Why you may feel burden of funding municipal pensions

When a retirement plan has guaranteed benefits, any cash that vanishes through shrinking investments and stock market losses must be recouped somewhere.

In the case of the Illinois Municipal Retirement Fund, the bill for record losses will ultimately be paid by local taxpayers. Every municipality will share the pain.

Local governments are just now beginning to sort out the impact of IMRF's $7.8 billion of investment losses in 2008. IMRF has long been arguably the best-funded pension plan for government workers in the state.

Unlike pension plans for state workers, IMRF is locally funded and supplies the retirement benefits for most government workers in local communities. Its benefits are defined and guaranteed by the Illinois Constitution.

By law, beneficiaries pay a fixed rate. Since investment income varies with the market, employer contributions are the only mechanism available to recoup the losses unless there is a change in the law or the constitution. The employers are local governments funded by local taxpayers.

IMRF's losses are gargantuan. Before the $7.8 billion vanishing act, IMRF was 100 percent funded. It had a dollar in the bank for every dollar it was obligated to pay in benefits.

Now it only has about 70 cents on the dollar. With billions still in the bank, there is no immediate need for its 178,000 current employees or 87,000 retirees to worry. The fund still has enough cash on hand to pay beneficiaries until 2028. But to keep future generations from paying the entire burden of the billions in losses, the payback will begin in 2010.

That's when local governments will be hit with a 10-percent increase on whatever they paid into IMRF before the losses.

For example, Kane County paid in about $5.4 million a year into the fund before the losses and could say it had an adequately funded benefit program for its employees.

"Obviously, at this point that's not the case," said Kane County Finance Director Cheryl Pattelli. Not only is the county's program underfunded because of the losses, but it must pony up $534,000 in new cash to bail out IMRF's losses.

That's a big problem for a governmental body that finished last year nearly $3 million in the red, and just let its employees know they may be facing layoffs to shore up another $3.8 million revenue shortfall this year.

IMRF contributions by local governments are generally funded through property taxes. With the tax cap, Kane County can't just increase its property tax levy by 10 percent. Ultimately, like other governmental bodies in this pinch, it becomes a new burden on their general or corporate fund, which fuels most of its services.

While most local governments haven't figured out where to find the extra cash for IMRF just yet, Arlington Heights is already sounding the alarm that its residents will foot the bill directly.

"We're anticipating that our property tax will go up next year because of the IMRF rate increase," Finance Director Tom Kuehne said.

Kuehne hasn't figured out how much the increase will be yet because it will be a function of how many employees there are and what their wages will be come fall when the city prepares its new budget.

St. Charles will be tagged with finding about $120,000 more to pump into IMRF, but city officials have already reported that they have no plans to increase local property taxes to do so. However, they do not yet know where the new money will come from.

Like many communities, St. Charles, too, is already facing budget deficits and possible layoffs in the coming years even before the additional IMRF burden.

Naperville has already cut 43 jobs this year, but it will have to cough up another $300,000 for IMRF for the budget year that kicks in on May 1, 2010. Acting Finance Director Chris Smith said it is too soon to tell how the city will pay off that new obligation.

Elgin is in a similar holding pattern as it has yet to figure out how it will pay off $225,000 in additional IMRF burdens.

The problem will only get worse in the near future. A one-time 10-percent increase on payments to IMRF won't recoup its losses fast enough. IMRF officials' plan is to increase the required contribution by 10 percent every year through about 2014, or until it can regenerate the money on its own through investment returns.

IMRF officials told the Daily Herald back in September that simply waiting on the markets to improve is not an option.