In the midst of budget crises and financial woes, Evanston faces a pension predicament that the mayor says could bankrupt the city in 10 years if no solution is found.
With a recent estimate placing the pension debt at more than $159 million, Mayor Elizabeth Tisdahl made the issue a top priority at last month’s Evanston Day. During the daylong visit to Springfield, the mayor and other city officials pressed legislators to reform pension funding for firefighters and police officers.
Although a bill to reform police and fire pensions passed the Illinois house, the Illinois General Assembly adjourned May 7 without a Senate vote on the plan. Meanwhile, Evanston officials are left struggling to find funds for the city’s pension deficit.
Between 1997 and 2008, that deficit nearly tripled, according to a 2008 report by the Blue Ribbon Committee, a pension task force created by the Evanston City Council in 2008.
“It’s been building up over the last two decades,” said Deputy Fire Chief Greg Klaiber. “I commend the city manager and the council for finally addressing the issue over the past two years.”
THE ROOT OF THE PROBLEM
Upon retirement, police and firefighters receive an amount of money agreed upon before retirement. The pension funds come from three sources: contributions from each paycheck, city funds and investments on stocks and bonds.
By law, the city is required to make annual contributions to the pension fund, so that when police and firefighters retire, the city won’t be required to take out huge amounts of money from its general fund to pay for the retirements.
Previous city administrations failed to regularly contribute money toward the pension funds, and this contributed to the city’s pension dilemma, said Cmdr. James Hutton, secretary for the police pension fund.
“The city administrators did not live up to the expectations, and the money they didn’t contribute years ago is now costing the current administration three to four times the original amount,” Hutton said.
Following a state mandate, Evanston hires actuaries to calculate the annual pension fund contribution the city needs to make. Hutton said aside from the missed pension fund payments, missteps by actuaries were also to blame.
“They inflated retirement ages and death rates, among other things, and basically made it look like the city didn’t owe as much as they did,” Hutton said.
In 2007, the city hired a new actuarial firm called the Gabriel, Roeder, Smith & Company. The firm’s first task was assessing the state of the police and firefighter pension system, according to the Blue Ribbon Committee report.
The firm divided the values of the current funds by the amount needed to pay for future benefits. Ideally, those percentages should be between 70 and 75 percent, Klaiber said.Instead, the firm found only 44.2 percent of the fire pensions funded. Of the police pensions, the figure was 42.1 percent.
LOOKING TO SPRINGFIELD
In 1993, Illinois passed a law requiring cities to reach 100 percent of their pension funds by 2033. In an effort to meet that requirement, Evanston is working to increase contributions to the pension funds.
For the upcoming fiscal year, the city allocated 8.1 percent of its budget to fire and police pensions, setting aside more than $7 million for the fire department and more than $10 million for the police. That marks a 3.9 percent increase from the previous year for the fire pensions and a 14.2 percent increase for the police fund.
The pension burden comes entangled with the city’s budgetary struggles. City officials have sacrificed funding for other programs and allocated it toward pensions, Klaiber said.Since pension rules are set at the state level, city officials are hoping-and lobbying-for reform from Springfield.
A police and fire pension reform bill is currently in the state Senate after the House passed it in March. House Bill 5873 would create a two-tiered pension system for firefighters and police, where new hires after a certain date will have a different pension plan from those currently hired. The exact details of the new system remain unknown, however, according to the Illinois Municipal Retirement Fund’s website.
On May 7, the General Assembly adjourned without a Senate vote on the bill. House Bill 5873 remains at a standstill.
“They didn’t pass anything,” Assistant City Manager Marty Lyons said. “Nothing happened in Springfield. No police or fire pension was passed.”
POSSIBLE SOLUTIONS
Among proposed pension reforms are changes to paycheck contributions and retirement ages, Klaiber said.
As it stands, firefighters contribute 9.45 percent of each paycheck toward their pensions and police contribute 9.91 percent of theirs, according to the Blue Ribbon Report. Both contributions far exceed the 6.25 percent that employees in the private sector contribute, Klaiber said. Police and firefighters can retire starting at 50 years old.
Hutton said he doesn’t think altering the pension system is necessary. The reform lies in the way the city funds the pensions, he said.
“We need to find ways to fund pensions without bankrupting the city and adding huge taxes on the citizens,” Hutton said.
One option could be increasing the percentage of their pension that firefighters and police officers are allowed to invest in the stock market, he said. The current law allows them to invest up to 45 percent of their pension in stocks and bonds.
“If they increase that by 10 to 20 percent, we could get more returns,” Hutton said. “In the long run, we’re going to make money in the stock market. I mean, even though the economy hasn’t been doing well as a whole the past few years, long term investments are going to make money no matter what, and that could help the pension funds.”
For his part, Lyons said he hopes lawmakers will take action when they return to business in Springfield.
“We hope that when the legislature gets back, they will take up pension reform for police and fire, so cities don’t have to raise property tax and cut other services,” Lyons said.
