Pension plans stress Naperville budget

Retirement plans for police and fire employees stressing Naperville's budget, but what to do about it?

Wednesday, August 18, 2010

This is the first in a two-part series on the problem of public safety pensions and their funding.

Naperville's police and fire pension funds tanked in fiscal year 2009.

The Police Pension Fund lost $10.5 million. The Fire Pension Fund lost slightly less than $10 million.

And that's when the trouble really started.

Public pensions are messy business. It's a complex issue of tax burdens, investment returns, unfunded liabilities and other difficult concepts. But this November, it'll be boiled down to one question at the ballot box, when Naperville voters will be asked whether to send a message of pension reform to Springfield.

The problem

"You care because public safety pensions represent 24 percent of your property tax levy," said Naperville City Manager Doug Krieger, "whereas a decade ago, it was only 12 percent."

That number is growing, in short, because Naperville's unfunded liability is growing.

"You look at assets, or how much is in the fund, over liability, or how much is owed to pensioners and how much is owed to employees currently," said Dan DiSanto, assistant to the city manager. "If your assets don't match your liability, you have an unfunded liability."

Police and fire pension funds are paid into from three sources: contributions from the city, deductions from the employee's paycheck and investments. In a defined-benefit pension, when investments fail to turn a profit, it's up to the city to contribute more to make up for the shortfall.

In Naperville, the Police Pension Fund is only 53.5 percent funded. If every police officer in the city's force were to retire today and be added to the already existing pool of retired police officers, the city would be able to pay out only 53.5 percent of what it owes. Likewise, the Fire Pension Fund is 59.2 percent funded.

Naperville's unfunded pension liability, the amount it owes to its current and future pensioners in the police and fire departments, now stands at $101.5 million, and depending on how the markets do, that figure could continue to grow. According to a state law passed in 1993, the city will have to pay that bill, that is, it will have to be 100 percent funded, by 2033.

The result is that as budgets are passed each year, an increasing proportion will have to be put toward funding pensions rather than providing city services.

"This all goes back to 1993," said Don Bisch, president of the Naperville Police Pension Board.

That year, a new state law required the police and fire pension funds be fully funded by 2033, but it also changed the formula for how much cities would be required to contribute each year. Rather than contribute a flat rate each year as they had been doing, cities could contribute less in the late 1990s and early 2000s than they had been previously, based on a percentage of police and fire payrolls. But as the 2033 deadline to reach 100 percent funded approached, the amount cities had to contribute each year increased dramatically.

Bisch likens it to an adjustable rate or balloon mortgage.

"Payments went up and people couldn't afford their payments, and they lost their homes. We don't want to see the municipalities, including Naperville, get to the point where they can't make their payment," he said.

The problem was compounded when the recession hit and investments sunk, leaving the city with an even bigger hole to fill.

The question

Come Nov. 2, Naperville residents will be asked to vote on whether the Illinois General Assembly and the governor should "immediately pass meaningful police and fire pension reform that will reduce the future funding obligation on local taxpayers." The question is non-binding, meaning nothing can change unless the Legislature and governor approve.

Still, it's a loaded and unfair question, for a number of reasons, according to representatives of the police and fire boards.

"Ask a taxpayer if they want to lower their tax burden, and what are they going to say?" said Bisch, the person responsible for making the case for the city's 174 officers and 50 retired officers in the pension system.

There are other reasons police and fire pension representatives are asking residents to vote "No" on the question. It draws comparisons between police and fire positions and other public employees, it fails to acknowledge the history of public pension funding, and because it's not binding, an answer either way wouldn't enact any reforms.

But perhaps most important for voters, the ballot question is nebulous on what shape pension reform might take.