If all the major state worker retirement plans were run like the Illinois Municipal Retirement Fund, would we have needed a massive public pension overhaul?
Obviously, it’s a question that can never be fully answered. But one fact is clear: IMRF is the state’s best managed and most financially stable pension provider with a funding level of about 86 percent, much higher than the state’s five major retirement funds. Even some public pension critics concede IMRF is the best of the bunch.
Providing retirement benefits to local government workers in thousands of municipalities, IMRF is the latest subject of the BGA Good Government Spotlight because it acts as a shining example of how the often maligned traditional defined benefit plan can work — provided it’s properly funded by employees and government, pursuing a sound investment approach and dedicated to weeding out questionable practices and corruption.
William Atwood, executive director of the Illinois State Board of Investment (ISBI)
“The IMRF is a model of retirement success,” asserts William Atwood, executive director of the Illinois State Board of Investment (ISBI), which manages the pension assets for the General Assembly, state judges and Illinois employees.
In December, Gov. Pat Quinn signed into law a comprehensive pension reform bill that was years in the making and was passed by slim majorities in both chambers of the General Assembly. The constitutionality of the law, which is vehemently opposed by organized labor, will likely be tested in court. The bill does not directly affect IMRF’s operations.
There are many aspects to the new law but its major thrust is cutting overall costs and forging a pathway over the coming decades to fund the plans so each can fully meet their obligations to retirees—something only IMRF now has the firepower to accomplish.
With assets equal to 86 percent of its obligations, the IMRF is outpacing its pension peers. By comparison, the state’s largest public pension with $37 billion in assets, the Teachers Retirement System (TRS), is 47 percent funded, according to the ISBI. The State Universities Retirement System (SURS) is about 45 percent funded, while the State Employees Retirement System (SERS) is 36 percent funded, according to the agency. The Judge’s Retirement System is 29 percent funded, while the General Assembly Retirement System is 22 percent funded.
While some public pension critics agree that IMRF is Illinois’ best-funded public pension, they add that it’s a modest accomplishment.
For example, IMRF trails the Wisconsin Retirement System which is 100 percent funded, notes Sheila Weinberg, a certified public accountant and founder of the Northbrook-based Institute for Truth in Accounting, which advocates for clarity and openness in government financial reporting.
“Compared to the Wisconsin Retirement System…IMRF doesn’t look so good,” she said in an email to the BGA. “If IMRF was a corporate pension plan, because of its funding ratio, the Internal Revenue Service would consider it to be ‘endangered.’ “
IMRF Executive Director Louis W. Kosiba asserts 100 percent funding is his goal but adds that his fund’s financial strength is a matter of pride, especially during difficult economic times. Kosiba also stresses that IMRF requires each of its members – nearly 3,000 local governments throughout the state – to be responsible for maintaining contributions to the fund and for distributing benefits to their retirees.
Each unit, says Kosiba, has “skin in the game”.
The municipalities, townships, park districts, school districts and other local governing units in the IMRF use their combined contributions – now totaling about $28 billion in assets – to earn solid returns on their investments.
At the same time, the IRMF doesn’t have to worry about its capital being depleted by the mismanagement or misdeeds of its members.
“Because of those separate silos, if one local government decides to give large salaries to its employees, only that local government pays for that largesse,” Kosiba said.
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There are other differences, too.
The IMRF receives no state funding. Its contributions come from employers – the municipalities, counties, school districts and other local governments, which are its members, and their employees.
Illinois’ other major public retirement systems rely on contributions from the Illinois General Assembly, which has trimmed its contributions for years as the state has been mired in a budget crisis.
Additionally, the performance of the five state pension funds is hampered because membership contributions and payout are part of a single kitty, not within distinct silos offered by IMRF. So, for example, if one school district decides to award its teachers hefty raises, when those teachers retire, all the TRS members are on the hook to help pay for those increased retirement benefits.
“The primary issue for policymakers should be how to best to provide state pension plans the same reliability of funding as enjoyed by the IMRF, ” Atwood contends.
All of which comes as a high compliment to the jocular, but humble Kosiba as he directs the IMRF.
He is an old hand at the pension business. An attorney, Kosiba was general counsel to the TRS before joining the IMRF in 1988. He was general counsel until he became the IMRF’s executive director in 2001.
While he prides himself on transparency and sound management, Kosiba credits part of the IMRF’s success to a legislative stroke of good luck. When the General Assembly created the IMRF in 1939, it mandated that each local government maintain its contributions and that each unit could withdraw no more than what it paid into the system.
“There for the grace of God, go I,” Kosiba said of the guidelines for his fund.
The IMRF’s 175,000 working members contribute 14 percent of the funding, while employers pay 27 percent. Investment income represents 59 percent of the money. Employees pay a fixed annual rate of either 4.5 percent or 7.5 percent. If long-term investment performance falls short then the employers must pony-up more money to keep the fund in trim.
The IMRF’s target annual return on investment is 7.5 percent. In fiscal 2012, it earned 13.7 percent. Kosiba said consistent, double-digit returns (and a stronger economy) would ease the annual contributions of employers, which would be a benefit to the budgets of local governments.
“IMRF employers share all the risks and rewards of investment returns,” he said. “If sustained, this could help reduce individual employer contribution rates in a few years.”
Indeed, backers of public pensions, including public employee unions, see IMRF as an example of how public pensions should be funded and managed. Many are angry that state lawmakers authorized periodic pension “holidays”, that have shorted funding levels at the state’s major retirement funds, or ignored actuarial recommendations and didn’t make total employee contributions to the funds.
IMRF Executive Director Louis W. Kosiba asserts 100 percent funding is his goal but adds that his fund’s financial strength is a matter of pride, especially during difficult economic times.
“It is ironic that one of the reasons (IMRF) has higher funding ratio …is the state requires local government to make contributions that the plan’s actuaries recommend,” says Weinberg. “Yet, the state has skipped (major pension payments) and routinely does not pay the recommended contributions.”
The other way to maintain fiscal discipline is to keep down administrative costs, Kosiba said.
The IMRF’s annual administrative cost is $78 per member, compared with an average of $115 for public pension funds in North America, according to a recent study by Cost Effectiveness Measurement Benchmarking Inc., a pension research group based in Toronto.
“It’s a validation of what we do, but we need to keep getting better,” Kosiba said.
Yet, IMRF has occasionally had to deal with scandals.
For instance, there was the Bellwood administrator who was accused in 2010 of boosting his annual salary to $472,000 by loading his contract with vacation and sick pay benefits, which resulted in a $253,000 annual pension. He has since been indicted on theft and official misconduct charges.
That same year, Highland Park’s Park District director received bonuses to boost his final-year salary to $435,000, leaving him with an annual pension of $166,000. The park board president and two board members resigned after facing the anger of the suburb’s taxpayers.
But Kosiba said while those cases were a black eye to the IMRF, it was only the individual governing bodies that paid for the additional benefits.
“I pride ourselves on being a transparent organization,” Kosiba said. “We have to earn and maintain the trust of our members. Trust is like a thin layer of ice that’s easy to break through but takes a long time to rebuild.”
John T. Slania is a freelance writer for the BGA’s policy team.