Merging downstate police, fire pensions helps but Illinois needs pension reform

Merging downstate police, fire pensions helps but Illinois needs pension reform

The Illinois Supreme Court voted to uphold a law consolidating 649 municipal police and firefighter pension funds. It may help the state’s pension woes, but amending the Illinois Constitution is needed for real solutions.

In a small, rare victory for Illinois’ pension systems, the Illinois Supreme Court rendered an opinion Jan. 19 that affirmed the constitutionality of consolidating 649 downstate police and firefighter pension funds.

The ruling should help buoy funding ratios but does not address systemic problems within the state’s defined benefits pension programs, which are still needed to provide retirement security for public pensioners and taxpayers.

The ruling determined the 2019 legislation consolidating the 649 separate municipal police and firefighter pension funds into two larger pension funds was permissible under Illinois’ pension protection clause. The many funds were combined as the Illinois Police Officers’ Pension Investment Fund, Peoria, and the Illinois Firefighters’ Pension Investment Fund, Lombard.

The consolidation of these smaller pension systems has likely reduced administrative expenses and could provide access to higher returns and new asset classes not previously accessible to funds with less available capital. This is a small, positive step to begin fixing the state’s pension systems, but it does not address the fundamental problems creating Illinois’ nation-leading pension crisis.

Illinois’ growth in public pension debt has been driven by the historical underperformance of investments, insufficient employer contributions, benefit increases, changes in actuarial assumptions, demographic and other changes. Those factors are both impossible to predict and carry the inherent risks of defined benefit systems such as Illinois’ public pension systems.

By the end of fiscal year 2022, suburban and downstate police and fire pension funds had more than $10.4 billion in unfunded actuarial liabilities. That included $6 billion from police funds and $4.4 billion from firefighters’ funds. The combined funding ratio was 64%.

Experts warn systems with less than 60% funding ratios are considered “deeply troubled,” meaning these funds are on the brink. In fiscal year 2021 funding ratios stood at 59.4%, and while results for downstate systems in fiscal year 2023 are not available from the Illinois Department of Insurance, the Commission on Government Forecasting and Accountability reported Illinois’ state-run systems experienced growth in pension debt totaling about $2.5 billion in 2023, indicating pension debt within downstate systems may have also risen.

The consolidation of municipal police and fire pension systems was likely a net positive for the systems as a whole but should not be misconstrued as a meaningful solution to Illinois’ pension crisis. Only structural pension reforms enabled through a constitutional amendment can truly solve the problem.

A “hold harmless” pension reform plan such as one originally developed by the Illinois Policy Institute – based loosely on bipartisan 2013 reforms – could help to eliminate state and local unfunded pension liabilities and achieve retirement security for pensioners.

Previous analysis showed changes such as capping pensionable salary, replacing 3% compounding raises with true cost-of-living increases and adjustments to realign benefits with historical inflation rates would have saved the state $2.4 billion in the first year alone, and more than $50 billion by 2045. It would also fully fund the plans, as opposed to the state’s goal of 90% funding, to truly safeguard retirees’ benefits.

Without real reform, problems within downstate police and fire pensions will persist. Unfunded liabilities will continue to grow and pension systems will become even leaner, putting Illinois’ public servants’ retirements at risk and taxpayers’ wallets in jeopardy.

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