When Gov. J.B. Pritzker recently endorsed a task force report calling for the consolidation of fire and police pension funds, he called for quick legislative passage and made it clear he has little respect for those who disagree.
A target of particular Pritzker scorn was the Illinois Public Pension Fund Association, which represents the 600-plus local pension fund administrators. He asserted that their objections arise strictly out of their financial self-interest.
“These are the folks who run the junkets. The recent one cost about $8 million to the taxpayers to send people to Lake Geneva on a retreat. ... I realize that this is going to disrupt their business model, but frankly, we have to do better for the taxpayers of this state,” Pritzker was quoted as saying.
There’s no doubt that pension turf and investment fees are subtexts to this debate. After all, Pritzker is proposing the consolidation of roughly 650 downstate and suburban municipal fire and police pension plans into two state-run investment vehicles — one for firefighters and the other for police.
But there are real issues surrounding the consolidation question that need to be addressed before legislators put their stamp of approval on it.
At least that’s the opinion of Amanda Kass, the associate director of the Government Finance Research Center at the University of Illinois-Chicago’s College of Urban Planning and Public Affairs.
Kass contends the consolidation idea has “merit,” but that the report issued by the Pritzker task force, which was headed by Deputy Gov. Dan Hynes, “doesn’t have enough information to say for certain whether the task force’s recommendations are prudent policy and how individual pension funds and municipalities will likely be impacted.”
She said it’s necessary to wait for a “more detailed” legislative proposal to be introduced so that it can be subjected to a “thorough analysis of the estimated costs and savings and their respective time horizons.”
That’s not going to happen if consolidation proponents get their way.
Pritzker wants legislative approval now — in the six days (Oct. 28-30 and Nov. 12-14) allotted for the fall veto session.
On its face, the plan looks simple enough.
Fire and police pension money now invested by local boards would be managed by two investment funds, the purported benefits being greater investment returns because the bigger funds would have more options and lower administrative costs. The task force estimated the funds are losing $1 million a day under their current administration.
The task force predicted consolidation would generate an additional $820 million to $2.5 billion in investment income over five years. But other experts, like those at Wirepoints, contend those numbers are inflated, that an examination of 10-year returns of other state pension funds reveals the additional income would be between $800 million and $1.5 billion.
But Kass points out another potential problem — “the upfront costs of consolidation” — merging 650 funds into two — “could be more than the additional investment returns in the short-term.”
She also noted the 650 funds are of varying size, positing that one-size-fits-all estimates do not apply. As a consequence, “...whether the recommendation ultimately saves municipalities and taxpayers money will vary on a case-by-case basis and depends on a variety of factors, including the investment rate assumption.”
The task force report did not include any estimates of immediate transition costs. But Kass quoted a 2012 report on the same issue as contending that it would “take 11 years to break even and begin realizing any costs savings in excess of transition costs.”
Smaller funds are restricted in the size of investments they can make, a rule put in place to limit risk. But Kass noted that easing those restrictions would allow smaller pension funds to seek “higher returns” while avoiding the transition expenses that go with consolidation.
Returns would vary, however. The large Joliet police pension fund has embraced great risk and been volatile, gaining 0.6 percent in 2015 and 12.9 percent in 2017.
Then there is the question of “investment rate assumption,” how large an annual gain funds anticipate. Individual funds each make their own assumptions, ranging from 5 to 8 percent.
The higher the assumption, the lesser the unfunded liabilities. The lower the assumption, the greater the unfunded liabilities. That’s a tough issue because unfunded liabilities determine the amount of money municipalities contribute to their pension funds.
“Figuring out how switching to a uniform investment rate assumption will impact contributions should be carefully studied and would need to be done for each fund as the impact depends on their individual investment rate assumptions,” Kass warns.
Many people will not understand all the points Kass raises in her critique of the consolidation issue. But they get the general idea — it’s hugely complicated and requires careful thought by people conversant with the issues.
In other words, consolidation represents the kind of challenging issue that would prompt many legislators to run screaming from the room. Either that or rubber-stamp the Pritzker plan and let him worry about the details.
Jim Dey is a staff writer for The News-Gazette. His email is email@example.com.