In­creas­ing Li­a­bil­i­ties In Illi­nois

The Bond Buyer - - Front Page - By YVETTE SHIELDS

The un­funded li­a­bil­i­ties of lo­cal gov­ern­ment public safety funds out­side Chicago nearly dou­bled over the last decade, erod­ing funded ra­tios to be­low 60%.

The data is in a De­cem­ber re­port from the Illi­nois Gen­eral Assem­bly’s Com­mis­sion on Gov­ern­ment Fore­cast­ing and Ac­count­abil­ity that re­viewed the sta­tus of the 653 po­lice and fire­fighter funds that cover public safety work­ers in mu­nic­i­pal­i­ties out­side Chicago. For fis­cal 2016, the re­port ex­am­ined 356 po­lice and 297 fire­fighter funds.

The re­port – along with one from the state au­di­tor gen­eral’s of­fice – un­der­scores the sweep­ing pen­sion bur­dens that are pres­sur­ing Chicago and Cook County area gov­ern­ments, the state, and down­state mu­nic­i­pal­i­ties.

The COGFA public safety re­port of­fers a 26-year view of the funds. Com­bined, the po­lice and fire­fighter funds “had $953 mil­lion in un­funded li­a­bil­i­ties in fis­cal year 1991. By fis­cal year 2016, that fig­ure had jumped to $9.93 bil­lion,” it says.

Un­funded li­a­bil­i­ties reached that peak of $9.93 bil­lion in fis­cal 2016 from $5.17 bil­lion in fis­cal 2007.

“Po­lice and fire funds ended fis­cal year 1991 with ag­gre­gate funded ra­tios of 75.09% and 76.40%, re­spec­tively,” the re­port says. In fis­cal year 1999, the funded reached peaks of 76.37% and 78.57%, re­spec­tively, but then a year-over-year down­ward trend be­gan. “Po­lice and

Fire pen­sion funds bot­tomed out in the low 50’s in the wake of the 2008 stock mar­ket down­turn, but have grad­u­ally in­creased each year since 2009.”

Com­bined, the funds were 57.58% funded in fis­cal 2016, down from 62.55% in fis­cal 2007, but up from the low of 51.13% in fis­cal 2009 which re­flected the mar­ket down­town dur­ing the fi­nan­cial cri­sis. Com­bined, they peaked at 77.31% in 1999.

Un­der a 2011 law, lo­cal gov­ern­ments have shifted from a statu­to­rily based pay­ment to an ac­tu­ar­i­ally based con­tri­bu­tion level that puts their funds on a path to a 90% funded ra­tio by 2040.

The pre­vi­ous COGFA re­view was pub­lished in May 2015 and was based on fis­cal 2013 data. The De­cem­ber re­port adds three years of data.

Un­der the new law, be­gin­ning in fis­cal 2016 pen­sion funds could be­gin in­ter­cept­ing a por­tion of their lo­cal gov­ern­ment’s state grants if a mu­nic­i­pal­ity was delin­quent in con­tri­bu­tions. This year, the amount that can be in­ter­cepted hits 100%. How­ever, fund­ing in­ter­cept rules have not yet been adopted that would al­low such ac­tion.

The public safety funds out­side Chicago ac­count for just a small piece of the statewide pen­sion quag­mire, but the fund­ing pres­sures -- es­pe­cially given the state man­date -- have im­pacted the credit pro­file of some lo­cal gov­ern­ments.

“We’ve down­graded ap­prox­i­mately 15% of our port­fo­lio of Illi­nois cities in 2017,” said Moody’s In­vestors Ser­vice an­a­lyst David Levett. “Among cities we’ve down­graded, pen­sions have been the pri­mary rat­ings driver.”

The col­lec­tive funded ra­tios of all Illi­nois public pen­sion funds falls un­der 50% with the col­lec­tive li­a­bil­i­ties of public pen­sion funds statewide at $185.2 bil­lion in fis­cal 2016 com­pared to $168.2 bil­lion in fis­cal 2015.

The col­lec­tive funded ra­tio de­te­ri­o­rated to 47.9% from 49.4%, ac­cord­ing to the bi­en­nial re­port re­leased in Oc­to­ber by the Illi­nois Depart­ment of In­sur­ance. It as­sessed the health of all 671 of the state’s public pen­sion funds.

Of the $185.2 bil­lion un­funded tab based on fis­cal 2016 fig­ures, large funds make up $175.3 bil­lion. The state’s five funds alone ac­count for $126.5 bil­lion. The state has since dis­closed its fis­cal 2017 re­sults which put its un­funded li­a­bil­i­ties now at $128.9 bil­lion.

The other large funds in­clude Chicago’s four funds, the city’s sis­ter agen­cies’ and school district’s funds, Cook County’s two funds, the Chicago area wa­ter district, and the Illi­nois Mu­nic­i­pal Re­tire­ment Fund which cov­ers mu­nic­i­pal em­ploy­ees out­side Chicago.

The Dec. 28 re­port from Au­di­tor Gen­eral Frank Mautino of­fers the views of state ac­tu­ary Che­iron which con­ducts an an­nual re­view of the state’s five funds. It found cur­rent in­vest­ment re­turns “rea­son­able” but warned of sol­vency con­cerns in event of a mar­ket down­turn. The ac­tu­ary also now re­views the Chicago Teach­ers’ Pen­sion Fund.

The funded ra­tio of the six ranged from the Chicago teach­ers’ fund high of 51.3% to the Gen­eral Assem­bly fund’s low of 14.9%.

“Che­iron has con­cerns about the sol­vency of the sys­tems if there is a sig­nif­i­cant mar­ket down­turn and rec­om­mended the sys­tems in­clude stress test­ing within the val­u­a­tion re­ports,” the re­port said.

All sys­tems are or will be ex­pe­ri­enc­ing neg­a­tive cash flows -- mea­sured by con­tri­bu­tions af­ter ben­e­fits and ex­penses are sub­tracted -- which may im­pact the in­ter­est rate re­turns that are re­al­ized, the re­port fur­ther warned.

Che­iron also rec­om­mended shift­ing the fund­ing sched­ule, which now aims to reach a 90% funded ra­tio by 2045, to tar­get 100%. “Con­tin­u­ing the prac­tice of un­der­fund­ing fu­ture ac­cru­als in­creases the risk of the sys­tems be­com­ing un­sus­tain­able,” the re­port said.

Such a move is un­likely. Gov. Bruce Rauner and law­mak­ers agree that fur­ther ef­forts are needed to solve the state’s pen­sion mess, which along with the two-year bud­get im­passe that ended in July dragged the state’s rat­ings down to low­est among states and to the verge of junk sta­tus. The courts have ruled that ben­e­fits are pro­tected by the state con­sti­tu­tion and other mea­sures that would trim li­a­bil­i­ties have stalled.

The Illi­nois Mu­nic­i­pal League this year plans to press law­mak­ers to ease the path for con­sol­i­da­tion to help ease strains with ben­e­fit cuts off the ta­ble.

“The Gen­eral Assem­bly should re­duce long-term pen­sion costs by con­sol­i­dat­ing the ad­min­is­tra­tive and/or in­vest­ment func­tions of the over 660 mu­nic­i­pal public safety pen­sion funds to achieve greater ad­min­is­tra­tive ef­fi­ciency and in­vest­ment re­turn op­por­tu­ni­ties,” the league wrote in a re­port this month about its leg­isla­tive agenda.

The Demo­cratic leg­isla­tive ma­jori­ties and Rauner and his fel­low Repub­li­cans did agree in the fis­cal 2018 bud­get pack­age to es­tab­lish a new tier of pen­sion ben­e­fits but that’s yet to come to fruition. An­other mea­sure that phases in the im­pact of ac­tu­ar­ial as­sump­tion changes – such as a low­er­ing of as­sumed in­vest­ment re­turn rates -- has trimmed neart­erm con­tri­bu­tions but will add to long-term strains.

The ac­tu­ary’s re­cer­ti­fi­ca­tion of con­tri­bu­tions to the funds trimmed $900 mil­lion off the orig­i­nal $8.8 bil­lion fig­ure for fis­cal 2018. The ac­tu­ary cer­ti­fied to­tal pay­ments of $8.67 bil­lion for the next fis­cal year that be­gins July 1. The state’s bud­get to­tals $36.1 bil­lion.

With much at­ten­tion be­ing paid na­tion­ally to in­vest­ment re­turn rates used by public funds and other ac­tu­ar­ial as­sump­tions, Che­iron of­fered a gen­er­ally pos­i­tive as­sess­ment of the cur­rent sta­tus of the state and Chicago teach­ers’ funds.

Che­iron “re­viewed the ac­tu­ar­ial as­sump­tions used in each of the six sys­tems’ ac­tu­ar­ial val­u­a­tions for the year ended June 30, 2017, and con­cluded that they gen­er­ally were rea­son­able with two ex­cep­tions, both of which ap­plied to the Chicago Teach­ers’ Pen­sion Fund,” the re­port said.

The Chicago teach­ers’ fund made the rec­om­mended changes in De­cem­ber.

Che­iron high­lighted the na­tional trend of low­er­ing as­sumed re­turn rates to re­flect con­cerns over the low-in­ter­est-rate en­vi­ron­ment. In 2001, 105 of 127 ma­jor public funds sur­veyed as­sumed 8% re­turn rates, ac­cord­ing to data cited from the Na­tional As­so­ci­a­tion of State Re­tire­ment Ad­min­is­tra­tors. Only 17 funds used an 8% rate as of Novem­ber with the me­dian as­sump­tion now at 7.5%. Twenty-five plans use a rate of 7% or lower.

The ac­tu­ary rec­om­mended that the Chicago teach­ers’ fund lower its as­sumed rate of re­turn to no higher than 7.25% and its wage in­fla­tion as­sump­tion be low­ered to 3.25% from 3.50%. The fund adopted the rec­om­men­da­tions in De­cem­ber. The fund had pre­vi­ously low­ered its rate to 7.5% from 7.75% in­vest­ment re­turn rate for cal­cu­la­tions through fis­cal 2016.

Over the last few years, all the Illi­nois funds have low­ered their as­sumed rate of re­turns with TRS and the State Em­ploy­ees’ Re­tire­ment Sys­tem now at 7%, the State Uni­ver­si­ties Re­tire­ment Sys­tem now at 7.25%, and the Judges’ Re­tire­ment Sys­tem and Gen­eral Assem­bly Re­tire­ment Sys­tem both at 6.75%.

Che­iron was selected to serve as state ac­tu­ary un­der a 2012 law and is charged with re­view­ing state con­tri­bu­tion re­quests from the var­i­ous pen­sion funds and iden­ti­fy­ing rec­om­mended changes to ac­tu­ar­ial as­sump­tions that the boards must con­sider be­fore fi­nal­iz­ing their cer­ti­fi­ca­tions.

A sweep­ing over­haul of public school fund­ing signed by Gov. Bruce Rauner on Aug. 31 added the Chicago Teach­ers’ Pen­sion Fund to the list of five state funds that must sub­mit in­for­ma­tion to the ac­tu­ary. ◽

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