1
Report to Governor JB Pritzker
Illinois Pension Consolidation Feasibility Task Force
October 10, 2019
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Table of Contents
1. Executive Summary
2. Background on Illinois Pension Plans
a. Suburban & Downstate Police & Fire Pension Plans
b. Cook County & City of Chicago Pension Plans
c. Illinois Statewide Pension Systems and Other Pension Plans
3. Recommendation, Step 1: Consolidate Suburban & Downstate Police & Fire Pension Plan Assets
4. Recommendation, 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
5. Conclusion
6. Appendix: Illinois Pension Consolidation Feasibility Task Force Creation & Members
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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.
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. 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. 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.
Not only does this negatively impact the funding level of police and fire pension plans, but local
taxpayers are left with the burden of paying taxes to make up for these lower investment returns,
forcing most municipalities to rely on a never-ending cycle of increasing local property taxes or cutting
services to meet their pension obligations.
To help solve the police and fire pension funding problem and relieve the burden on taxpayers,
Governor Pritzker announced the creation of the Pension Consolidation Feasibility Task Force on
February 11, 2019, to explore and make recommendations for consolidation of pension funds in order to
achieve the greatest value for employees, retirees, and taxpayers. Members of the task force include
municipalities, labor unions, former elected officials and financial experts.
After eight months of data collection, analysis, and many meetings, the Task Force recommends the
State take the following actions:
STEP 1: Consolidate suburban & downstate police & fire pension plan assets.
The single most impactful step that the State can take to address the underfunding of downstate and
suburban police and fire pension funds is to consolidate the plans’ investment assets. This step is
immediately actionable and beneficial to the health of the plans, retirees, and taxpayers. Analysis by the
Department of Insurance estimates that if the more than $14 billion of suburban and downstate police
and fire plans were to achieve investment returns similar to the other larger Illinois plans over the next
five years, they would collectively generate an additional $820 million to $2.5 billion in investment
returns alone. If they were to achieve comparable returns over the remaining 20 years on their statutory
ramp to 90% funded status, they would create an additional $3.6 to $12.7 billion in investment returns
alone.
To achieve this consolidation, the Task Force recommends that the State create two new funds, one for
municipal police beneficiaries and one for municipal fire beneficiaries, to pool the assets of the roughly
650 downstate and suburban police and fire funds and manage those assets. Each fund would be
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governed by a board with equal representation of employees and employers. Each local pension plan
would maintain an individual and separate account within the new consolidated funds, such that no
assets or liabilities are shifted from one plan to another. Each of the two consolidated funds will be held
in independent trusts, separate from the State Treasury, with sole governance provided by their
respective boards.
With up to $1 million a day in lost investment returns to the pension plans, the Task Force
recommends there be legislation passed by the General Assembly in the fall of 2019 that will achieve
this consolidation.
In addition, the Task Force recommends other statutory changes to ensure the State is compliant with
the safe harbor standard of the Social Security Administration and Internal Revenue Code, thereby
avoiding substantial and sudden future costs to municipalities resulting from non-compliance.
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
Downstate and suburban police and fire funds face further financial challenges beyond just the
underperformance of investment returns and high cost of administering assets of these systems that
consolidation will address. Therefore, the Task Force recognizes there may be additional advantages to
consolidating the benefit administration of these plans. However, because such action requires further
discussion with those who would be affected by such a change, it is the recommendation of the Task
Force that it should continue to review the advantages and challenges of consolidating benefit
administration, and to make potential recommendations to the Governor on this issue.
Additionally, there are 15 other pension systems in Illinois outside of suburban and downstate police
and fire that bear significant financial burdens. Unlike suburban and downstate police and fire plans
these funds are larger funds, and consolidation would not achieve material improvement of their
investment returns. Because the current financial pressures on these systems are so significant,
especially for the City of Chicago, it is recommended that the Task Force to continue to review the
potential advantages of consolidation of these larger systems and to make recommendations to the
Governor on this issue.
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Background on Illinois Pension Plans
In the United States, all state governments maintain some form of retirement system(s) (or otherwise
referred to as “funds” or “plans”) for the retirement security of their public employees. The size, shape,
form, and number of these systems varies dramatically, however, across states. Pennsylvania, Illinois,
and Minnesota are the states with the highest number of public state and local pension systems, with
1,597; 664; and 577, respectively. 78% of states in the US have fewer than 100 state and local pension
systems, with 26% of states having fewer than 10. As for the size of each state’s average state and local
pension system, Illinois ranks 42
nd
out of 50 states for the average value of total assets per pension
system.
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Chart 1: Size Comparison of Pension Plans in US
1
US Census Bureau, 2017 Census of Governments: Finance—Survey of Public Pensions: State- and
Locally-Administered Defined Benefit Data, with amended Illinois local funds based on Department of
Insurance FY 2017 report
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In other large states with comparable population size (such as New York, California, and Texas), the
number of pension systems are significantly less than Illinois (9, 86, and 140, respectively). For a
regional comparison, Ohio has only one pension system for all police and fire personnel, and 8 state and
local pension systems in total. Some states that have gone through a consolidation process over the
years include Wisconsin, Massachusetts, West Virginia, Ohio, and Colorado. Two specific state systems
that have substantially consolidated assets are the Massachusetts Pension Reserve Investment
Management Board (PRIM) and the State of Wisconsin Investment Board (SWIB). PRIM, for example, is
a not-for-profit agency with a chief investment officer and other investment managers specializing in
various markets such as real estate, private equity, hedge funds, etc. Salaries and other costs of
operation are charged on a pro rata basis back to the participating funds.
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Suburban and Downstate Police and Fire
In Illinois, the vast majority (649) of the existing 664 pension plans are for police and fire personnel
employed by municipalities outside of the City of Chicago.
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These plans are commonly referred to as
“suburban and downstate” police and fire pension plans. While 98% of Illinois pension plans are for
suburban and downstate police and fire, their plan assets represent less than 10% of the total plan
assets for all Illinois public pension plans. This makes these plans unique to the other plans in the state
in that their governmental aggregate volume of assets is significantly smaller than the other Illinois,
Cook County, and City of Chicago plans.
Table 1: Average Volume of Assets by IL Pension Plan Category ($ in Millions)
Plan Category
# of
Plans
Average Actuarial
Value of FY 2017
Assets Per Fund
Suburban & Downstate Police & Fire Plans
649
$22
Cook County & City of Chicago Plans
9
$3,533
Illinois Statewide Plans
6
$16,883
While the average suburban and downstate police and fire pension plan has $22 million in actuarial
value of assets, 65% of those plans have less than $20 million in assets, and 44% of them have less than
$10 million in assets.
4
2
Sources: Boston Consulting Group analysis; March 2019 phone conversation with Keith Brainard,
Research Director of National Association of State Retirement Administrators (NASRA); March 2019
phone conversation with Michael Travaglini, prior senior staffer at PRIM.
3
The number of plans varies year-to-year and as such, these numbers may differ slightly from other
publicly-available sources
4
Source: Illinois Department of Insurance, Public Pension Division, 2017 Biennial Report
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Table 2: Suburban and Downstate Police and Fire Pension Plan Asset Volumes ($ in Millions)
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Plan Assets
Count
% of Total Count
Total Actuarial Value
of FY 2017 Assets
% of Total Assets
$0-$10M
285
43.9%
$1,136
7.9%
$10M-$20M
139
21.4%
$2,069
14.4%
$20M-$30M
88
13.6%
$2,182
15.2%
$30M-$40M
47
7.2%
$1,627
11.4%
$40M-$50M
26
4.0%
$1,118
7.8%
$50M-$60M
9
1.4%
$539
3.8%
$60M-$70M
10
1.5%
$653
4.6%
$70M-$80M
15
2.3%
$1,132
7.9%
$80M-$90M
8
1.2%
$677
4.7%
$90M-$100M
1
0.2%
$96
0.7%
$100M+
21
3.2%
$3,092
21.6%
Total
649
$14,321
As of December 31, 2017, the smallest and the largest suburban and downstate plan assets among these
pension funds held $2,000 and $250 million, respectively, with only 3% of the plans having assets
exceeding $100 million. Due to liquidity concerns around smaller plans bearing larger risk, plans with
smaller size generally achieve substantially lower investment returns. In addition to a wide gap in assets,
the number of active fund participants varies greatly by fund. The average number of plan participants
per plan is only 67 individuals, with 24 plans having only one active participant. Only five suburban and
downstate police and fire plans have more than 500 active participants, with the Rockford Police
Pension Fund having the most at over 600.
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Based on Illinois Department Insurance data available in the spring of 2019
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Table 3: Funded Levels of Suburban and Downstate Police and Fire Pension Plans
The funded ratio for the average suburban and downstate police and fire pension plan is 55% funded,
with 59% (384 of 649) of funds at or below a 60% funded level. In many of these plans, the cash inflows
(contributions from employers and employees, and investment returns) are less than the cash outflows
(benefits and expenses). Also, their investment returns are often less than their assumed actuarial
discount rate, meaning the average unfunded accrued liability gap of 45% is unlikely to ever be closed
without major corrective action.
For the purposes of this Task Force, the Illinois Department of Insurance conducted an analysis of the
investment returns of these plans, looking at 592 suburban and downstate police and fire plans from FY
2004 to 2013.
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The market values of the sample plan assets were $6.7 billion in FY 2004 and $11.5 billion
as of FY 2013, and earned an annual average of 5.61% on investments, net of fees. The Department then
looked at what those plans would have earned had they been pooled together into a larger system to
take advantage of economies of scale, broader investment options, and more choices on investment
vehicles. The analysis showed that had they performed similarly over the FY 2004-2013 time period to
the Illinois State Board of Investment (ISBI) or the Illinois Municipal Retirement Fund (IMRF), they would
have returned 6.73% or 7.62%, respectively. These two systems were used as a basis for comparison
because of their composition of a pooling of smaller funds. This 112 to 201 basis-point increase in
returns would have netted suburban and downstate police and fire plans an additional estimated $160
million to $288 million annually.
6
Some funds were excluded from the analysis because they either had different fiscal year dates, or
were terminated at some point during the 10-year period of analysis.
% Funded Range # of Funds
Total
Participants in
Funds
Actuarial Value
of Assets (A)
Actuarial Calculated
Accrued Liabilities (L)
Unfunded Accrued
Liability (L-A)
Avg. % Funded
(A/L)
201% - 700% 3 8 $5.2 $1.3 -$3.9 397%
151% - 200% 2 23 $7.4 $4.4 -$2.9 166%
101% - 150% 17 385 $208.7 $199.0 -$9.8 105%
81% - 100% 36 1,107 $411.7 $479.0 $67.3 86%
61% - 80% 207 12,534 $5,142.6 $7,477.9 $2,335.2 69%
41% - 60% 275 23,976 $7,601.6 $14,585.2 $6,983.6 52%
21% - 40% 21 671 $893.9 $2,765.6 $1,871.7 32%
0% - 20% 88 4,963 $53.9 $340.5 $286.6 16%
Total 649 43,667 $14,325.0 $25,852.9 $11,527.9 55%
Notes:
Pension Division
IL Department of Insurance
(4) As s ets are ca lcula ted bas ed on a fi ve yea r s moothing as required by Article 1 of the IL Pension Code.
(3) The informa tion i s ba s ed on the Divis ion's enroll ed a ctua ry valuati on reports with a ssumptions developed a nd documented in 2017
experience report.
(2) The funds wi th over 151% a re new funds wi th more a ctive partici pa nts tha n annuita nts or have only one member in the fund.
(1) Four funds di d not s ubmit an Annua l Statement i n FY 2017. Pendi ng hea rings .
Data as filed for Fund's FY 2017 ($ in Millions)
Summary of Pension Funds in Article 3 and Article 4 of IL Pension Code
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Table 4: Comparison of Suburban & Downstate Police & Fire Plans’ Net Investment Returns to IMRF &
ISBI, FY 2004 - 2013
Table 5 shows a more recent 5-year investment return average and compares the returns of suburban
and downstate police and fire plans to other pension plans in Illinois, besides just IMRF and Illinois State
Board of Investment (“ISBI”)-managed assets. Based on the data for this time period, were suburban
and downstate police and fire plans to achieve investment returns similar to the other Illinois plans over
the next five years, they would create an estimated additional $820 million to $2.5 billion in investment
returns alone, above and beyond the returns they would ordinarily experience.
As the statutorily defined pension ramps are currently constructed, higher returns will ultimately mean a
reduction in the required annual employer contribution, and therefore an easing of the burden on
taxpayers to pay down the unfunded pension liabilities. While required employer contributions adjust to
changes in investment returns, it would be reasonable to inquire how an increase in these returns would
impact the overall health of the pension plans if required employer contributions remained unchanged.
For the sake of comparison, if the suburban and downstate police and fire plans were to have
experienced returns similar to the Illinois Municipal Retirement Fund (IMRF) over the last 5 years, and
that additional $2.5 billion were layered on top of the employer contributions actually made over that
time period, the plans would be 10 percentage points better funded today as a result of just those 5
years of improved returns (65% funded instead of 55%).
Table 5: Comparison of Suburban & Downstate Police & Fire Net Investment Returns to All Other
Illinois Pension Plans, FY 2012 - 2016
FY 2012 - 2016 Avg. Annual Investment Returns (Net Fees) For IL Pension Systems ($ in Millions)
No.
of
Plans
5-Yr
Avg.
Ann.
Returns
If Suburban & Downstate Police & Fire Returns
Matched That of the Other IL Systems…
Basis Point
Increase
Annual $
Increase
5-Yr Total $
Increase
Suburban & Downstate
Police and Fire
649
5.06%
N/A
N/A
N/A
Total All Other Systems in IL
15
6.89%
183
$262
$1,360
IMRF
1
8.28%
322
$461
$2,460
IL Statewide Systems
5
6.18%
112
$160
$820
Chicago Area
6
6.94%
188
$269
$1,398
Cook County
3
7.38%
232
$332
$1,741
Basis Point
Increase Annual $ Increase
Suburban & Downstate
Police and Fire
5.61% N/A N/A
IMRF 7.62% 201 $288
ISBI 6.73% 112 $160
Avg.
Ann.
Returns
FY 2004 - 2013 Avg. Annual Investment Returns (Net Fees), $ in Millions
If Suburban & Downstate Police & Fire
Returns Matched That of IMRF or ISBI…
10
As indicated, the larger pooled systems tend to operate more efficiently in terms of investment fees and
expenses than smaller ones. For example, as of FY 2018, IMRF spent $127 million on direct investment
expenses on $40.8 billion in total assets, for an investment expense-to-assets ratio of 32 basis points. In
the same year, ISBI spent $22 million on direct investment expenses on $18.4 billion in total assets, for
an investment expense-to-assets ratio of 12 basis points. When the Illinois Department of Insurance
analyzed the suburban and downstate police and fire pension plans in FY 2013, they found that these
plans spent $65 million on direct investment expenses on $11.5 billion in assets, for an investment
expense-to-assets ratio of 57 basis points. Were these assets pooled and managed similar to the assets
of IMRF or ISBI, they would have saved an estimated $38-$51 million annually on investment-related
expenses alone.
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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 $3.0
million annually for reoccurring training. This does not include costs associated with these trainings of
travel, lodging, wages, etc.
8
7
Source: 2018 Comprehensive Annual Financial Reports. Note, because IMRF and suburban and
downstate police and fire pension plans also administer benefits to pensioners, whereas ISBI does not,
general administrative expenses were excluded from this comparison.
8
"Public Safety Pension Fund Consolidation: The Benefits to Illinois Taxpayers," March 2017:
https://iml.org/file.cfm?key=15332
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Cook County & City of Chicago Pension Plans
Nine of Illinois’ pension plans cover just the areas of Cook County and City of Chicago. With around
100,000 participants, these systems make up 18% of all participants in Illinois’ pension plans. Similarly,
their plan assets make up 19% of Illinois’ total pension assets.
Table 6: City of Chicago and Cook County Pension Plan Funding Levels ($ in Millions)
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Retirement Systems/ Pension Funds by
Area:
FY 2016
Unfunded
Liability
Increase in
Liability from FY
2015
FY 2016
Actuarial
Assets
FY 2016
Funded
Level
CHICAGO TEACHERS' PENSION FUND
$9,635.4
0.30%
$10,610.7
52.41%
COOK COUNTY EMPLOYEES' A&B FUND
$7,238.2
-0.04%
$9,488.2
56.73%
MUNICIPAL EMPLOYEES A & B FUND OF
CHICAGO
$10,465.0
6.35%
$4,590.4
30.49%
POLICEMEN'S ANNUITY AND BENEFIT
FUND OF CHICAGO
$9,804.5
21.02%
$3,052.1
23.74%
METROPOLITAN WATER RECLAMATION
DISTRICT RETIREMENT FUND
$1,070.9
0.74%
$1,372.4
56.17%
LABORERS' & RETIREMENT BOARD
EMPLOYEES' A&B FUND
$1,245.6
7.27%
$1,263.7
50.36%
FIREMEN'S ANNUITY AND BENEFIT FUND
OF CHICAGO
$3,971.0
12.41%
$1,074.9
21.30%
PARK EMPLOYEES' & RETIREMENT
BOARD EMPLOYEES' A&B
$611.9
18.90%
$393.6
39.15%
FOREST PRESERVE DISTRICT EMPLOYEES'
A&B FUND
$132.0
2.27%
$198.2
60.04%
Chicago and Cook total
$44,174.5
7.69%
$32,044.1
42.04%
State Total
$185,192.1
10.10%
$170,230.5
47.90%
As shown in Table 6, the funds range from nearly $200 million in plan assets to over $10.6 billion. The
funded ratios for each vary between 20% and 60%. The funded ratio for the Cook County and City of
Chicago plans falls below the state average. In FY 2016, no funds significantly decreased their unfunded
liability. Instead, most funds saw an increase in unfunded liability. From FY 2012 to FY 2016, the funds
experienced a 7.16% investment return, somewhat better than the average for the state.
10
9
Source: Illinois Department of Insurance, Public Pension Division, 2017 Biennial Report
10
Based on Illinois Department Insurance analysis in the spring of 2019, using Comprehensive Annual
Financial Reports
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Illinois Statewide Pension Systems and Other Pension Plans
In addition to the pension plans addressed above, there are five state-funded pension plans and the
Illinois Municipal Retirement Fund (IMRF). Like the five state-funded plans, IMRF serves government
employees across Illinois, but the State of Illinois does not have the same obligation to pay benefits to
IMRF’s pensioners. In addition, IMRF is significantly better funded than the other plans, and has
exercised greater ability to order the intercept of state-shared revenue that would ordinarily go to a
municipality, if that municipality fails to make a full statutorily required contribution to the pension
system in a timely fashion. Altogether, these six plans have approximately 460,000 participants, more
than all of Illinois’ other plans combined.
Table 7: Statewide Pension Plans ($ in Millions)
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Retirement Systems/ Pension Funds by Area:
FY 2016
Unfunded
Liability
Increase in
Liability from
FY 2015
2016
Actuarial
Assets
FY 2016
Funded
Level
TEACHERS RETIREMENT SYSTEM OF ILLINOIS
$71,407.8
13.91%
$47,222.1
39.81%
ILLINOIS MUNICIPAL RETIREMENT FUND
$4,585.3
0.26%
$43,226.9
90.41%
STATE UNIVERSITIES RETIREMENT SYSTEM
$23,221.7
3.56%
$17,701.6
43.26%
STATE EMPLOYEES' RETIREMENT SYSTEM OF
ILLINOIS
$29,882.8
14.93%
$15,632.6
34.35%
JUDGES' RETIREMENT SYSTEM OF ILLINOIS
$1,675.6
10.97%
$870.9
34.20%
GENERAL ASSEMBLY RETIREMENT SYSTEM
$312.5
13.36%
$50.8
13.99%
Statewide Plans Total
$131,085.6
9.50%
$124,704.9
48.75%
Statewide Plans Total except for IMRF
$126,500.3
11.35%
$81,478.0
39.18%
All Illinois Pension Plans
$185,192.1
10.10%
$170,230.5
47.90%
The average statewide plan has approximately $21 billion in assets. With $51 million in assets, the
General Assembly Retirement System is the smallest fund. The Teachers Retirement System (TRS) is the
largest, holding $47 billion in assets. Because of TRS’ size relative to the other statewide systems, TRS’
unfunded liability is more than half the unfunded liability for these six plans combined.
When IMRF is excluded, the statewide systems averaged a 39.18% funded ratio in FY 2016, which is
below the average of all Illinois pension plans. This makes Illinois one of the most underfunded for state
pension systems in the country. In FY 2016, none of the funds reduced their unfunded liability over the
previous year. Instead, most statewide funds’ unfunded liabilities grew by at least 10%. From FY 2012 to
FY 2016, the five state-funded plans experienced a 6.18% investment return, slightly better than the
average all Illinois state and local pension plans.
11
Source: Illinois Department of Insurance, Public Pension Division, 2017 Biennial Report
13
IMRF’s 90% funded ratio is by far the best of all statewide funds, and the return on its investments has
surpassed all others over the past five years, leading many to consider it a model plan for best practice
comparison.
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Recommendation, Step 1: Consolidate Suburban & Downstate Police &
Fire Pension Plan Assets
The breadth of the pension issue in Illinois is vast, extending to all areas of the state and to many
different public sector workers. From Chicago to Cairo, and from teachers to first responders, the effects
of underfunded Illinois pensions negatively impacts state and local finances, and therefore crowds out
funding available for other critical public goods and services. The Task Force recognizes that it must
make recommendations that will tackle the issue holistically and that also can be effectuated as soon as
practicable.
There are a number of facts which underlie the initial recommendation of the Task Force:
• Illinois has more pension plans than all but one other state in the US, and some of the greatest
levels of underfunding
• The plan assets in each individual police and fire plan are substantially smaller than most plans
nationwide and in the state
• It is extremely inefficient to maintain so many pension plans with so few active participants and
such small asset bases
• Unless the investment returns of the police and fire plans are improved, substantial additional
contributions from employers and/or employees will be required to make progress on
improving funded levels
• Healthy investment returns are vital to public employee pension plan survival, as investment
income is required to compensate for cash-flow shortfalls
• The suburban and downstate police and fire pension plans are falling behind in meeting their
minimum required investment rates of return
• If these plans were consolidated, they would achieve substantially higher returns and could save
the taxpayers in excess of $160 million on an annual basis
Therefore, the clearest and most compelling initial recommendation of the Task Force is to consolidate
the assets of all of the 649 suburban and downstate police and fire pension plans under two new
statewide funds—one for police and one for fire. Currently, as separately managed assets, these plans
achieve investment returns and investment expense efficiencies far below what they would if they were
pooled and managed together. As separate funds, each would have their own board in charge of their
own personnel and asset management decisions, and each fund’s assets would remain separate from
the assets of other statewide pension systems. Consolidated statewide police and fire funds have been
achieved in other states, including Ohio, where in 1967, $75 million in assets and $490 million in
liabilities were consolidated from local public safety funds across the state. As of FY 2018, the Ohio
Police and Fire Pension Fund had an investment portfolio of $15.7 billion and approximately 27,000
active members.
13
12
Based on Illinois Department Insurance analysis in the spring of 2019, using Comprehensive Annual
Financial Reports
13
https://www.op-f.org/information/aboutopf
14
The decision of voluntary versus mandatory pension plan participation in the consolidation was also
contemplated by the Task Force. It was determined that mandatory consolidation is the sensible
approach as the better performing plans would perform at least as well in the long term under a
consolidated model; the worst performing plans would perform substantially better; and greater
consolidation would provide greater cost efficiencies to all plans.
Similar to the assets of the existing funds under consolidated management, the suburban and
downstate police and fire pension plan assets would be pooled into two separate trusts, one for police
and another for fire, for the sake of investment performance, but for accounting purposes would
maintain individual and separate accounts for each municipality. On a regular basis each consolidated
fund would provide a valuation of total assets, which would be done annually in accordance with the
Governmental Accounting Standards Board, and a pro-rata share of each of the trusts’ assets will be
assigned to each account held by the individual municipalities. The assets and liabilities will remain
within the individual local pension plan accounts, such that no assets or liabilities will be shifted from
one local plan to another.
With the daily opportunity cost of lost investment returns to the pension plans, the Task Force
recommends that there be legislation passed by the General Assembly in the fall of 2019 to provide for
this consolidation immediately.
Combining the management of the assets will have the following advantages:
• Achieve economies of scale by minimizing administration costs and investment consulting
services fees
• Create better and more efficient asset liability management with respect to short term cash-
flow matching
• Create the ability to invest in more diversified, higher return assets to achieve better performing
portfolios
• Enhance uniformity in setting investment and other actuarial assumptions
• Provide greater choice in selecting investment vehicles (e.g., equity-related instruments)
• Dramatically reduce the number of asset managers and other service providers to reduce fees
and maximize efficiencies
• Monitoring two plans rather than 649 plans would dramatically improve the supervisory
efficiency and enable more in-depth review and audit without incurring substantial additional
cost by the Department of Insurance
While consolidation of assets will provide the greatest benefit to the plans at this time, the Task Force
does recognize some challenges to such action:
• Plan sponsors may feel their influence is being diluted
• Misinformation creates skepticism about the stated advantages of consolidation
• Pushback from asset managers as the savings on investment fees through consolidation mean
less money for those managers
• There could be initial costs for transitioning assets into the consolidated asset pool; although
this would be substantially less than the upside from stronger investment returns over a matter
of a few years
• The change in structure and governance of a consolidated pool will come with typical transition
challenges
• Possible objections from better funded pension plans, although underfunded plans will not
dilute better-funded plans due to separate account management as previously stated.
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Task Force Consideration of Consolidation Under ISBI
The Illinois State Board of Investment (ISBI) currently manages $18.4 billion in defined benefit assets of
the State Employees’ Retirement System, the General Assembly Retirement System, the Judges’
Retirement System of Illinois, the Illinois Power Agency, as well as the State of Illinois Deferred
Compensation Plan.
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Under current statute, the 9-member ISBI board consists of 5 trustees appointed
by the Governor, with the advice and consent of the Senate, who may not hold an elective State office;
the State Treasurer; the State Comptroller, as the Chairperson of the State Employees’ Retirement
System; the Chairperson of the General Assembly Retirement System; and the Chairperson of the Judges
Retirement Systems.
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This role of only administering assets works well with the initial recommendation
for only asset consolidation of suburban and downstate police and fire funds. With respect to
maximizing the investment returns of these police and fire funds, ISBI has done fairly well at meeting its
investment return benchmarks in recent years, but has experienced lower returns on average than
IMRF. However, it is still unclear that if the return assumptions between the ISBI and IMRF were similar
over the years, how the average returns for each system would compare over the long term; as
investment strategy is largely dictated by the assumed investment returns by the systems’ boards.
Members of the Task Force voiced several concerns with the consolidation of police and fire assets
under ISBI. Those concerns included, but were not limited to, the relationship between state-level
retirement systems and the local-level police and fire plans, and the negative connotations of state and
local employee asset consolidation. As such, the Task Force agreed that the consolidation of suburban
and downstate police and fire assets under ISBI would be abandoned, in favor of separate statewide
police and fire funds.
Task Force Consideration of Consolidation Under IMRF
The Illinois Municipal Retirement Fund (IMRF) manages both the assets ($40.8 billion in assets) and the
benefit administration ($45.4 billion in liabilities) of local government and school district employees
outside of the City of Chicago and Cook County.
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Because the initial recommendation of the Task Force
is to consolidate only the assets of suburban and downstate police and fire, IMRF’s role in managing
only the assets of these plans would be different from its current model. IMRF’s strong return on
investments makes such a fund appealing for the consolidation of these police and fire funds. Additional
appeal of IMRF is that it has much of the existing fund infrastructure in place to quickly expand
management to the assets of suburban and downstate police and fire plans. Generally, IMRF would seek
to mirror its current investment categories and strategy with the newly consolidated police and fire
assets to replicate its successes for these additional $14 billion in assets. However, since the alternative
assets held by IMRF are not always as easily divisible as conventional investment categories, police and
fire assets would need to be managed by IMRF in a trust separate from the existing assets until IMRF
would be able to replicate the portfolio composition of the existing assets; at which time, the two trusts
could be consolidated.
Under current statute, the 8-member IMRF board consists of:
• 4 executive trustees elected by participating units of government
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https://www.isbinvestment.com/
15
40 ILCS 5/22A-109
16
Source: 2018 Comprehensive Annual Financial Reports
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• 3 employee trustees elected by participating IMRF members
• 1 annuitant trustee elected by IMRF annuitants
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Some members of the Task Force voiced concerns with the consolidation of police and fire assets under
IMRF, as well. Ultimately, amending the current IMRF governance structure to accommodate the new
suburban and downstate police and fire assets without diluting the representation of existing IMRF
employees proved problematic for consensus among the Task Force. It was determined that, while
setting up two new statewide police and fire plans would take additional time and resources, it is more
amenable than consolidation under IMRF, and far more financially advantageous to these plans than to
maintain the status quo with no consolidation.
Task Force Consideration of Consolidation Under a New Police Fund and New Fire Fund
While creating new statewide funds for suburban and downstate police and fire may create some
minimal duplication of effort with the other statewide funds and entail some start-up and ongoing costs,
it is fairly common practice to differentiate pension systems by the types of members they’re serving.
Insomuch as the interests of police and fire personnel are different from other government employees
served by existing retirement systems, and different from one another, it would be reasonable to
establish separate systems for these employees. In light of the aforementioned challenges with
consolidation under existing systems, the Task Force recommends establishing two new statewide
police and fire funds that include all existing suburban and downstate funds, with assets consolidated
under their own respective trusts and under the purview of separate governing boards. The Task Force
recommends setting up board structures to provide equal representation of employees/annuitants and
employers on the board of trustees. The Task Force also recommends including two ex officio members
to each board—one representative of the statewide association representing participating
municipalities (65 ILCS 5/1-8-1) and one representative of a statewide association representing
police/fire employees, each with full voting and other rights.
The Task Force recommends each board composition consist of 8 trustees, as follows:
• 3 executive trustees elected by participating municipalities, as defined by Article 7, Section 1 of
the Illinois Constitution
• 2 police/fire employee trustees elected by participating police/fire members
• 1 police/fire annuitant trustee elected by police/fire annuitants
• 1 ex officio trustee that is a representative of the statewide association representing
participating municipalities (65 ILCS 5/1-8-1)
• 1 ex officio trustee that is a representative of the largest statewide association representing
police/fire employees
Note: The Illinois Fraternal Order of Police dissented on this recommended board composition, desiring
a board composition with a majority of employee trustees and a minority of employer trustees.
The Task Force also notes that if consolidation of benefit administration for these funds is
recommended in the future, that the composition of consolidated fund boards will likely be revisited.
17
40 ILCS 5/7-174
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The Task Force recognizes that there will be unique challenges from the period of the consolidation
legislation becoming effective and the normal board operations of a fully consolidated pool of assets,
which may be referred to as the “transition period.” As such, and only for the transition period, it
recommends an interim board for each be appointed, with the State Treasurer appointed as a trustee
and chair to preside over meetings and only to cast a vote in the event of a tie among the other 8
trustees. The 9-member interim board would consist of the same categories of the aforementioned
trustees, but would be appointed by the Governor. The Governor would also appoint an interim
executive director.
The Task Force recommends the following timeline for consolidation of assets for each police and fire
board:
• July 1, 2020: Effective date of enacting legislation; transition period begins
• Following effective date of enacting legislation:
o Governor appoints, and terms begin, for interim trustees and the two interim executive
directors
o Interim custodian, actuary, general counsel, independent consultant(s), and auditing
firm selected
o Election and seating of permanent trustees; transition period ends
o Seating of permanent executive director, selected by the new board (existing executive
director may be considered)
o Selection of permanent custodian, actuary, general counsel, independent consultant(s),
and auditing firm (may extend existing contracts)
• By July 1, 2023: Newly consolidated funds are fully operational, assuming at least 80% of existing
assets have been consolidated into the trusts, with permanent boards and staff seated.
Final “Step 1” Recommendation: Fix to Tier 2
The Task Force also recognizes that there are some unique Tier 2 benefit issues that are particular to the
work of first responders. Among the many changes to the pension plans for state and local government
employees hired since 2011, Tier 2 members receive a substantially smaller benefit relative to Tier 1
members (those hired before 2011) and experience a pensionable salary cap that grows at a slower rate.
While advantageous to the long-term financial health of the pension systems, these changes have
received criticism from Tier 2 members as creating inequity in comparison to Tier 1 members. There
have also been significant concerns that the slower Tier 2 pensionable salary cap growth and revised
final average salary calculation will be in violation of the “safe harbor” standard of the Internal Revenue
Code and Social Security Administration. Some state, county, and municipal employees covered by a
public pension plan are not required to pay into the Social Security system; this includes teachers and
almost all public safety personnel in Illinois, among others. Generally, the “safe harbor” standard
requires that those employees exempted from Social Security receive a retirement benefit from their
public pension plan that is at least equal to the benefit they would receive under Social Security, in order
to continue being exempted from the program. If the benefits do not wind up being at least equal to
that of Social Security, the state and local governments will have to either bring up the level of Tier 2
benefits to meet Social Security, or enroll Tier 2 employees in Social Security and pay the associated
contributions retroactively. The annual cost of delaying this safe harbor fix to Tier 2 first responders is
substantial, as it compresses great liabilities into a shorter timeframe to be paid down. As such, the Task
Force recommends the following changes to Tier 2 benefits be made to make the asset consolidation
package as comprehensive as possible:
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1. Surviving Spouse Benefit for Non Line of Duty Death — Under Tier 1 benefits, surviving spouses
of police and fire pension participants were entitled to 54% of final average salary, and if the
employee passes away before they are vested, the spouse is still eligible for 54% of the salary
at the time of death. When Tier 2 was enacted, Tier 2 spouses became entitled to two-thirds of
the pension the deceased was entitled to at time of death, and therefore no pension benefit if
the employee has not worked at least 10 years. This change is of particular concern, and
unique to, first responders. To ensure surviving spouses are entitled to some benefit in the
event of a tragic pre-mature death of a first responder, the Task Force recommends the Tier 1
surviving spouse benefits be reinstated for Tier 2 police officers and firefighters.
2. Pensionable Salary Cap — Due to the aforementioned federal safe harbor concerns, for
downstate and suburban police and fire employees the Task Force recommends increasing the
pensionable salary cap growth (since the enactment of Tier 2 in 2011) from the current lesser
of one-half the Consumer Price Index (CPI-U) or 3%, to the lesser of CPI-U or 3%. This will
attempt to ensure the pensionable salary cap grows quickly enough to avoid non-compliance
with the federal safe harbor provision.
3. Final Average Salary — Currently under Tier 2, pension benefits are calculated based on the
average of the highest 8 of the last 10 years of a member’s service. Because of the physical
demands of the job for first responders, their years of service tend to be more abbreviated
than other public-sector occupations. With this concern and the aforementioned safe harbor
concerns, the Task Force recommends police officers’ and firefighters’ benefits be calculated
instead on the average of the highest 4 of the last 5 years of a member’s service.
While the fixes to Tier 2 benefits for suburban and downstate police and fire plans will have some
associated cost, that cost is minimal in proportion to the improved investment returns resulting from
consolidation. On average and over a five-year period, the recommended fixes to Tier 2 benefits are
estimated to offset between $70 and $95 million of the $820 million to $2.5 billion (3-9%) in investment
return gains, and avoids a potential and costly safe harbor violation.
Recommendation, 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
While much of the focus of the Task Force’s initial recommendations have been on the advantages to
consolidating assets of suburban and downstate police and fire pension plans, there also may be
advantages to the consolidation of the benefit administration of these plans as well. The Task Force
does recognize the latter may require a longer discussion with those affected by such a change,
particularly the members of the plans themselves. At $26 billion in actuarial accrued liabilities, as of
fiscal year 2017, across these suburban and downstate plans, the stakes are high, both for the financial
resources of the plans and taxpayers, and for the life-altering decisions in awarding members certain
benefits. With many of these plans in dire financial positions, and with an average funded level of only
55%, both components of assets and liabilities need a thorough review.
The more decentralized the structure is for benefit administration, the greater the cost becomes to
administer those benefits, but with perhaps more nuanced information guiding the prevailing decision
to offer certain benefits in unique cases. As mentioned prior in this report, the trade-offs for this nuance
entail administrative duplication (e.g. accounting, legal services, auditing, actuarial, training, association
fees, travel, etc.) and a lack of consistency in decision-making among funds, associated with having 649
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individual and independent funds. While the exact cost of these issues is not easily quantifiable, it is
likely to have added embedded costs to the plans over time. These hidden costs result in fewer dollars
to be invested over time and therefore, ultimately, fewer dollars to pay retirement benefits for plan
members.
In looking at the overall cost of administering funds, a system such as IMRF, which administers benefits
centrally on behalf of thousands of local government employees, spends an estimated 8 basis points
annually as a proportion of total fund actuarial value of assets. Annual administrative costs-to-actuarial
value of assets for all Illinois plans, except for suburban and downstate police and fire, equate to an
estimated 9 basis points. Suburban and downstate police and fire pension plans on the other hand
spend an estimated 19 basis points annually as a proportion of total fund actuarial value of assets.
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Aside from any potential financial benefit due to changes in benefits awarded under a consolidated
model, suburban and downstate police and fire plans could experience in excess of $14 million annually
in savings from administrative costs alone were their costs-to-asset expenditures to fall more in line with
the other Illinois systems. That is not to say that consolidation can only entail one centralized benefits
administration board, as is the case with other plans in Illinois. It may very well be that some other form
of consolidation could occur to preserve local knowledge of unique local cases, while saving on
duplicative efforts and increasing consistency in benefit-awarding decisions.
In addition to the review of consolidation of benefit administration, some Task Force members have
expressed concerns around the suburban and downstate police and fire funding ramp, which should
also be reviewed in “step 2” of the Task Force’s work.
The arguments in favor of considering a review of the ramp include the following: While consolidation of
assets will be a strong net positive to the pension plans and therefore their beneficiaries, additional time
may be needed on the required employer contribution schedule for the pension plans to benefit from
improved year-over-year investment returns. For reference, under the Illinois Pension code, the
required minimum employer contribution for these plans is calculated each year as a level percentage of
payroll sufficient to bring the funded-ratio up to 90% by 2040, and is determined under the projected
unit credit actuarial cost method. Beginning in fiscal years after March 30, 2011, any actuarial gains or
losses from investment return incurred in a fiscal year is “smoothed” over the following 5-year period.
The impact of this amortization schedule generally means dramatic year-over-year increases in required
municipal employer contributions (largely funded by property taxes) until a 90% funded-ratio is
achieved in 2040, at which time the required contribution drops tremendously. The Task Force
recommends reviewing the feasibility of this date, in conjunction with other actuarial changes to help
front-load contributions and thereby curb the annual rate of growth in employer contributions. For
context, other Illinois pension plans have the following statutorily-required year by which they are to hit
90% funded: 2045 for Illinois statewide systems, 2050 for one of Cook County’s plans, and an average of
2057 for the City of Chicago pension plans.
The 15 other pension systems in Illinois, outside of suburban and downstate police and fire, clearly bear
significant financial burdens, with the unique exception of IMRF, which is currently 90% funded. These
systems are clearly differentiated from the suburban and downstate police and fire plans in that there
may be no immediate discernable and material investment return advantage by further investment fund
18
Source: FY 2018 IMRF Comprehensive Annual Financial Report and Department of Insurance analysis
of all other systems’ financial reporting. Includes total fund administration, as it is difficult to
differentiate the administrative costs associated with asset management versus benefit administration.
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consolidation. On average, they tend to achieve returns more consistent with other larger systems
nationally and do not bear the same restrictions on asset classes as plans with substantially smaller asset
volumes. That is not to say, however, that they cannot improve their investment returns, that they
cannot invest more efficiently, or that they should not be consolidated in some way. Some form of
consolidation of these larger systems may also reduce administrative overhead, create more efficient
investment through further economies of scale, and create more consistency and efficiency in the
administration of benefits.
The greatest financial issue facing these systems is that the growth in liabilities has been consistently
diverging from the growth in assets. A fixed 90% funded level target date, market experiences vastly
different from actuarial assumptions, and insufficient contributions into the system, have compressed
remaining unfunded actuarial accrued liabilities into a shorter and shorter timeframe. This has led to
unsustainable growth in required employer contributions and has consistently increased the burden on
state and local government operating revenues.
The City of Chicago pension funds have experienced their own unique financial challenges in recent
years that warrant specific considerations with respect to the future work of the Task Force. Their
current funded levels and projected growth in required employer contributions means significant
changes will need to be made to correct course; which may entail greater efficiencies captured through
some level of consolidation. As such, the Task Force and the Governor’s Office will continue to work with
the City of Chicago on this issue as part of the next phase of this work.
Therefore, it is the recommendation of the Task Force that it continues to review these issues and
include them in a final recommendation to the Governor.
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Appendix: Illinois Pension Consolidation Feasibility Task Force Creation &
Members
On February 11, 2019 Governor Pritzker announced the creation of the Pension Consolidation Feasibility
Task Force to explore and make recommendations for consolidation of pension funds in order to achieve
the greatest value for pensioners and taxpayers. Task Force members include:
• William J. Brodsky – Co-Chair, former Chairman and CEO of the Chicago Board Options Exchange
(CBOE)
• Pat Devaney – Co-Chair, President of the Associated Fire Fighters of Illinois
• Hon. Christine Radogno – Co-Chair, former Illinois Senate Minority Leader
• Michael Carrigan, President, Illinois AFL-CIO
• Hon. Brad Cole, Executive Director, Illinois Municipal League
• Hon. Karen Darch, Village President, Barrington, IL
• Dan Hynes, – Ex Officio, Deputy Governor for Budget & Economy, State of Illinois
• Tim Kobler, Executive Board Member, Illinois Fraternal Order of Police
• Louis Kosiba, Former Executive Director, Illinois Municipal Retirement Fund
• Cameron Mock, – Ex Officio, Chief of Staff & Senior Fiscal Advisor to the Deputy Governor,
Governor’s Office of Management & Budget, State of Illinois
