ILLINOIS NEWS NETWORK
Illinois may be entering a new chapter in the saga of local pension debt after an appeals court this month ordered a cash-strapped Illinois city to raise property taxes to meet its firefighter pension obligations.
In a complex 86-page decision, the First District Appellate Court decided that the city of Harvey must pay $15 million in damages to the local pension fund and approve a property tax levy specifically for the pension system, which the court said was on the brink of bankruptcy.
The Firefighters’ Pension Fund in Harvey, a city that has been plagued by mismanagement, was only 27.2 percent funded as of 2014, the court found. By contrast, the city of Chicago’s four pensions are on average only 21 percent funded.
The situation in Harvey may repeat itself throughout the state in the coming years, according to Mark Glennon, a former venture capitalist and the founder of the WirePoints website.
“It’s only a matter of time before pensions bleed out to a level as bad as Harvey in many of Illinois’ municipalities,” Glennon told Illinois News Network.
Because the state Supreme Court ruled two years ago that pension benefits cannot be reduced, the only options for cities that are drowning in pension debts would be through a change in the Illinois Constitution or through the federal bankruptcy process, he said.
The situation should come to a head in the next two or three years as some cities might have to consider a pay-as-you-go system for pension benefits, which Glennon said is far from affordable.
“Apparently the courts will step in before that, trying to order blood out of turnips, which is what they were doing in Harvey,” he said.
Not all Illinois communities are in such bad shape, however. The Village of Vernon Hills reports its police pension is more than 80 percent funded. The state average for police and fire pensions stands at 54 percent, according to Ralph Martire, executive director of the Center for Tax and Budget Accountability in Chicago.
The real solution for local pension indebtedness will come through tax policies and changes in how the pension systems operate, Martire told Illinois News Network. Currently, the repayment plans for unfunded liabilities are done through what’s called percentage of payroll, he said, indicating that this method comes at a lower cost today but with ramped-up costs in future years.
A better way would be through what’s known as level-dollar amortization, which would force local governments to expend more money initially in exchange for more stability as the debt is paid off over time, he said.
Another way to help local communities improve their pension finances over time would be to consolidate the more than 650 police and firefighter pension systems in Illinois under a single administrative framework. Communities could reap a sizable financial savings by moving toward such a consolidated system, according to Larry Bury, deputy director of the Northwest Municipal Conference, which represents 45 municipalities and townships in Illinois.
Each municipality’s pension system has its own investment managers, attorneys and other overhead. By putting their administration under a combined system, $33 million annually could be saved, not including the rise in investment performance that would come with the higher assets base, Bury said, adding that the consolidation idea is moving beyond the discussion stage.
“We’re in the process of working on different options,” he told Illinois News Network.
A report issued in March by the Pension Fairness for Illinois Communities Coalition, which includes numerous local government advocacy groups, said local pension funding levels in Illinois have continued to decline despite a 400 percent jump in taxpayer contributions. Consolidating all the police and firefighter plans within the Illinois Municipal Retirement Fund (IMRF) would reduce operating costs by about $1,000 per member per year, for a savings of nearly $1 billion over 30 years, according to the report.
“Consolidation into the IMRF under a new section or a similar structure appears to be the most practical and cost-effective solution,” the report says.
Consolidation makes sense provided it applies to achieving administrative efficiencies and doesn’t pool assets and liabilities, which would be unfair to municipalities that have healthier, well-funded pension systems, according to Glennon.
The Pension Fairness report seems to recognize that distinction.
“While funds are combined for investment purposes, the funds from one unit of government cannot be utilized to subsidize the funds of another unit of government,” it says.
But Martire is less certain that a consolidation plan could deliver on its promises.
“Those consolidation efforts don’t always save money, and they aren’t always more efficient,” he said, noting that Oklahoma decided not to consolidate its local pension systems due to high transition costs.
And whether Illinois could mandate that all local governments take part in such consolidation efforts raises constitutional questions, Martire said.
“It’s a far more difficult question than it may seem at first blush,” he said.