The math behind IMRF

How the fund — and this report — add up

Friday, September 17, 2010

What is IMRF?

The Illinois Municipal Retirement Fund is the second-largest pension fund in Illinois. It covers most municipal, county and park district workers outside Chicago. It includes sheriff's deputies but not police officers or firefighters. It also includes some school administrators and employees of some quasi-government agencies that work exclusively with governments.

How does it work?

Employees contribute 4.5 percent of pay every check, which is invested to help fund their retirements. Government agencies kick in the rest at rates that fluctuate depending on the pay and ages of their workforces. When an employee retires, IMRF averages the most lucrative 48 continuous months of the last decade of his or her career, and calculates a pension based on how many years the employee worked. It tops out at 75 percent of average pay, with 40 years of service.

The only exception is sheriff's deputies, who set aside more per paycheck (7.5 percent) so they can retire earlier and collect more (80 percent of pay at 32 years).

Once IMRF figures out the monthly pension, it estimates how long the retiree will live and calculates a total pension cost. It subtracts the employee's contributions, which usually cover a fourth of the total cost, and takes the rest out of the employer's deposits. All that money — the employee's and employer's shares — is deposited into a special pooled account that covers all retirees.

How does pension spiking cost taxpayers?

IMRF makes government agencies contribute over time at a pace that will cover pension costs if employees' salaries rise at a normal pace. But when salaries spike at the end of a career, the 48-month pay average spikes too, and neither the employee nor the local agency has contributed enough to cover the super-size pension.

So IMRF takes a bigger chunk out of the local agency's pot of pension contributions — with the extra being contributions that, in essence, were put in there to cover other future retirees. Now left with a deficit to cover future retirees, the local agency must pay more than usual to make up the difference over time.

How did the Tribune determine spiking costs?

Using the state's Freedom of Information Act, the Tribune obtained IMRF data on all retirees since 1995, including their calculated pension costs. Reporters focused on 44 who had retired since 2008 into pensions earning at least $100,000 a year. Using the open records act, reporters obtained detailed pay records for all 44 from their previous employers, calculated their base pay for their most lucrative 48 months, and determined what their pension costs would have been if only base pay had been used to determine pensions. The difference was the extra amount taxpayers had to pay for inflated pensions.

To determine larger costs of spiking, the Tribune could not easily obtain or analyze detailed pay records of tens of thousands of retirees. So it analyzed the IMRF data and projected pension costs if Illinois followed a Kansas rule that allows pensions to be based on pay that increases up to 15 percent a year, but no more. Using that, the Tribune found that, for 29,248 employees who retired in the past decade making at least $20,000 a year, a fourth of them would have had their pensions reduced, saving taxpayers $147,387,777.66 in extra pension costs.