Illinois Pensions Reviewed

The answer to whether there will be Illinois pension reform in the next year is a resounding, maybe. One thing that is clear is that any reform efforts will be motivated by concerns regarding "Tier 2" pensions.

• Illinois Pension Obligation: Illinois pension law mandates that the state cover 90% of the estimated pension obligations by June 30, 2045. However, the state's five pension plans are severely underfunded by approximately $140 billion.

• Illinois Tier 2 Concerns:

  • Safe Harbor & Social Security: The Tier 2 pension system, which covers those hired after 2011, offers fewer benefits than the Tier 1 system, and as the Tier 2 system grows, Tier 2 benefits might not meet the Social Security safe harbor requirement, which mandates beneficiaries to receive benefits equal to or better than Social Security;

  • Subsidizing Tier 1: While Tier 2 under TRS is funded at 121%, most TRS members are under Tier 1 with TRS’ funding level at only 44 percent. This means Tier 2 employees are subsidizing benefits for Tier 1 employees; and

  • Recruitment and Retention Issues: Police and fire departments in Illinois have faced challenges in recruiting and retaining workers due to concerns about the two-tier pension system according to police and firefighter unions.

• Illinois Pension Reform Considerations:

  • • First Responder Benefits: Unions for first responder beneficiaries argue they should be part of the Tier 1 pension system; however, associations for their employers note the negative unintended consequences of any reform that is not uniformly applicable in the pension benefit changes (i.e. creating winners and losers);

    • Deferred Retirement Option Plan (DROP): DROP allows certain individuals to continue working for several years while their pension payments are placed in a special account. While there are concerns for the appearance of "double dipping" as individuals earn both a pension and a salary and some pension systems have reservations about DROP increasing unfunded liabilities, first responder unions note that many states use DROP to address recruitment and retention issues;

    • Investment Returns & Payment Schedule: Recent years have seen higher than expected pension investment returns, and investment returns could potentially be improved further with money savings by changing when the state makes pension contributions (i.e.  pension payments on the first day of the fiscal year rather than the last to allow the payments to be invested for an entire fiscal year);

    • Pension Ramp:

      • The 1995 pension ramp backloaded pension obligations along with subsquent pension legislation to mandate 90% funding by 2045;

      • The Illinois Municipal League proposes re-amortization with reducing the percentage obligation or extending the deadline to 2050; however, unions oppose re-amortization that reduces pension obligations, and some legislative committee leaders question the reducing pension obligations on principle;

    • Proposed Legislation:

      • House Bill 4098 proposes multiple changes to pension obligations, which includes some aspects recently advocated by interest groups, such as deferred retirement options and unfunded liability payments, and also includes provisions (i) expanding the pension buyout program, (ii) changing cost of living calculations, (iii) creating a tiered retirement age schedule, and (iv) extending the pension obligation deadline from 2045 to 2050, but with a 100% funding obligation;

      • House Bill 4065 also separately focuses on health benefits for first responder retirees.

    • Omnibus vs. Standalone Legislation: While most pensions reforms occur through comprehensive legislation, there may be some debate on separate, "standalone" bills.

References:

• Fiscal responsibility: Illinois lawmakers hope to pass pension reform plan this fall (WAND - July 19, 2023)

• State lawmakers looking to address Illinois pension debt with additional $500 million (The Center Square - July 19, 2023)

• House committee takes first look at possible fall pension reform (The Daily Line - July 20, 2023)

• Latest hearing on pension proposal exposes point of contention between lawmakers and among pension systems (The Daily Line - August 24, 2023)

• Illinois police, fire leaders urge lawmakers to eliminate Tier 2 pension system (WAND - September 28, 2023)

• What is the Illinois Sustainable Investing Act?

The Illinois Sustainable Investing Act is a legislative act that mandates public agencies in Illinois to integrate sustainability factors into their investment decision-making processes. This includes investment analysis, portfolio construction, due diligence, and investment ownership.

• What are "sustainability factors" as defined by the Act?

Sustainability factors refer to elements that might have a material and relevant financial impact on the safety or performance of an investment. These factors are complementary to financial factors and financial accounting.

• Can you provide examples of sustainability factors?

Yes, sustainability factors may include corporate governance and leadership factors, environmental impacts like greenhouse gas emissions, social capital factors affecting relationships with key external parties, human capital factors recognizing workforce value, and business model and innovation factors.

• How should public agencies approach sustainable investment factors?

Public agencies are required to prudently integrate sustainability factors into their investment decision-making, analysis, portfolio construction, due diligence, and investment ownership. The goal is to maximize anticipated financial returns, minimize projected risk, and effectively execute their fiduciary duty.

• Are there any specific guidelines for proxy voting under the Act?

Yes, the Act allows the State Treasurer to manage the domestic and international proxy voting activity for shares held directly by the System and execute required ballots on behalf of the System, subject to certain conditions and the Board's consent.

• What are the proxy reporting requirements under the Act?

Starting from September 1, 2023, and annually thereafter, the Board must publish guidelines for voting proxy ballots and a detailed report on its website. This report should describe how the Board considers sustainability factors, among other details.

• How do investment managers fit into the Act's requirements?

Beginning January 1, 2024, investment managers must disclose, prior to the award of a contract, a description of the process through which they integrate the sustainability factors into their investment activities.

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Sources

• Illinois Treasurer's Office - Sustainable Investing Act

• Illinois General Assembly - Public Act 101-0473

• Illinois General Assembly - Public Act 103-0324

• Illinois General Assembly - Public Act 103-0468

• What is Illinois state pension consolidation?

Illinois state pension consolidation refers to the merging of multiple local police and firefighter pension funds into two statewide funds: one for police and another for firefighters. This move aims to streamline administration, reduce costs, and potentially increase investment returns by pooling assets.

• Why was pension consolidation considered in Illinois?

The consolidation was considered to address the fragmented nature of Illinois' pension system, which consisted of hundreds of individual pension funds, each with its own set of assets, liabilities, and administrative costs. By consolidating these funds, the state aims to achieve economies of scale, improve investment returns, and ensure the long-term sustainability of the pension system.

• How does the consolidation impact individual pension benefits?

The consolidation is primarily administrative and does not alter the pension benefits of individual members. The rights and benefits of pension plan members remain protected and unchanged. The main goal is to enhance the investment capabilities and reduce administrative costs.

• Who oversees the consolidated pension funds?

The consolidated pension funds are overseen by two new statewide boards: one for police pensions and another for firefighter pensions. These boards are responsible for the management, investment, and administration of the consolidated funds.

• What are the expected benefits of pension consolidation?

The expected benefits of pension consolidation include increased investment returns due to pooled assets, reduced administrative costs, improved transparency and accountability, and enhanced financial stability for the pension system.