Gov. J.B. Pritzker on Thursday unveiled a plan to merge roughly 650 local pension funds for suburban and downstate police officers and firefighters into two statewide funds in an effort to narrow a widening funding gap and ease the property tax burden on homeowners.
The idea of consolidating the public safety pension funds — which together have roughly $11.5 billion in unfunded liabilities — is not new, but many previous attempts have failed to gain traction in the General Assembly as police and firefighter unions and other interests have pushed to retain local control.
The governor is now calling on lawmakers to take swift action to require the funds to combine under a plan recommended by a task force he assembled shortly after taking office in January.
According to the task force’s 22-page report, each day the funds remain separate, they collectively forfeit nearly $1 million in potential investment returns, “forcing most municipalities to rely on a never-ending cycle of increasing local property taxes or cutting services to meet their pension obligations.”
“That’s not just a missed opportunity; that’s a hole that these funds are digging deeper every year,” Pritzker said at a news conference in Chicago on Thursday. “And then municipalities have to ask taxpayers to fill the hole.”
If the funds were to perform similarly to larger Illinois pension plans over the next five years, it would mean additional investment returns of $820 million to $2.5 billion over the next five years, according to the report, which cites a state Department of Insurance analysis.
Under Pritzker’s plan, there would be separate statewide funds for police officers and firefighters, each managed by an eight-member board with equal representation of municipalities and police officers or firefighters.
Each police or fire department would maintain a separate account within the funds, and the money would be held in a pair of trusts separate from the state treasury. Assets and liabilities would not be shifted from one municipality’s plan to another. But the funds would be able to pool their assets for investment purposes and cut down on administrative fees currently paid separately by each local fund.
The first-year Democratic governor’s push to win approval for his plan could be his next major test following a spring session in which he accomplished nearly all of his legislative priorities. Pritzker on Thursday called addressing unfunded pension liabilities for local governments and “the surging property tax burdens they create” among the most critical fiscal challenges before him.
While legislation to consolidate the funds has not yet been introduced, Pritzker wants lawmakers to take up the issue when they return to Springfield at the end of the month for the first half of the scheduled six-day fall veto session.
Noting that a bipartisan task force ensured “we had all the voices heard from in the process,” Pritzker said he feels “good about the prospects for veto session.”
Former Illinois Senate Republican leader Christine Radogno, one of the task force co-chairs, said at the same news conference that without taking this action, “taxpayers will be asked to pay more. There’s no doubt about that.”
The plan has picked up a key backer in the state’s firefighters union. But winning support for such a monumental change over the next month won’t be an easy task for Pritzker, and consolidation will face strong pushback from police unions and from a statewide association that represents trustees of the existing funds.
Illinois House Speaker Michael Madigan “will take the proposal under review” while lawmakers are briefed on the governor’s plan, spokesman Steve Brown said.
The governor’s plan addresses only one small part of the state’s crushing pension problems. Not dealt with in the report are $134 billion in unfunded liabilities in statewide retirement systems covering teachers, university employees, state workers, legislators and judges; and Chicago’s nearly $30 billion in unfunded liabilities across four funds.
Mayor Lori Lightfoot at one point had floated the idea of Chicago being part of a consolidation, but her latest legislative asks don’t include that idea.
Pritzker said examining the potential benefits of consolidating the state and city funds will be among the next jobs for the task force, though the report says “consolidation would not achieve material improvement of their investment returns” for the much larger funds.
Over the past decade, the annual investment returns reaped by the suburban and downstate police and fire funds, on average, have been about 2 percentage points lower than those of the Illinois Municipal Retirement Fund, which has more than 429,000 members across 3,000 units of local government, excluding Chicago. IMRF — the state’s best-funded public pension fund — is a model for the proposed consolidation.
Opponents of consolidation have argued for the importance of local control and pushed for fewer restrictions on how small funds invest their money.
Given the opposition to pension fund consolidation, the task force found mandatory consolidation would be “the sensible approach.” Better performing plans would perform “at least as well in the long term under a consolidated model,” while “the worst performing plans would perform substantially better.”
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The new statewide police fund would have $8.7 billion in assets, according to the Department of Insurance analysis, while the firefighter fund would have roughly $6.3 billion. Currently, 65% of the local funds have less than $20 million in assets and 44% have less than $10 million, which creates limitations on the types of investments available to them.
Collectively, the existing funds have enough assets to cover only 55% of liabilities, far short of the state-mandated target of 90% funding by 2040 and a figure that has dropped since it was at nearly 63% before the Great Recession, according to a report earlier this year from the legislature’s bipartisan Commission on Government Forecasting and Accountability. In all, the funds — which are required for any town with at least 5,000 residents and one full-time police officer or firefighter — cover about 20,000 police and 14,000 fire department employees and retirees.
The task force is also proposing a costly series of changes for police and fire pensioners hired after 2011, in response to concerns that the current setup may violate federal rules for workers who are exempt from Social Security.
The proposal would reinstate surviving spouse benefits for that group of police officers and firefighters, increase their pensionable salary cap and amend their final average salary calculation. The report estimates these changes to suburban and downstate plans would offset between $70 million and $95 million of the projected $820 million to $2.5 billion in investment return gains over a five-year period.
The task force also will continue to look at whether even more money could be saved by centralizing the administration of benefits rather than leaving that in the hands of the local pension boards.
Amanda Kass, associate director of the Government Finance Research Center at the University of Illinois at Chicago, said the report’s lack of detail about the upfront transition costs of consolidation stood out to her.
The report acknowledges initial costs for transitioning assets into the consolidated pool, but said that would be “substantially less than the upside from stronger investment returns over a matter of a few years.”
“I think in general the idea of having assets pooled together and centrally managed makes a lot of policy sense,” Kass said. “I’m a little skeptical or unsure on how much money it’s going to really save, especially in the short-term.”
Pritzker’s plan will face strong opposition from some police unions and from a statewide association that represents trustees of the existing funds.
Sean Smoot, director and chief counsel of the Police Benevolent and Protective Association of Illinois, said his group is “philosophically opposed to consolidation,” a position he said he expressed to Pritzker when he sought an endorsement during last year’s race for governor.
Smoot objected to his union and the Illinois Public Pension Fund Association, of which he is deputy counsel, being excluded from the governor’s task force.
A major concern for opponents now is that lawmakers will heed Pritzker’s call for quick action this fall. “That would be a complete recipe for disaster,” said Smoot, who had not seen the specifics of the governor’s plan.
The voice for police officers on Pritzker’s task force was Tim Kobler, chairman of the Illinois Fraternal Order of Police Labor Council. But Kobler said his role diminished after he expressed the FOP’s opposition to the proposed composition of the board of the statewide police pension fund.
The existing local boards are made up of two representatives elected by current police officers, one elected by retirees and two appointed by the local mayor. Kobler said the FOP felt strongly that the statewide board should mirror that structure.
“We appreciate Gov. Pritzker taking this on,” Kobler said. “It is an issue that we want to be part of the solution, but governance is a major issue for us.”
Lawmakers should take the time to get it right rather than “hurry up and make a rash or quick decision,” he said.
While the state’s largest firefighter union has opposed consolidation proposals in the past, Pat Devaney, president of the Associated Fire Fighters of Illinois and another task force co-chair, said he’s confident that the plan Pritzker put forth will be in the best interest of firefighters across the state.
While members of the firefighters union have expressed concern about greater state involvement in their pension funds, Devaney said the plan would ensure that each fund’s assets and liabilities will be walled off and that, for the time being, the existing local boards continue to administer benefits.
“I went into this process on behalf of the firefighters with an open mind, and these decisions were very data-driven,” Devaney said. “We looked at this and looked back five years, 10 years, 20 years, as many ways as we could, and at the end of the day, it was conclusive that we could drastically improve our returns and lower our fees with a consolidated investment pool.”
dpetrella@chicagotribune.com
jmunks@chicagotribune.com
