SPRINGFIELD — Mounting debt in more than 650 police and fire pension funds statewide is squeezing municipal budgets, crowding out services and threatening to add to ever-rising property tax bills as officials have repeatedly failed to reach consensus on an overhaul.
Cities and towns have long been at odds with police and firefighter unions over the most talked about solution, consolidating the funds, and a handful of bills aimed at fixing the problem went nowhere in the General Assembly's spring session.
This summer, however, there's optimism that a viable reform proposal could soon be put to lawmakers, as a task force appointed by Gov. J.B. Pritzker is set to make recommendations aimed at improving the health of pension funds statewide.
"The issue is so apparent that it's a matter of how we get this done, not should we get this done," Illinois Municipal League Executive Director Brad Cole said. "And so, from that perspective, I'm very optimistic that something can come forward for the fall veto session."
After a spring session in which lawmakers passed a significant number of Pritzker's priorities — including recreational cannabis, gambling expansion and initial steps toward moving to a graduated-rate income tax — pension reform could be the next big test for the governor.
Much of the attention on pensions has focused on the $134 billion in unfunded liabilities in Illinois' five statewide public pension funds and Chicago's roughly $28 billion across its four funds.
But many suburbs and towns statewide are facing their own pension crises, though the numbers are smaller by comparison.
Collective unfunded liabilities for more than 650 suburban and downstate police and fire pension funds ballooned to $11 billion as of the 2017 budget year, the most recent numbers available, according to a report released last month by the legislature's bipartisan Commission on Government Forecasting and Accountability.
All together, those 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.
In all, the funds cover about 20,000 police and 14,000 fire department employees and retirees.
Local governments have been pushing for more than a decade to combine those individual funds, which are required for any town with at least 5,000 residents and one full-time police officer or firefighter, to cut down on management costs and, hopefully, reap better returns on their investments.
Opponents of consolidation, including local pension boards and police and firefighter unions, have argued in favor of local control and pushed for fewer restrictions on how small funds invest their money.
The goal of the task force discussions is to emerge with a "solution that everybody agrees is in the best interest of the retirees and our active police and firefighters, as well as municipalities," said Deputy Gov. Dan Hynes, who is overseeing the group's work.
The Associated Fire Fighters of Illinois, the state's largest firefighters union, has opposed consolidation proposals that would require funds to transfer assets and control of them to another entity.
But in a sign that it could support consolidation under the right circumstances, the union backed legislation introduced this spring that would create a centralized fund and give local firefighter pension boards the option of transferring their assets.
It also would allow municipalities whose investments are transferred to the statewide fund to raise property taxes to pay for pension contributions without counting against property tax caps. That's a potentially volatile proposal politically given that property taxes represent another vexing issue facing the state and Pritzker — and another one the governor has assigned to a task force in a search for solutions.
The measure, however, was one of several pension bills that went nowhere during the spring legislative session.
Pat Devaney, president of the Associated Fire Fighters of Illinois and a co-chair of the Pritzker task force, declined to comment, saying he did not want to get ahead of the group's final recommendations.
Hynes didn't give a specific time frame for when the task force will finalize its recommendations.
"We don't want to put an artificial deadline down, because we want to get it right and make sure everyone is comfortable with not only the recommendations, but a plan to implement them," Hynes said.
The bills in the General Assembly this spring represented two concepts — total consolidation of the 653 downstate public safety pension funds, as well as consolidation of investment that retains some local decision-making.
The Illinois Municipal League has been advocating for total consolidation, but earlier this year the organization backed separate bills that allow local pension boards to retain some decision-making ability.
"We have said we would like to consolidate all of it, meaning the investment of the funds, the determination of disability awards, all of the management, everything," said Cole of the Illinois Municipal League. "But if that's too much to ask, we've broken it into the second piece, which is let's leave those 653 local boards and let them continue to have their local representation and decision-making ability on disability awards and other things, but let's put all the money together and invest it in a consolidated pool, so there can be a higher rate of return."
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Combining all of the funds would result, conservatively, in a 2-percentage-point net gain on investment returns and dividends, according to Cole.
Opponents that favor local control of the funds, including the unions and the pension boards themselves, have effectively staved off consolidation measures.
"In the past, we've proposed one piece of legislation and people said, 'Well, we don't like that,' and that was it," Cole said. "If you go to a buffet line and can't find something to eat, you're the problem, not the cafeteria. So that's why we presented all the different bills."
Many proposals over the years have called for the downstate and suburban fire and police pension funds to be merged with the Illinois Municipal Retirement Fund.
The IMRF is 90% funded with more than $42 billion in assets as of earlier this year, and its leaders have argued it would be weakened by the consolidation proposals made during the spring session.
With more than 429,000 members, the IMRF is the largest system in the state by membership, with members spread across 3,000 units of government -- counties, townships, villages, school districts and cities, excluding Chicago.
"Our board talked about the fact that we're very well-funded, and that consolidation would involve an increase in IMRF's unfunded liabilities," IMRF Communications Manager John Krupa said. "They have a fiduciary responsibility to protect and make decisions that are in the best interests of our membership."
While there could be benefits to consolidation, such as lower overhead costs and better investment returns in the long run, policymakers shouldn't expect it to be a quick fix for shoring up municipal budgets, said Amanda Kass, associate director of the Government Finance Research Center at the University of Illinois at Chicago.
"Consolidation could potentially save money in the long term, but there's going to be transition costs in the short term," she said.
A recent report commissioned by the Illinois Public Pension Fund Association, which opposes consolidation, underscores that point. The report, prepared by Chicago-based Anderson Economic Group, estimates the combined pension funds could save about $21 million annually — a 25% reduction in overhead costs — through consolidation.
But depending on a variety of factors, including how much of the funds' assets would have to be liquidated and reinvested and how the stock market performs during the transition period, the upfront costs of consolidation could reach $155 million. The report says consolidation also could result in upfront savings of up to $126 million if the market were to drop significantly during the transition period.
In a separate report, Anderson Economic Group found that smaller pension funds could improve their investment returns by nearly 2 percentage points per year if the smallest funds -- those with less than $2.5 million in assets -- were allowed to invest more heavily in the stock market. That's a position long held by the pension fund association.
Consolidation "is not the right way to go," said James McNamee, president of the pension fund association, which represents the local pension boards and their trustees. Pointing to the study his group commissioned, McNamee said lifting investment restrictions would be a better way to improve the funding level of the pension funds.
"The boards are already in place; they're already trained," McNamee said. "Just take the handcuffs off us."
It remains to be seen whether the state will attempt to address Chicago's pension problems in concert with addressing the local police and firefighter funds.
At a recent public appearance, Pritzker skirted questions about whether his administration and the mayor's office had held further discussions about pension consolidation.
"There's ongoing conversation about how to help the city overcome its challenges, how the state can work with the city on a variety of issues," Pritzker said, including funding pensions, combating violence and creating jobs. "These are all things that are ongoing dialogues between my staff and her staff and directly between the mayor and me."
Pritzker wouldn't say whether there would be legislation introduced to address the pension issues ahead of the legislature's fall veto session.
When the task force was first announced earlier this year, there was a broad scope that called for looking at the downstate and suburban police and firefighter pensions, the five state systems and Chicago's pension systems, Hynes said.
"We quickly realized the best way to start was on suburban and downstate police and fire," he said. "And that's really where we are focusing."
"This would have been done many, many years ago if it was easy," Hynes said.