pension funds bottomed out in the 1950s following the stock market decline of 2008, but have steadily increased each year since 2009,” the report said.

COGFA uses information extracted from individual pension fund annual reports submitted to the Public Pensions Division of the Illinois Department of Insurance.

Beginning in 2011, the state began requiring local governments to tie contributions to an actuarial level and achieve a 90% funded ratio by 2040. In 2016, the state comptroller began enforcing an enforcement mechanism built into the law that allows the funds to seek the diversion of various tax funds that pass through the state to municipalities that do not pay the full contribution.

Pressed for funding, some local governments have sold off assets like their water supply systems. Some market participants believe that the number of pension bonds could accelerate, fearing that the window could close on historically low interest rates.

Illinois was the third-largest source of POB emissions, behind California and Arizona, among local governments rated by S&P Global Ratings from the start of 2020 through September 2021.

“We expect a continued acceleration in issuance as issuers compare the seemingly successful transactions of their peers with their own large and growing unfunded liabilities, and some issuers may anticipate an end to historically low interest rates,” said S&P in an October report.

The pension burden is weighing heavily on the ratings of Chicago, the state government and some other struggling local governments due to a flawed funding system and legislative action to date has made little progress in addressing quagmire, S&P Global Ratings warned in an August report.

Governor JB Pritzker won legislative approval in November 2019 for his proposal to merge the assets of more than 600 pension funds into two systems, one for police and one for firefighters, in a bid to reduce administrative costs and increase returns on investment. Benefits continue to be managed by individual local councils.

Under the legislation, local credit unions must transfer all their securities, funds, assets and monies to the newly created police and firefighters retirement investment funds before the July 1, 2022 deadline. Some transfers have begun this year and the process continues amid ongoing litigation filed by 18 individual police and fire funds in February.

While some pension funds fought the move, most local governments seeking help to cut costs supported it, and it was endorsed by the Illinois Municipal League. The benefits of consolidation are limited, but rating agencies consider it a positive step.

The plaintiffs argue that the legislation violates the pension clause of the state constitution which states that membership “in any state pension or retirement system, any unit of local government or school district, or to any agency or instrument thereof, shall be a binding contractual relationship, the benefits of which shall not be diminished or altered.

The plaintiffs argue that their benefits are affected because the law “deprives plaintiffs of their autonomy and authority.”

The lawsuit further argues that pension plan members’ benefits are compromised because transition costs are covered by loans through the Illinois Finance Authority that the two new consolidated funds must repay.

The state’s attorney general countered that constitutional protections were limited to member benefits, not the management of funds. Arlington Heights Police Pension Fund et al. vs. Pritzker et al, ask the court to declare the law unconstitutional and seek class action status which, if approved, would impact all funds subject to consolidation.

The new firefighters fund said it had data to support achieving the consolidation’s goal of lowering the cost of investing by comparing the fees it paid versus what would have been paid on based on its assumption of $874 million in assets in October and $304 million in assets in November with $28 million in expected savings each year. The fund received $550 million in December.

“To date, FPIF has successfully transferred over $2.8 billion in investment assets from 157 firefighter pension funds,” the firefighters reported on their site. The Commission this month adopted a yield to maturity of 7.125%.

The police fund has hired advisers and issued administrative rules to manage the transition process, but the website does not yet report any transfers.

“We expect IPOPIF to be operationally ready to receive and manage assets by March 1, 2022,” executive director Richard Wright wrote to pension board trustees in a November 15 letter. “We expect to be fully operational by June 30, 2022 and ready to meet all legal requirements.”

The Illinois Municipal League’s 2022 legislative agenda approved Dec. 11 includes efforts to give local governments more wiggle room, including reducing the required funding ratio target from 90% to 80%.

“A lower funding rate will allow flexibility to meet immediate funding for operations and provide sufficient stability for future pension obligations,” IML said.

A second proposal would extend the amortization date to at least 2050 or later from 2040 to provide “immediate financial relief to affected communities”. Only Chicago has a longer timeline under its law-approved overhaul that gives it until 2055 to achieve a 90% funded ratio.