Kane County joins municipalities protesting IMRF investment strategy
More than 30 Illinois counties and municipalities are calling for the Illinois Municipal Retirement Fund to retract a decision that's forcing local governments to find millions of additional dollars for pensions in the 2020 fiscal year.
Trustees of one of Illinois' largest public employee pension funds voted in December to lower its expected annual rate of return on investments to 7.25%. For the past 25 years, the expected rate of return was 7.5%.
With less money expected to come in on the investment side, local units of government in the $42 billion pension fund must kick in more money to avoid the underfunding many of the state's other pension funds.
On the ground level, in Kane County, that means finding an extra $1.6 million in 2020 and about $5 million during the next three years. That's a 21% increase above what county officials budgeted for pensions.
County officials have already hinted at employee layoffs and/or delaying capital projects.
"We're being painted into a very expensive corner," county board Chairman Chris Lauzen said. He is one of the leading voices pushing IMRF trustees to reconsider the decision. "This is a property tax issue. And this is not satisfactory."
DuPage, Lake, McHenry and Will counties are also protesting IMRF's decision, as are Aurora and North Aurora.
Lauzen's beef stems from IMRF's own history of investment success. During the last 10 years, including the Great Recession, IMRF saw five years of investment returns better than 13.5%. Two of the years were better than 21%.
Brian Collins, IMRF's new executive director, said he's proud of that record. But the national trend in pension funds is to lower the expected rate of return based on actual poorer market performance, he said. A 7.25% expected rate of return is the median across the industry right now.
Collins pointed to a gradual downward performance trend of the markets. Thirty years ago, pension returns were about 8.3%. Twenty-five years ago, that fell to about 7.4%. Twenty years ago, it was 5.9%.
Even with recent rebounds, the trend in the last decade puts a reasonable, conservative expectation at 7.25%, he said.
"Our policy is to always be trending toward 100% funding," Collins said. "Anything less than 100% funding is borrowing. The expected rate of return is critical. It's the single biggest decision we make at IMRF. If we are too optimistic, we will be underfunding the plan. If we assume 10% and we only earn 5%, we are borrowing. We are taking medicine along the way so that you don't find yourself in the disastrous place that all the other funds in this state are in."
Lauzen and his fellow officials protesting the decision want IMRF to base its expectations on IMRF's better-than-average performance, not a national average. They would rather see IMRF not hit the 7.5% rate of return and make up the difference on the back end than pay upfront.
He said lowering the expected return shrinks expectations for the fund managers while giving them millions more in management fees through the increased local contributions.
"It's we pay more, you do less," Lauzen said.
Lauzen tried to get IMRF trustees to place an item for reconsideration on their next meeting agenda. That effort failed. That leaves two routes -- changing the state legislation governing IMRF or working to change the makeup of IMRF's board of trustees.
Lauzen said he believes changing state law is unlikely. He is exploring options, or at least independent oversight, to the internal election process for IMRF's eight trustees.