He who asks is a fool for five minutes, but he who does not ask remains a fool forever.”

-Chinese Proverb

 

By: Mark Glennon*

 

Sorry to single you out, Pekin, Illinois, but we will use you as an example of the pension crisis now facing Illinois municipalities. Actually, we have noticed you because at least some of your city officials are asking good questions, which your local paper has reported. On that count you are ahead — most towns like you are keeping heads firmly implanted in the sand.

 

But answers have been elusive, which Pekin has found frustrating. That frustration is entirely predictable and typical, which is what this story is about.

 

Pekin is a town of 34,000 people in central Illinois. Median income for a household in the city is about $42,000. Its pensions for police and firefighters are two of the 650-plus pensions similarly maintained by towns and cities around Illinois for police and fire.

 

Here is Pekin’s pension situation, based on this year’s report on pensions from Illinois’ Commission on Government Forecasting and Accountability: Its police pension is about 59% funded with about $17 million in unfunded liabilities. Its fire pension is 39.6% funded with $31 million in unfunded liabilities. Those numbers are quite old, especially for the police fund which is based on 2012 numbers, but that’s par for the course with official reporting.

 

That compares with an average funding ratio for all police and fire funds of 56% at the end of 2012, according to that COGFA report. So, Pekin is in somewhat worse shape than average, but it is by no means alone — there are plenty of police and fire pensions with funding ratio’s below 40%.

 

These are the questions some Pekin officials have begun to ask: What can we do to make the pensions whole? Why, if we are paying in required contributions, does the problem continue to worsen?  What are the real numbers and how do we really compare? How much of a property tax increase would we need to begin funding them properly?

 

Good questions, but Pekin, like so many other municipalities, has been unable to answer them. Nor can we.

 

For starters, the city doesn’t post the annual actuary reports on its pensions, and nobody seems to be showing any indication they have reviewed and understood them. Some municipalities publish them, but most do not. In Pekin’s case, the most recent actuary report for the police fund that we can find referenced wouldn’t be worth looking at, anyway.

 

Specifically, Pekin’s latest financial statements incorporate information for the police fund from an April 2012 actuary report. That report uses a 1971 life expectancy table! It uses mortality data collected between 1964 and 1968. Life expectancies on that table tracked public safety workers who, at age 50, would have been born between 1914 and 1918. (I emphasize that I believe the actuary has now been replaced and that the new one has produced a newer report that’s not publicly available. We are trying to get newer actuary reports from the latest actuary.) Use of that grossly outdated mortality data by a number of municipalities was exposed in a Forest Park Review article last year. It was ignored by the rest of the press, though we wrote about it here.

 

And if Pekin officials did have a sincere actuary report in hand, would they know what to make of it? Probably not. The city’s Finance Director is quoted in one story as saying, “the percentage funded means that if the entire fire department retired today the city would only have [that] percent of the money it needs to pay pensions.” That’s very wrong. Funding levels and unfunded liabilities assume workers will retire and die according to projections.

 

That’s not a criticism of the Finance Director or other Pekin officials; they should not be blamed for not understanding what’s been so deliberately obscured. The fact is that municipal pensions are far too convoluted to be managed by those charged with doing so, and the problem is rampant.

 

How much of a property tax increase would be needed to start funding Pekin’s pensions properly? That’s a good way of looking at it because property taxes are really the only significant revenue source municipalities can look to. But there’s no chance of answering that based on publicly available data. You would need a good, current actuary report using honest, transparent accounting and assumptions. You rarely find that in the public pension world, where the accounting is “idiotic,” according  William Sharpe, a Nobel Prize-winning economist. As he said recently, “Using any sensible economic view of the value of [pension] liabilities, the difference in value is astronomical. It’s a crisis of epic proportions.” Pekin, like most other public pension sponsors, has little idea what it has on its hands.

 

What we do know is that Pekin’s total revenue from all sources was about $25 million in 2014, according to its financials. The unfunded liability for the two pensions officially is almost twice that, and far worse using real numbers. So, finding a way to pay down the unfunded pension liability or honoring it as public workers live through retirement will be difficult indeed.

 

What is the big picture like for the rest of Illinois’ police and fire funds? Those funds officially had $953 million in unfunded liabilities in 1991. By 2012, that figure had jumped to $8.4 billion, says COGFA! But nobody knows what the real numbers are, and they increase every day.

 

Now, a couple other things you should know about Pekin: No, it’s not directly opposite on Earth from Pekin, after it was named, now called Beijing. That’s an urban myth you constantly heard if you grew up in Illinois, apparently started way back in the 1830s by one of Pekin’s founders.

 

And, no, the name for the Pekin high school teams is not The Chinks, though it really was until 1980! They once won the state basketball title under that name.

 

Keep asking about pensions, Pekin. Remember that proverb.

 

*Mark Glennon is founder of WirePoints. Opinions expressed are his own.

 

 

 

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Jim
The reason Pekin to date hasn’t done anything to address the debt part of the pension is, the city council and public didn’t know about it. The debt has been hidden by select city officials for many years. In fact when the $53 Million debt problem was revealed by a local taxpayer to the council, the newspaper, Pekin Times, printed two false stories trying to keep the public in the dark! Hopefully after another city meeting dealing with the subject, it appears at least three council members are concerned enough to keep the issue on the front burner. Likely most other communities with pension problems haven’t been… Read more »
Bruce

Mark, it seems like the question you ask is just left open. Why won’t a city like Pekin do exactly exactly what is needed to determine a sound actuary analysis? It seems like all the required assumptions are available, like life expectancy, returns on investment (expected, not hope for numbers), expected retirement dates of current employees, expected ending salary….sure seems like a worthwhile excercise. At least to see where the numbers really land. Or are we better off not knowing?

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