Illinois legislators gather input from cities, unions on pensions

Wednesday, September 22, 2010

CHICAGO ­— Municipal and union officials from throughout Illinois gathered in Chicago on Tuesday to discuss proposals to change the pension structure of public safety workers.

At one end of the divide stand city officials like Rockford Mayor Larry Morrissey, who said the benefits are too rich and that police officers and firefighters aren’t contributing enough of their salaries to fund them. On the other end are police and fire unions, who say poor financial investing and low market returns are to blame.

Today’s hearing of the Illinois House of Representatives subcommittee on police and fire pension reform hit on those points, and many more, as legislators try to move forward on a reform bill. The committee members’ goal is to craft legislation and pass it during the fall veto session.

The two-hour meeting, which was cordial despite the groups’ differences, in downtown Chicago touched on a number of proposals, from combining the hundreds of local public safety pension funds into one statewide system to changing actuarial rules and investment policies.

Several recommendations

“A lot of things can work. A lot of things can be a solution,” said Morrissey, who spoke on a panel assembled by the Illinois Municipal League, a government advocacy group.

The league presented several recommendations for changing future police and fire benefits, including:

* Increasing the retirement age from 50 to 60.

* Increasing the time in which the maximum pension can be earned, from 30 to 35 years of service.

* Setting a cap on salary used for pension calculations.
* Using an average final salary for pension calculations, not salary on last day of service.

Those changes, if included in a bill that passed this fall, would go into effect for employees hired in 2011 or later. That’s similar to the two-tiered pension system created by state lawmakers this spring, in which most local and state employees hired after Jan. 1, 2011, would pay more, get reduced benefits and work longer for their pensions.

The league also presented recommendations that would reduce unfunded liabilities of the state’s pension plans, including increasing contributions for employees already in the system.

Employee contributions

According to league’s calculations, the amount contributed by employees under the police and fire pension system is completely spent within two years of retirement, leaving the employer contributing the bulk of the cost toward retirement.

“They need to share more in the cost of what are very generous benefits,” said Carbondale Mayor Brad Cole. “An employee or their spouse could collect $7.5 million after contributing about $300,000 over the course of their career.”

The league’s calculations assume employees start working at age 22, receive a 5.5 percent raise every year, retire at 52 and live until 83. Pat Devaney, president of Associated Fire Fighters of Illinois, didn’t disagree with the league’s math but said its assumptions aren’t based on reality.

Statewide, Devaney said, firefighters begin work at 26, retire at 54 and have 28 years of service — numbers that would take a bite out of the league’s worst-case calculations.

Key problems

Devaney, speaking on behalf of both police and fire unions, said the problem with pension plans isn’t the benefits. He cited a Commission on Government Forecasting and Accountability study that showed 77 percent of unfunded police and fire pension liabilities are caused by factors other than benefit changes.

Instead, he said, “the three leading drivers” were poor investment returns, incorrect actuarial assumptions and isolated cases of cities intentionally not making their contributions.

Devaney referred to negotiations this spring between police and fire unions and legislators over a public safety pension reform bill. Although those talks ultimately stalled, Devaney said the unions are standing behind one reform they proposed, giving the state enforcement authority over cities that don’t make their pension contributions.

Such authority doesn’t exist right now, and passing it would eliminate the black hole in which cities can find themselves if they start skipping payments, said Art Tepfer, an actuary representing the Illinois Public Pension Fund Association.

‘Fundamental equation’

“It’s the fundamental equation of pension funding: contributions plus returns equals benefits,” he said. “The problem is if you do not make a contribution in this formula, ultimately what will happen is you will have to put in a contribution and all the expected investment earnings that would have been generated.”

The league’s group did not have an official position on the enforcement. Morrissey said he’s not opposed to it, noting that any fine or seizure of local tax revenues would ultimately harm police and firefighters through cuts in their employee ranks.

“This is political warfare between active employees, retired employees and taxpayers,” he said. “If the Legislature mandates that we pay and we don’t go through with other reforms, we’ll end up dealing with the issue but it will be in bankruptcy court. That’s when the whole house of cards melts down.”