Cop, Fire Pensions Don’t Respond To Merger Call

Consolidation promises to cuts costs, improve investment returns but public safety retirement funds prefer local control and clout, a BGA Rescuing Illinois report finds.

Photos of police and fire department image courtesy of Inventorchris CC 2.0.

It’s been more than four years since a bipartisan, government-backed study recommended that hundreds of Illinois small police and fire pensions be fused into a single, unified investment group.

And what’s happened since? Nothing.

Inertia has set in despite the backing of Governor Bruce Rauner, key lawmakers, public pension experts and municipal finance professionals who contend consolidation is the preeminent way for public safety pension funds to cut costs, improve investment returns and become more financially viable, a BGA Rescuing Illinois report finds.

Police and Fire department pensions infographic

Yet even as the funding levels and investment returns for public safety pensions lag those of other municipal retirement plans, the local police and fire pension bosses adamantly oppose any merger. They argue it will wrest local decision-making control from them and potentially allow fiscally weak funds to contaminate the pool of stronger pension players.

“I don’t want to be a little fish in a big pond,” said Theodore “Ted” Sanders, president of the Sauk Village Police Pension Fund and a retired police sergeant. “The pension is my source of income. A takeover would be a disaster.”

Others strongly disagree with that rationale and cite the 2012 study’s finding as proof that big changes are needed.

Logic of consolidation

The Illinois General Assembly’s Commission on Government Forecasting and Accountability (COGFA) hired Chicago-based Marquette Associates to conduct the research. The study found that consolidation could:

  • Eliminate duplicate operational costs and trustee-related expenses. Currently, each of the 600-plus funds has its own board of trustees (estimated by pension experts to be nearly 3,000 trustees in total) and professionals to assist in fulfilling operational responsibilities, such as assessing disability claims. The largest trustee-related expense involves mandatory continuing education of pension rules and regulations.
  • Cut investment-related fees. Each fund retains investment professionals to manage pension fund assets. On average, investment-related costs account for nearly 62 percent of downstate pension fund expenses—the largest single cost.
  • Improve market clout. Larger accounts benefit from more competitive pricing. Investment professionals charge a reduced rate when they manage larger pools of money.
  • Diversify investment portfolios. Smaller funds by law are limited in the amount of stocks that can be included because they are more volatile. A larger fund could expand the investment mix, thereby opening the possibility of better returns.

Marquette noted in its report that based on its estimate of investment expenses, it wouldn’t be cost effective to merge all funds, or leave consolidation to the discretion of each fund.

Instead, it recommended a partial consolidation of funds with assets under $10 million, which would yield savings of $210.6 million over 30 years with a pay back of costs starting in one year.

The study’s cautious endorsement may explain the initial lack of action by the General Assembly. But the state budget crisis, which is having a ripple effect on municipalities’ finances, is adding new urgency in the quest for efficiency, lower costs and better returns.

Gaining fresh momentum

Overall, funding levels for police and fire funds have lagged the Illinois Municipal Retirement Fund (IMRF), which manages the pensions for municipal employees outside Chicago and Cook County.

The aggregated police and fire funds were 55.96-percent funded as of 2012—according to the most recent report from the COGFA. That’s far short of the 80 percent funding level that is considered safe and a widely held standard based on corporate plans. Some police and fire funds are funded as low as 18 to 25 percent.

For example, a 2014 BGA Rescuing Illinois report found that total unfunded liabilities for scores of suburban Cook County police and fire pension was about $3 billion and counting.

In contrast, IMRF is 88-percent funded, according to Executive Director Louis Kosiba.

Municipal advocacy groups such as the Illinois Municipal League and Northwest Municipal Conference have long advocated a public safety consolidation, which in some ways would reflect the merger of fire, emergency and police functions occurring in communities throughout the state.

The issue gained fresh momentum last year when a state task force on local government consolidation and unfunded mandates, led by Lieutenant Governor Evelyn Sanguinetti, recommended the public safety funds be combined into a single investment authority.

Rauner had earlier proposed a consolidation under IMRF as part of a broad pension reform package. Kosiba said that while he supports a consolidation, he is “not keen” on the funds being absorbed by IMRF saying a separate public safety pension fund is a better option than jamming them under the IMRF tent.

In February, Sen. Dan Duffy (R-Lake Barrington) introduced a bill that would consolidate the funds and transfer management to the Illinois State Board of Investment (ISBI), which oversees the pension assets of the General Assembly Retirement System, the Judges' Retirement System of Illinois and the State E​mployees' Retirement System of Illinois.

The police and fire pension funds that pay different investment consultants earn a substandard return on investment due to the small nature of the funds and the restrictions on investment, Duffy said.

“There will be a small initial cost associated with this but taxpayers and beneficiaries will benefit from professional investment management and great returns,” he added. 

“This is an easy move to save substantial taxpayer dollars through efficiency while many of our local governments are struggling to pay pension costs,” a Rauner spokeswoman said.

However similar proposals have been put forward in the past but none have progressed, mostly as a result of strong opposition by the public safety funds that want to maintain local control.

Fear of losing power

“Is there a problem?” asked Cary Collins, a Hoffman Estates attorney who represents of Illinois police and fire pension funds. “Pension funds are well managed on an individual basis within the villages,” he said. “Any costs associated with consolidation would exceed the improvement in investments.”

Collins said some trustees worry the funds will be commingled so that a well-funded district ultimately rescues a starving one—although big funds such as IMRF prevent that by segregating municipal accounts.

Consolidation won’t solve the problem of underfunding, but market power can improve returns, which would in turn ease a municipality’s liability.

There’s room for the Downstate fire and pension funds to improve their performance. 

These funds, in the aggregate, have posted returns ranging from .3 percent to 5 percent in most years, according to COGFA. That trails returns of 5.6 percent at ISBI and 6.69 percent at IMRF for the 10 years ending December 2015. 

(However, the lack of heavy exposure to stocks benefitted the public safety funds in the 2008-09 market crash, which set back funds that were heavily invested in equities).

The problem of substandard returns could be solved if the legislature offered more latitude for the funds to invest in stocks, Collins said. It would also help if municipalities fully funded the plans, he added.

Indeed, the police and fire pension funds operate at a disadvantage because IMRF requires municipalities to pay a fixed percentage of payroll annually—and are charged interest if they are delinquent. In contrast, funding requirements for police and fire funds pensions can vary among municipalities.

“Police and fire are less well funded for this and other reasons,” said Lisa Happ, director of finance for the village of Schaumburg.

Firefighters aren’t opposed to reforms that would lead to better funding and pay the benefits that are promised, said Pat Devaney, president of the Associated Fire Fighters of Illinois, which represents 221 local unions and 15,000 firefighters.

“We haven’t been presented with data showing that moving to a consolidated approach would increase returns,” Devaney said. “We don’t dismiss these ideas but no one has given us the facts.”

Pension consolidation advocates said despite the logic of their position they don’t expect police and fire funds to embrace consolidation any time soon.

“The sail is not catching much breeze,” said Brad Cole, executive director of the Illinois Municipal League, which advocates for more than 1,200 municipalities in the state. “But then, anything can happen any time.”

About the Author

Judith Crown

Judith Crown is a veteran business journalist and a regular BGA freelance contributor. She has worked for major news outlets including BusinessWeek Chicago and Crain’s Chicago Business.