By: Ted Dabrowski and John Klingner
Shrinking local tax revenues as a result of COVID-19 means hundreds of Illinois municipalities are likely to underfund their public safety pension plans this year. That’s sure to push many of the state’s 643 local pensions closer to insolvency. More than 200 of those plans were less than 50 percent funded even before the pandemic hit.
That may soon pit two sets of local government officials against each other: pension fund trustees who are responsible for keeping the funds healthy vs. city officials who’ve underfunded pensions so they can have enough cash to pay for their active public safety workers and other services.
The more the pension funds get shorted, the more trustees could be impelled to demand full payment from their sponsoring cities.
To do that, there’s a little-known law that can help trustees get the funds they’re owed. Illinois’ “pension intercept” law, passed in 2011, gives trustees the power to demand the state comptroller garnish a municipality’s tax revenues so they can be handed over to the pension fund.
Since its implementation in 2015, the intercept law has been used to garnish funds from three of the most economically depressed cities in the state: Harvey, North Chicago and most recently, East St. Louis. Wirepoints covered the details of those intercepts in the following reports: Harvey, the first domino in Illinois; Beyond Harvey: Many Illinois municipalities running out of options; and Third domino falls: Illinois Comptroller set to confiscate East St. Louis revenues.
Other cities may suffer the same fate due to the financial damage that’s been done to both their cities and pension funds. Without pension reform, local funds will either end up closer to insolvency, or city services will go unfunded in an attempt to keep failing public safety pensions afloat.
The potential for more pension intercepts
A new Wirepoints analysis of the most recent Department of Insurance pension data found that 351 of Illinois’ 643 downstate public safety pension funds did not receive their full contributions in FY 2019, the latest year of full data available from the state. That means over 200 sponsoring Illinois municipalities failed to meet their obligations to at least one public safety pension fund. (There is some controversy over what constitutes a contribution shortfall for a pension fund. See the Appendix below for more information.)
The shorted pension funds received a contribution that was, on average, 20 percent smaller than the required payment calculated by the Department of Insurance. Some contribution shortfalls were negligible, while others were far more significant. For example, the village of Rantoul shorted its contributions to its police fund by over 75 percent.
In dollar terms, the shortfalls ranged from just a few dollars to over $4 million each for both Rockford’s police and firefighter funds. Below are the 20 most-shorted pension funds in 2018, by dollar amount.
Unsurprisingly, pension funds in struggling cities like North Chicago and East St Louis made the list. But so did funds in larger and more stable cities like Springfield, which shorted its police fund by $1.3 million, and Peoria, which shorted its police and firefighter funds by a total of $2.7 million as compared to the DOI’s required contribution.
Funds approaching insolvency
But the current economic downturn could very well bring a host of additional Illinois cities and pension funds down to near-insolvent levels. In FY 2019, nearly a third of Illinois’ public safety funds were already less than 50 percent funded. Many simply struggled to tread water at the height of the longest market bull-run in history.
Illinois’ downturn will inevitably drive many more funds closer to zero. Couple that with the fact that many are located in some of Illinois’ economically worst-off cities that haven’t provided full contributions in years, and the potential for more intercepts is higher than ever. Some of the worst-funded pensions are listed below.
Many will want to blame underfunding as the cause of Illinois’ local pension crisis. But it’s really ballooning pension promises that have created the problem, same as at the state level. Public safety pension promises have swamped local communities and taxpayers’ ability to pay for them.
In 1987, municipalities owed a total of $2.6 billion in total pension benefits to public safety workers and retirees across the state. By 2018, that number had jumped to $28.8 billion – an increase of over 1,000 percent. By comparison, the state’s economy only grew by 278 percent over the same time period.
And it’s not as if taxpayers didn’t try to keep up with funding. Illinois police and fire pension assets, buoyed by taxpayer contributions, grew 730 percent over the period.
Larger salaries have made the pension crisis even worse by inflating the size of police and firefighters’ pension benefits. Average downstate and suburban public safety salaries in Illinois have grown nearly 60 percent since 2005, to nearly $90,000 from under $57,000. That’s more than double the growth of ordinary Illinoisans’ earnings, which have only grown 25 percent over the period.
Those ever-growing salaries and benefits have forced taxpayers to pour hundreds of millions of dollars more into local pensions over the past decade, only to watch the health of those funds deteriorate. Despite a tripling of taxpayer contributions and the massive stock market rally since 2005, police and fire pension shortfalls nearly tripled to $13 billion in 2019. The collective funded ratio of the funds has also fallen to 55 percent, down from 62 percent in 2005.
In all, the number of local pensions with funded ratios below 50 percent has doubled since 2005, to 200 funds from 100 funds. Pension trustees are more likely to resort to intercepts as the funds they’re responsible for reach critical levels.
The intercept law is not a solution to the state’s local pension crisis. It’s a zero-sum game – simply moving limited local revenues from one line item to another fixes nothing.
Major pension and labor law reforms could help ease municipalities’ pain, but state politicians refuse to even consider changes. Gov. J.B. Pritzker has gone as far as categorically rejecting an amendment to the pension protection clause in the Illinois Constitution.
Nor will politicians give cities the power to pass reforms themselves. The state continues to control all pension, collective bargaining and prevailing wage laws, leaving local governments with little influence over their own costs. State lawmakers won’t even give insolvent municipalities like Harvey or East St. Louis the option to declare bankruptcy – a tool that is the last hope for dozens of broken Illinois cities.
The only likely near-term outcome? Lawmakers will either stand by as intercepts cut into core services across the state, or they’ll move to suspend the garnishments, essentially telling police and firefighters their retirement security doesn’t matter.
Read more about the crisis facing Illinois cities:
- Harvey, the first domino in Illinois
- Beyond Harvey: Many Illinois municipalities running out of options
- Third domino falls: Illinois Comptroller set to confiscate East St. Louis revenues
- Why a bankruptcy option for municipalities is essential
Appendix. Details of Illinois’ pension intercept
There has been some controversy as to what constitutes an underpayment to a public safety fund under the current intercept law. Some arguments have been made that the DOI-calculated required contribution should not be used to determine which funds have been shorted, since the law allows for funds and cities to use independent actuaries to calculate the required payment amounts.
The below includes a description of the intercept law as well as a review of how the required contribution for cities is determined.
Under a state law passed in 2011 and updated in 2015, downstate and suburban police and firefighter pension funds that don’t receive their actuarially required annual contribution from their municipality can demand the Illinois Comptroller ”intercept” some of the municipality’s state-based revenues and send an amount equal to the missing contribution over to the fund.
From (40 ILCS 5, Art. 3 and 4)
If a participating municipality fails to transmit to the fund contributions required of it under this Article for more than 90 days after the payment of those contributions is due, the fund may, after giving notice to the municipality, certify to the State Comptroller the amounts of the delinquent payments, and the Comptroller must, beginning in fiscal year 2016, deduct and deposit into the fund the certified amounts or a portion of those amounts from the following proportions of grants of State funds to the municipality: (1) in fiscal year 2016, one-third of the total amount of any grants of State funds to the municipality; (2) in fiscal year 2017, two-thirds of the total amount of any grants of State funds to the municipality; and (3) in fiscal year 2018 and each fiscal year thereafter, the total amount of any grants of State funds to the municipality. The State Comptroller may not deduct from any grants of State funds to the municipality more than the amount of delinquent payments certified to the State Comptroller by the fund.
1. The DOI “actuarially determined contribution” calculation for cities serves as a public standard across the 643 pension local pension systems, but some funds and/or cities don’t use the contribution calculated by the DOI. Instead, the law allows them to hire their own actuaries to determine what the city should pay.
From (40 ILCS 5, Art. 3 and 4)
The city council or the board of trustees of the municipality shall annually levy a tax…equal to (1) the normal cost of the pension fund for the year involved, plus (2) an the amount sufficient to bring the total assets of the pension fund up to 90% of the total actuarial liabilities of the pension fund by the end of municipal fiscal year 2040, as annually updated and determined by an enrolled actuary employed by the Illinois Department of Insurance or by an enrolled actuary retained by the pension fund or the municipality. In making these determinations, the required minimum employer contribution shall be calculated each year as a level percentage of payroll over the years remaining up to and including fiscal year 2040 and shall be determined under the projected unit credit actuarial cost method.
Of course, any fund that receives a contribution larger than the DOI-calculated amount is by definition not deemed by Wirepoints to have been shorted.
The problem arises when some pension funds receive less than the DOI-calculated contribution amount as a result of using an independent actuary. Because those independently-determined contributions are lower than the DOI-calculated amount, Wirepoints’ may be overstating the number of officially-shorted pension funds because we count those funds as being shorted.
However, the appropriateness of those independent actuaries’ assumptions is an open question. The pension statute’s actuarial requirements/standards, used by the DOI, are already lenient: i.e., only 90 percent funding by 2040, PUC cost method. If the fund’s independent actuary requires a lower contribution than the DOI actuary’s calculations, that likely means it used even more lenient assumptions and could be in violation of the rules in Illinois’ Pension Code.
There is also the issue of determining a standard when there are multiple actuary valuations. There can be up to five different calculations for what a city is required to contribute: one calculation by the pension fund’s actuary, one by the city’s actuary, one by the unions’ actuary, one by the DOI actuary, and, when those are in dispute, a calculation by an actuary set to mediate between the different parties.
In the end, the determination of whether a fund has been shorted or not is ultimately decided by the Illinois Comptroller’ office when it certifies or does not certify a pension fund’s intercept request.
2. Illinois’ list of 643 local pensions includes 99 Fire Protection Districts (FPDs) that are not funded through city contributions. The FPDs have a much harder time benefiting from the intercept law as very little, if any, of their funding comes from revenues that can be intercepted by the state.