Public safety pension investment returns are missing targets -- by nearly $1 billion

  • The Naperville fire and police pension funds missed investment return targets by more than $15 million each over the course of the past five years, as did most of the other 640 public safety pension funds in the state.

    The Naperville fire and police pension funds missed investment return targets by more than $15 million each over the course of the past five years, as did most of the other 640 public safety pension funds in the state. Daily Herald File Photo, 2010

 
 
Updated 11/9/2019 5:45 PM

Over the past five years, 642 public safety pension funds in the suburbs and downstate have received more than $3.2 billion in investment returns.

However, those funds were expected to generate at least $4.1 billion from investments, a nearly $1 billion miss.

                                                                                                                                                                                                                       
 

In all, 85% of the fire and police pension funds didn't meet the state's minimum investment funding target between 2014 and 2018. That's according to a Daily Herald analysis of pension fund financial reports published every two years by the Illinois Department of Insurance.

The shortfalls could be even greater, because local pension boards sometimes set investment goals higher than the state's targets.

The state's actuary assigns an assumed rate of return to every fund each year based largely on the amount to be invested and the type of investments available to funds of that size. In 2018, those rates ranged from 4.25% to 6.5%.

Overall, the funds beat the targets in 2014 and 2017 but fell short in 2015, 2016 and -- by $729 million -- 2018. Each fund covers a single local police or fire department.

One reason the funds miss investment goals is that many don't have enough money to participate in investments that might bring greater rewards, with greater risk.

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"Even the largest of these police and fire pension funds are small, and the small ones are tiny, and they don't have the heft to make good investments over a period of time," said Louis Kosiba, a task force member and former executive director of the Illinois Municipal Retirement Fund.

The investment shortfalls only compound chronic underfunding in the pension programs for police and firefighters.

"It's very concerning, because it's definitely going in the wrong direction, and this reinforces our thinking that consolidation is a good thing," said Christine Radogno, a former Republican state senator and member of the Illinois Pension Consolidation Feasibility Task Force.

"The employer contribution is dictated by many assumptions, and when those assumptions are wrong, it's the employer that has to cover the miss," Radogno said. When the employer is a local government, that cost is passed to taxpayers.

Consolidate or not?

The task force recently issued its findings and recommended pooling the assets of the more than 350 suburban and downstate police pension funds into a single fund and doing the same for the nearly 300 fire pension funds. Chicago's police and fire pension programs would remain separate.

                                                                                                                                                                                                                       
 

Some pension fund experts aren't sold on the task force's rosy outlook on consolidation. Many municipalities are pushing for consolidation, but the Illinois Public Pension Fund Association is lobbying against it.

Amanda Kass, associate director of the Government Finance Research Center at the University of Illinois-Chicago, argues that if the investments tank, more municipalities will be hurt under consolidation than when the funds were on their own.

"Assets pooled can take on riskier investments, but that risk can introduce greater volatility, and that impacts municipal pension contributions," she said.

Kass said the biggest problem with consolidation is it doesn't address unfunded liabilities -- the gap between a pension fund's assets and the benefits promised to workers. On average, the police and fire pensions are 55% funded, studies show. There's also the matter of the 3% annually compounded cost-of-living increase each pension gets that helps balloon taxpayer costs but that's constitutionally protected.

Suburbs: Merge 'em

Many suburbs argue consolidation at least could prevent that gap from getting worse.

Naperville fire and police pension funds are among the state's largest public safety pension funds and so have more liberal investment capabilities, yet each fell more than $15 million short of the state's investment revenue expectations over the course of the past five years.

"It is cause for concern and why we've advocated for consolidation and for a change in the investment capabilities," said Rachel Mayer, the city's finance director and treasurer of both funds. "We're only getting a 4.8% rate of return, and if we were able to take on more risk, we think we'd average 7%."

Fire and police pensions in both Aurora and Hoffman Estates also missed investment fund targets by more than $10 million over the past five years. The Des Plaines police pension fund and Lisle-Woodridge fire pension fund each were off by more than $10 million as well, according to the analysis.

The task force estimates consolidation of assets would generate an additional $820 million to $2.5 billion in the first five years, which proponents said would reduce property tax burdens on homeowners. The bill authorizing consolidation has been filed in the state Senate.

On Friday, the Fraternal Order of Police gave the consolidation its blessing based on promised amendments to the proposal that would give firefighters and police a majority of seats on the investment boards.

Proponents argue consolidation will reduce administrative costs, though the recommendation does not include eliminating the local pension boards that handle disability claims.

Deputy Gov. Dan Hynes, another member of the task force, said the fire and police boards lobbied for two separate statewide funds instead of consolidation into a single public safety pension fund.

"There's just a desire on the police and fire organizations to keep those funds separate and have some autonomy," Hynes said.

Got a tip?

Contact Jake at jgriffin@dailyherald.com or (847) 427-4602.

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