STUMP » Articles » Illinois Bright Idea: Put a Bunch of Underfunded Pension Plans In One Pile » 10 October 2019, 23:11

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Illinois Bright Idea: Put a Bunch of Underfunded Pension Plans In One Pile  


10 October 2019, 23:11

[Just to clarify: the proposal is to put a bunch of plans in two piles. I just didn’t want to change the blog post title.]

The governor of Illinois has released a report:

Report to Governor JB Pritzker

Illinois Pension Consolidation Feasibility Task Force

October 10, 2019

Executive Summary

Of the financial challenges facing the State of Illinois, perhaps the most critical to state and local governments’ overall long-term financial health is the long-standing challenge of our unfunded pension liabilities and the ever-increasing burdens that places on local property taxes. Illinois has more than 660 funds, the second-highest number of pension plans of any state in the country.

I’m stopping this right here.

Here are the top states by population: (estimated population, 2018)

1. California 39,557,045
2. Texas 28,701,845
3. Florida 21,299,325
4. New York 19,542,209
5. Pennsylvania 12,807,060
6. Illinois 12,741,080

Illinois is (for now) still one of the most populous states in the country. It is not necessarily shocking that it’s up high in the number of pension plans.

Within the constellation of pensions in Illinois, roughly 650 of them are suburban and downstate police and fire plans, most of which face headwinds in large part caused by the relatively small size of each plan. Because many are so small, they are unable to gain access to investment opportunities that provide the highest returns and competitive investment fees.

Mmmm, that’s quite the claim.

Collectively these pension plans today earn significantly lower investment returns than larger pension plans. For example, suburban and downstate police and fire plans generated on average 2 percentage points less annually over the past 10 years than the statewide municipal employees’ fund.

Now, that is a very large difference. But let’s look at that municipal fund’s experience:

So, 2 percentage points less would be 7.2% per year (we’ll look at what the report says when I get to it) — the difference over 10 years:

9.2% per year for 10 years: cumulative increase of 141% (for a single deposit at the beginning)
7.2% per year for 10 years: cumulative increase of 100% (for a single deposit at the beginning)

Yup, that’s quite a difference.

But here’s something: look at IMRF against its peers. It’s about the same for the 10-year average, but noticeably lower for the 5-year average. Hmmm. (This happens for most of the Illinois state funds, by the way. Their 10-year average matches the peer group, but the 5-year average is about 1 percentage point lower. I wonder if something has occurred recently.)

Also: the Public Plans Database has 17 years of data now. But we’ll look at the longer-term averages in a different post.

Back to the executive summary:

In addition, these numerous small funds pay substantially higher expenses to manage their assets and administer benefits. The sheer number of plans and the extraordinarily modest asset levels relative to other plans exacerbate both of these challenges.

I do believe this. But I don’t think it’s really the expenses nor the returns that are really killing these pensions.

Or, rather, if you look at the Chicago Police fund, you’ll see that, just perhaps, the pensions for police and fire are inherently expensive. Or, to be fair, if you’ve been underfunding the plans for years, the costs escalate very rapidly.

Okay, let’s look at the two recommendations:

STEP 1: Consolidate suburban & downstate police & fire pension plan assets.

Okay, the argument is better investment returns, lower costs. I could see that.

The point would be to consolidate the investment, but the liabilities would not be commingled. There could still be issues, but I don’t want to get into that right now. It relates to the distinction between dollar-weighted returns and time-weighted returns, and I don’t want to go down that rabbit-hole again.

This doesn’t look like it’s about bailing out these funds, but at least improving the investment results… and maaaaaybe scraping together a big ole pile of cash that makes it ripe for…well, Illinois shenanigans. But, they already have huge state funds.

There’s a second part:

STEP 2: Review consolidation of suburban/downstate police & fire pension plan benefit administration; review of other state and local plans to determine advantages of consolidation


Wait a second.

Most of the Illinois state funds are already “consolidated” and quite large. If we go to the Public Plans Database page for Illinois funds, you’ll see two of the state funds are missing – the judges and the General Assembly. Those two are very small.

But which funds, exactly, do they think they’d be consolidating?

Chicago. And Cook County.

Uh huh.

And then they’d try a “bailout”…. or go cap in hand to the federal government. Good luck with that.


Before I get to the investment comparisons, let’s take a look at a histogram of plan size:

Lots of little plans. Those numbers are from Table 2 in the report.

Next, let’s look at some funded ratio stats:

I didn’t make a graph for this one, because it’s not all that interesting at this level of detail (note: it’s not very detailed).

What you should note:
- the vast majority of the plans are underfunded (>90%), and a majority are less than 60% funded.
- Overall, the plans are 55% funded
- However, it ranges from grossly underfunded (<20% funded ratio) to merely underfunded to a handful being fully-funded (and note: the number of people is also very few).

Most of the plans fell in 41-80% funded ratio range, and that includes most of the participants. But it’s still a wide variety of outcomes. I can see some issues when you’ve got a bunch of plans with different financial health. From a strategic asset allocation/liability driven investment perspective, one cannot manage for a grossly underfunded plan the same way as for a fully-funded plan.

Not appropriately.

But let us put that aside for now, as I doubt any of these downstate plans are following any LDI strategies.


So. I want to point something out.

I’m going to copy over two tables making comparisons.

Here’s the first one:

Second one:

Pretty clear, right?

Hmmm. How does that compare to the numbers I posted above? Quite different, eh?

Oh, right, they’re for different years. So, why were the ten-year comparisons made for 2004-2013? Isn’t that a bit old? Especially since they have a partially-overlapping 2012-2016 comparison. The heck?

Indeed, given they have that amount of data (and I bet they have older stuff, too), why not do a 15-year comparison?

I do believe the bunch-of-small-plans have smaller net returns, as I bet their fees/expenses were higher. And the paper does show that… but the difference is not that much: from page 10, we get investment expenses of:

IMRF — 32 basis points (aka 0.32%)
ISBI — 12 bps
Downstate — 57 bps


Aside from the difference in the rate of investment returns there is also administrative duplication (e.g. accounting, legal services, auditing, actuarial, training, association fees, travel, etc.) and a potential lack of uniformity in the administration of benefits associated with having 649 individual and independent funds. Further analysis will need to be performed to quantify the costs associated with duplicative administrative efforts across these local pension plans. For instance, all 3,250 police and fire plan trustees are required to take initial training of 32 hours, and annual/reoccurring training of 16 hours. The largest provider of local pension trustee training in Illinois charges local pension plans $800 to $1,700 per trustee for initial training and $465 to $930 per trustee for annual/reoccurring training. Training of this multitude of trustees costs taxpayers $3 to $5 million for initial training and $1.5 to $3.0 million annually for reoccurring training. This does not include costs associated with these trainings of travel, lodging, wages, etc.

Let’s get to that bit — which was released before this particular report.

It was pretty clear when that was released it was battlespace preparation.


So, I know this was a hit in order to make it more politically popular to put all the pensions into one big pile.

A week before the release of this report, we got this: Illinois pension conference cost taxpayers at least $8 million

Here’s a surprising statistic: Illinois has 656 local police and fire pension funds, and the cost of that is illustrated this week when they all came together for an annual meeting.

They held the gathering at the Grand Geneva Resort in Wisconsin. According to WCIA, 3,000 people attended the conference at a cost to taxpayers of at least $8 million.

There’s a bill in Springfield to combine many police and fire pension program to save costs.

The fund’s current managers insist cops and firefighters would lose access to local pension planners, and they claim the savings would be relatively small.

In the CapitolFax post on the consolidation proposal, they have a comment from the governor:

Gov. Pritzker was asked today about opposition from the Illinois Public Pension Fund Association, which represents the 600+ local pension fund administrators and conducts training sessions. His response…

“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.”

Thing is, putting it all in one big pile simply provides a different pay-off opportunity for a different group of people.

So, I could point to Calpers and all its lovely scandals over time. And you still get junkets with larger funds.


From the CapitolFax coverage:

  • UPDATE 1 *** ILFOP

The Illinois Fraternal Order of Police (FOP) today expressed strong concerns about the recommendations contained within the Governor’s Committee on Pension Consolidation Report. FOP members had initially been optimistic that the committee would propose a process that would reduce fees, increase investment returns and better guarantee retirement security for law enforcement officers, their widows and orphans. However, the committee’s recommendations fail to accomplish these critical things.

“Law enforcement officers were not allowed to participate, provide feedback or be shown that this was anything other than an attempt to grab officers’ money,” said FOP Labor Council Executive Director Shawn Roselieb,who noted that the committee’s meetings were not open to the public. “Officers have paid their own money into these police pension funds every working day of their lives.”

The report recommends that the consolidated police pension fund be governed by a board where only 50 percent of the trustees are law enforcement officers. Illinois’ 16 current public employee retirement funds, including the Illinois Municipal Retirement Fund, are constituted of governing boards with a majority of members of the fund.

“No one is more concerned with the proper administration of public safety pensions than our 36,000 members,” Roselieb said. “But this committee thinks downstate police officers are the only public employees who are just not smart or sophisticated enough to manage their own money.”

The State of Illinois’ “worst in the nation” track record of managing public pensions is also cause for concern among working and retired law enforcement officers.

“Illinois police officers are not inclined to believe the state when it says it’s going to responsibly manage their money,” said FOP State Lodge President Chris Southwood. “This problem is at the heart of the FOP’s concern. Any consolidation must contain a firewall between police officers’ money and the people responsible for the pension system debacle in this state.”

Roselieb and Southwood urged members of the Illinois General Assembly to actively seek input from law enforcement officers and the general public on any pension consolidation proposal, something that the Committee on Pension Consolidation did not do when formulating its report.

“We applaud Governor Pritzker for taking on this tough subject,” Southwood said. “But the committee’s secret deliberations and their attempt to diminish future public input on the pension fund’s governance are not the right way to reach a good solution.”


  • UPDATE 3 *** From Associated Fire Fighters of Illinois President Pat Devaney…

We support the recommendations of the task force.

Well, obviously, they need to get the pension fund members on board for this to be passed. I didn’t get into the details, but they asked for two separate funds, one for police and one for firefighters.

It looks to me like the FOP are interested in making sure their members are a super-majority of the board for the police fund. I think the governance of the funds are negotiable. I don’t think it’s a deal-breaker on the state side, though I can see it being a deal-breaker for the police & firefighter unions.



East St. Louis already faces a $2.2 million state funding diversion for its firefighters pension fund. Now the police pension board is demanding $1.79 million the city owes that fund.

East St. Louis was already facing an interception of state funds to make up for missed payments to its firefighters pension fund, but now the police pension is seeking the same remedy.

The city owes its police pension $1.79 million for fiscal years 2017 and 2018. The pension board voted Sept. 26 to ask Illinois Comptroller Susana Mendoza to divert state funds from the city until its debt to the police fund is paid, according to a letter received by the comptroller’s office.

Add that $1.79 million to the $2.2 million that the city firefighters pension is already seeking through Mendoza’s office, and the nearly $4 million would choke city finances that started the year with a projected $5.5 million deficit. The city in 2018 operated on $18 million and projected a $3.7 million deficit.

I tried looking for the town’s CAFRs, by the way. This is what I found. Yes, the most recent is from 2009. And no, this is not an old web site. On the same site, I found the current Treasurer’s reports. Those are not the same thing as CAFRs.

East St. Louis is not the only town in Illinois with pension interceptions.

Fourth Illinois city faces seizure of state funds for pensions

A pension board in East St. Louis has asked the state to redirect city money to the pension fund, the fourth time a a city in Illinois has faced the state’s pension intercept law.

The pension intercept law, enacted as part of the 2011 pension reform law that was largely struck down by the Illinois Supreme Court, gives Mendoza’s office 60 days to certify the information in the complaint. If verified, the state must funnel all state-collected funding to the pension fund, something East St. Louis officials said could create public safety funding issues.

The city joins Chicago, Harvey and North Chicago, which also have been referred to the state comptroller for shorting their actuarially required pension contributions. Chicago was referred by both its police and fire pension funds but the city challenged it in court.

More on the interceptions:

And here’s a table from Wirepoints:

So, here’s a question: when you’re only 16% funded, is it really going to help much to slightly decrease non-benefit expenses?

Because the money will run out before long-term investment returns will make much of a difference.


So, I don’t think Harvey, the first town with the pension interceptions, is salvageable at this point. If it had been allowed to do a municipal bankruptcy, they could have gotten their debts in order (and there were various dysfunctions that may have been remedied… or maybe not, and it would have died anyway.)

But the point is to cut the losses before things get too bad, and so that things can be remedied.

But the way the Illinois system is set up, pretty much no municipalities are allowed to file bankruptcy. I mean, they could, if the Illinois legislature authorized it.

And the legislature is not going to allow it.

Well, not while Madigan is in charge. Because once it goes to federal court, the state legislature doesn’t quite control events, now does it?

Ideally, before the financial hole gets too deep, municipalities could file for bankruptcy and then get to adjust the pensions to a risk-sharing plan, which is a kind of hybrid plan with much lower income guarantees but also not completely throwing participants to the full investment and longevity risk.

I’ve written about this before:

A Proposal: Restructuring Current Public Pensions Through Municipal Bankruptcy

The Core Idea:

There are two parts to the idea:

  • A sustainable defined-benefit pension, with risk-sharing elements
  • A legal mechanism by which current pension liabilities can be transferred to this risk-sharing system

That’s pretty much it.

The actual unique part of this proposal is the legal mechanism, which obviously hasn’t been tried in the public sphere yet.

Well, the bankruptcy isn’t exactly new, but coming up with a pre-packaged bankruptcy is new.

The full paper, which I co-wrote with lawyer Gordon Hamlin, is on Scribd.

I don’t think that consolidated management of the investments is necessarily a bad idea. Frankly, one should manage investments differently for fully-funded plans versus deeply underfunded plans. But I doubt that these plans were doing much in the way of asset-liability matching or any strategy other than try to maximize their returns under a specific risk appetite.

But it still won’t save the funds. And, as with IMRF, the municipalities would probably lose control over what they contribute… but what with more interceptions, they’re already losing control.

All I can say is that is it won’t make the situation worse.

But it won’t make it better enough.

And I certainly don’t trust step 2 of the plan mentioned in the proposal.

It’s one thing to take a bunch of itty-bitty plans and pile the money together to get better deals on investments.

It’s another thing to take some fairly large plans, which are grossly underfunded, and then…. what?

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