Local governments eye pension consolidation, regulations

Kevin Mathew, Copy Chief

The Illinois pension system was ranked last in the country in September by credit-rating agency Moody’s, and now the north suburbs are considering a plan to consolidate local pensions into a larger pool with better revenue.

Meanwhile, the state is looking at reform for 2016, and Gov. Bruce Rauner wants to move many government employees to a 401k-type pension plan, which would allow them to choose how much of their salary is set aside in a pension.

Deron Daugherty (Weinberg ’06), the president of the Evanston fire pension fund, said a switch to the 401k-type plan would not benefit Evanston because the current plan acts like a guarantee that protects families of safety employees who might face unexpected work injuries.

Employees must agree to changes in their pensions, and Daugherty said the December 2013 reform law, which changed the terms of employees’ pensions, was not made through balanced two-way conversations.

“In my opinion it’s pretty clearly unconstitutional,” he said. “The state’s constitution says flat out no unilateral changes to the pension funds. You can negotiate changes with the members, but you can’t just go in and say, ‘Hey we’re going to diminish your promised benefits.’”

A highly anticipated Illinois Supreme Court decision will decide the fate of the law, which is currently under constitutional review. The court heard oral arguments March 11 and is pursuing an accelerated review before the state budget is due May 31. The decision will likely shape what reforms state legislators will seek for 2016, but court spokesman Joseph Tybor told The Daily a final date is still “really uncertain.”

In the meantime, Rauner’s 2016 budget proposal calls for a 50-percent cut in the local income tax allotment to reduce the Illinois debt. State Sen. Daniel Biss (D-Evanston) called the plan “completely irresponsible” because of the stress it puts on local communities while potential savings from pension reform are still so uncertain.

Mark Fowler, executive director of the Northwest Municipal Conference, which represents about 1.3 million citizens in 44 municipalities and one township, said even if the income tax allotment cut does not pass, the possibility causes massive problems for local governments trying to plan for 2016. Currently, pensions can pull from income tax revenue if cities cannot pay their deficit, he said.

“When you’re either in the middle of your budget, or trying to craft a budget, how do you do that?” he said. “Do you craft a budget based on a 50 percent reductions of (income tax revenue) and hope that doesn’t happen?”

A larger pension fund would allow greater investment opportunities than small local pension funds, Fowler said. Although this would not change the size of pension payouts, investments would be able to grow faster before the payouts, decreasing the overall deficit.

Marty Lyons, Evanston’s chief financial officer and assistant city manager, said the city supports investment consolidation and looser restrictions on investment. The state currently requires the city to invest over a third of its funds in fixed income investments. Lyons said cities would benefit from being able to invest more in equities, which generate greater revenue for little extra risk.

Daugherty is less optimistic about the benefits of a larger fund but agrees restrictions need to be lifted. He said Evanston is already a large city, and a larger fund will not necessarily help shrink the deficit.

“We’re making good progress on addressing the pension debt that Evanston carries … and over the last six years have really worked with the boards to really address that problem,” he said. “For us to pool our resources, there’s not really a benefit to us at this point.”

Lyons said he met with Evanston pension officials a few years ago, and when they talked the primary concern was that state oversight would lead to reduced coverage for injured Evanston police or firefighters.

“That group wasn’t necessarily opposed to the idea of consolidated investments,” he said. “They were opposed to the idea of total consolidated administration, meaning that they didn’t want someone at a state agency determining whether or not a police officer or a firefighter was disabled or not. (But) the short answer is the city is very much in favor of a consolidated investment fund.”

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