Posted Online: Oct. 26, 2013, 9:06 pm
Illinois Q-C police, fire pensions face underfunding
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By Eric Timmons, firstname.lastname@example.org
Police and fire pension funds across the Illinois Quad-Cities are underwater to the tune of $163 million.
The number is the combined unfunded liability for the police and fire pension funds in Rock Island, Moline, East Moline and Silvis.
An unfunded liability is the amount by which future pension obligations exceed the amount presently available to pay them. The liability amount is an estimate calculated by the city's actuaries.
The accounts that pay out checks to retired police and firefighters in Rock Island and Moline are funded at less than 50 percent of the liability.
East Moline's pension funds are healthier, with the city's police pension 63 percent funded and the firefighters' account 76 percent funded.
The numbers for the Illinois Quad-Cities show how the pension crisis that has gripped the state of Illinois also is hitting hard at the local level. Part of the problem stems from the economic downturn that struck in 2008 and took a big bite out of investment funds cities use to build retirement accounts.
But unions also say there has been chronic under-funding of pension accounts for years that was justified by unrealistic expectations of investment returns.
The problems police and fire pensions pose for city budgets can be seen in changes in how Moline's property tax revenue is distributed.
In 2003, 18 percent of the city's property tax levy went to the police and fire pension funds, according to finance director Kathy Carr. This year, 47 percent of Moline's property tax dollars will go to the police and fire pension funds.
In Rock Island, the city will contribute almost $2.2 million to its public safety pension funds in 2014, an increase of 7.6 percent from this year, according to the city's actuarial report.
Average annuities paid out by police and fire pension funds have grown significantly.
Rock Island's average annuity was $28,558 in 2004 and $40,741 in 2010, according to a report on pension systems by the Commission on Government Forecasting and Accountability.
Reforms have been implemented that increased the age police officers and firefighters can reach full retirement eligibility from 50 to 55 that will help reduce cities' pension bills.
The reforms, signed by Gov. Pat Quinn in 2010, also created new formulas used to calculate pension amounts and cost of living increases. The changes created a two-tier system, with different rules for police officers and firefighters hired after Jan. 1, 2011.
In return for concessions from employees in the 2010 law, cities, beginning in 2015, will be penalized if they don't contribute enough to retirement accounts so that they are at least 90 percent funded by 2040.
Cities that don't meet their annual pension requirements will risk losing a share of sales tax revenue funding they get from the state. The money will be "intercepted" by police and fire pension boards and put into pension accounts to fulfill the 90 percent requirement.
Larry Frang, president of the Illinois Municipal League, says the provision is unfair and should be repealed.
Police and fire pension boards are made up of a retiree, two representatives elected by employees and two appointed by the mayor, which Mr. Frang said puts employee interests in control of the boards.
"We believe that you have to give the city council the power to decide on funding levels," he said.
In Moline, firefighter Brian Vyncke is president of the firefighters pension board. It will take time for Moline to dig itself out from under a sizable unfunded liability, he said, but progress is being made.
The city put $800,000 more into its police and fire pension fund this year than was required, he said, and also now uses more realistic estimates for estimated net returns on investments.
Mr. Vyncke said the board's former actuary had predicted returns of 8.5 percent on investments. The board's new actuary predicts returns of 7 percent, which Mr. Vyncke said still seemed "a little aggressive."
Before the 2010 changes, municipalities could only put 40 percent of their pension funds into stocks, Mr. Vyncke said. The rest was kept in secure but low-yield government bonds. Now, pension funds have been allowed to gradually increase their holdings in stocks, he said.
Moline's firefighter pension fund is divided 50/50 between stocks and bonds at the moment and Mr. Vyncke said that's likely to increase to a 55/45 split in favor of stocks next year.
Stocks are more prone to volatility, but Mr. Vyncke said Moline was "ultra-conservative" in its investment strategy.
Police and firefighters contribute about 9.5 percent of their annual salary to their retirement accounts.
A problem across the Quad-Cities is that in most cases there now are more retirees than workers in fire and police departments. For example, Rock Island's fire department has 89 retirees compared to 60 working firefighters.
Andrew West is president of the firefighters union in Rock Island and said headcounts in fire departments have been reduced in recent decades, which puts pressure on retirement funds as fewer workers are supporting more retirees.
Mr. West also said Rock Island has gotten more realistic in its expectation of returns on investments. The city used to project returns of 8 or 9 percent, but actual returns averaged closer to 5 percent, he said.
Pension reforms in Illinois generally have fallen hardest on workers, a point that's often lost in the coverage of pension funding throughout Illinois, Mr. West said. He praised East Moline for having the best funded pension accounts in the region.
East Moline finance director Megan Petersen said there's no secret to why the city's police and fire pension funds are in good shape.
She said she can only remember one occasion when the city didn't contribute the amount its actuary said it should to its pension funds, and the shortfall was made up the following year.
Ms. Petersen has no concerns about the reforms that from 2015 will no longer allow cities to short their police and fire pension funds.
East Moline already is putting more into its pension funds than the minimum the state will require to meet the 90 percent funding rate by 2040, she said.