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Thursday, October 31, 2019

Illinois Legislature to Consider Downstate Police & Fire Pension Fund Consolidation

On October 29, 2019, legislation was filed (Senate Bill 616, Senate Amd. #1) to implement the consolidation of the Downstate Police and Fire Pension Funds created by Articles 3 and 4 of the Pension Code. While this is only the initial draft of the legislation, the most meaningful takeaways from the bill are summarized below. In reviewing the changes, it is important to recognize that this bill is designed only to convert the local pension investment model into one more similar to IMRF.  As a result, there are certain compromises that make this only a half-step towards true pension reform.

1.  Local pension boards are not dissolved.  The bill does not eliminate the role of local pension boards in reviewing applications for pension benefits. The bill only takes away the investment authority from local pension boards and delegates it to one statewide pension board each for police and fire. 

2.  Consolidation will not occur overnight. The bill introduces a transition period during which the statewide pension boards will audit and verify each participating funds assets and take over custody and investment authority.  The transition period is intended to last no longer than 30 months from the effective date of the legislation.  During the transition period, municipalities may continue to establish actuarial assumptions which are not inconsistent with the Pension Code.  Likewise, the funding calculations based on those assumptions remain in local control.

3.  Municipalities will lose the ability to establish actuarial assumptions and independently set the actuarially required contribution.  Once the transition period concludes and the statewide board has custody over all pension assets, actuarial statements shall be prepared by or under the supervision of a qualified actuary retained by the statewide fund, and if a change occurs in an actuarial or investment assumption that increases or decreases the actuarially required contribution for the pension fund, that change shall be implemented in equal annual amounts over the 3-year period beginning in the fiscal year of the pension fund in which such change first occurs. The actuarially required contribution established by the statewide fund shall determine the annual required employer contribution, notwithstanding any formula or other language in Article 3 or Article 4 of the Pension Code to the contrary.  This change will result in mandatory pension contributions in the same manner IMRF creates mandatory employer contributions for the benefit of non-sworn employees. 

4.  Each municipality will have a separate pension account.  Some well-funded pension boards have expressed concern that the consolidation of pension funds for investment purposes will dilute their strong position. Fortunately, the bill addresses this problem directly. Each statewide board is directed to, “separately calculate account balances for each participating pension fund. The operations and financial condition of each participating pension fund account shall not affect the account balance of any other participating pension fund. Further, investment returns earned by the Fund shall be allocated and distributed pro rata among each participating pension fund account in accordance with the value of the pension fund assets attributable to each fund.” Based on this language, a fund's unfunded liabilities should not change simply because of the consolidation of investment authority. 

5.  Tier 2 benefits are adjusted.  The determination of final average salary and the calculation of survivor benefits for police and fire employees in Tier 2 (hired after 1/1/11) will be adjusted to address concerns that the current model may fail to qualify for an exemption from social security taxes.

Post by Adam Simon, Ancel Glink


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