By: Mark Glennon*
A crisis in the Dallas police and firefighter pension has captured national and international headlines thanks largely to a particular form of savings account offered to its members. Illinois’ second largest public pension, IMRF, also offers a particular form of savings account to its members. IMRF is not in crisis and its savings account is different, but the way it’s most different isn’t good for Illinois taxpayers.
The Dallas pension has experienced what you can think of as a standard “run on the bank.” It has all the usual problems with public pensions, but the killer was its DROP account. DROP accounts allow police and firefighters to keep working after retirement age while their pension benefits are deposited in a separate account earning an interest at 8-10% a year, as described by The Economist. That 8-10% hasn’t materialized, which should be no surprise, so the Dallas pension can’t meet its promises. Members in the Dallas system can withdraw their money, which they’ve rushed to do, causing the run.
Little known to Illinois taxpayers, IMRF also offers a savings account to its members, separate from pension benefits. It’s called the Voluntary Additional Contributions Plan. Members of that system may opt to contribute money to that account and are promised an interest rate equal to the current rate of return IMRF assumes for its pension investment earnings. Today, that rate is 7.5%. That account is in addition to the regular IMRF pension. IMRF members can contribute up to 10% of their earnings. We described the account here two years ago.
Should IMRF members, like those Dallas pensioners, panic about their money? No, because Illinois taxpayers are on the hook for any problem, including failure to meet the 7.5% interest that’s promised.
IMRF, you see, is unique among Illinois pensions. It has the right force an automatic increases in property taxes sufficient to meet its pension problems, and the guaranteed 7.5% rate of return on those savings accounts. That taxing power is the reason why IMRF is comparatively well funded, having a funded ratio of about 87% on a market basis.
It’s one thing to expect or hope for a 7.5% annual return, but promising such a high return is absurdly beyond what markets say is reasonable. A promise like that is extremely expensive. The true, fair market, guaranteed rate of return is something under 2.5%, the current ten-year Treasury yield. IMRF may well make 7.5% in any given year (especially this year thanks, ironically, to the Trump rally), but that’s no basis for an ironclad promise.
The bottom line is that, for the IMRF account, Illinois property tax payers get an automatic bill to cover the same problem that tanked the Dallas pension — failure to meet the investment returns promised.
Dallas is being forced to deal with its stupidity now. Illinois, however, is putting its stupidity into the basket with all the other claims it thinks taxpayers will somehow eventually cover.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.