Economic crisis hits IMRF, tax increases might be needed
Illinois taxpayers may soon be called on to bail out what is arguably the best-funded public pension plan in the state thanks to $3.6 billion in fund losses caused by the spiraling economy.
The Illinois Municipal Retirement Fund covers about 177,000 active employees of local governments and about 85,000 retirees. The good news for them is their retirement benefits are guaranteed no matter what the economy does.
The same cannot be said for the contributions from the 2,900 units of local government who use local tax dollars to fund the majority of the IMRF benefits. All of those governments will be hit with a call to increase their contributions in 2010 to recapture IMRF's losses. Governments without the cash to handle an increase might turn to taxpayers to fill the IMRF collection bucket.
Even IMRF Executive Director Louis Kosiba expects an impact to his Downers Grove property taxes as a result of his agency's investment losses.
"I will see my real estate taxes go up," Kosiba said. "But we need to have rate increases in order to preserve fiscal responsibility. We don't want to be a burden on future generations."
IMRF began 2008 with one dollar in the fund for every dollar promised to present and future retirees in the system. By the end of September, it only had 79 cents for every dollar promised. That's a deficit IMRF hasn't experienced since 1990 and a more rapid loss than when the technology boom fizzled out and Sept. 11 hit.
"I would like employers to start appreciating what is happening and let their employees know," Kosiba said. "IMRF is not able to swim upstream any faster than the next guy."
IMRF has no rainy day fund to recoup losses. Thus, more tax dollars are needed. The questions are how much and when.
That decision won't be made until Dec. 31, but the proposal on the table now would see an employer with a IMRF contribution rate of 10 percent of the total payroll cost ratchet that rate up to 16 percent to cover IMRF's losses. That could mean millions of dollars of new contributions for the largest units of government.
"That'd be pretty painful," Kosiba said.
To ease that pain, IMRF is looking at phasing in the rate increase to help avoid the need to raise taxes. For that government with a contribution rate of 10 percent, the rate could jump to between 10.6 or 11.2 percent with the phase-in. That's still a hefty jump for local governments who have their own spiraling economy woes. It's unknown how long the phase-in would last.
Ironically, governments that have funded their employees' retirements the best in recent years might see the biggest rate jump. Kosiba said any surplus dollars those governments have put into IMRF are gone. At a minimum, all local governments will pay a rate of 8.37 percent to IMRF. Top IMRF contributors only pay 1 or 2 percent right now.
While all of that is bad news, Kosiba said tax increases are the only immediate pain. IMRF still has billions of dollars to pay benefits for the next couple of decades even if it didn't collect another cent until 2028, Kosiba said.
That said, delaying rate increases, and any possible tax increases resulting from them, until the economy rebounds is not an option.
"Come 2011 or 2012, you're still going to have other budget needs, and it's not necessarily going to be any easier to play catch-up," Kosiba said. "It's a very costly and debilitating practice to say we'll play catch-up. And, eventually, all these retirement benefits have to be paid out."