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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