Can 401(k) Style Pensions Work in Illinois’ Local Pension Plans?
February 23, 2014 By: James T. Palermo*
An element of the recently passed but yet to be litigated Illinois pension reform is the 401(k) style savings plan for state workers. Though such a defined contribution plan would secure the future contributions of current employees, it would not reduce unfunded liabilities for benefits already earned.
The General Assembly hasn’t taken up local pension reform, but some speculate that it will resemble the state-wide reform passed last year. However, 401(k) type go-forward measures would be of little help to some of the nearly 650 downstate police and fire pension plans burdened by obligations already incurred that are often deeply underfunded.
Pension plans in Illinois municipalities such as Aurora, Highland Park, Berwyn, Carbondale, La Grange and others have funding deficits so deep that the pension liabilities due individuals already receiving retirement benefits exceed the entire plan’s assets. What this means is that municipal and employee contributions go towards the retirement benefits of those no longer working instead of the current employees. Put another way, hundreds, if not thousands of active Illinois police and fire employees participate in pension plans that have plans no assets set aside for their retirement.
My village, La Grange, is an example of the challenges some plans face. According our October 2013 actuarial valuation, the aggregate liabilities of our police and fire pension plans is $53.7 million. Of this, $20 million is owed active workers and $33.7 million is owed retirees and their survivors. But together the plans have just $25.1 million in assets. The retirees’ benefits alone are funded at just 74%; accounting for both active and retired employees, the two plans are funded at an anemic 47%. Funding levels are too tenuous to amortize the existing deficits and divert funding for new employees to a DC plan.
The maturity of our village and public safety departments contributes to our underfunding. La Grange’s population peaked in the 1960’s and there has been little increase to the public safety employee headcount. With longer life expectancy, many police officers and fire fighter (or their spouses) can expect to live longer in retirement than they served our village. At the time of our last actuarial valuation we had 45 active police officers and fire fighters contributing to their respective plans and 60 retirees and survivors were drawing benefits, a ratio of 1:1.33. This condition is unsustainable and leaves the retirement security of our current public safety workers at risk.
Local pension challenges will not be solved quickly or painlessly. When the General Assembly addresses local pension reform, its plan must provide for retirement age increases, employee contribution increases, municipal funding guarantees, revenue enhancements, benefit recalibration and municipal cost reductions. Lawmakers must take up the matter immediately. There is no time to lose.
*James T. Palermo, CFA is a trustee in the Village of La Grange and financial professional working in Chicago. His opinions are his own.