Asset Management CultureDecember 20, 2019

Illinois Finalizes Move to Consolidate 650 Pensions

Gov. J.B. Pritzker signs legislation to merge hundreds of pensions to improve operational efficiencies and funding ratios

Reported by Steffan Navedo-Perez

Illinois Gov. J.B. Pritzker signed a measure to consolidate 649 distinct public pension funds throughout the state in what he’s calling a “monumental accomplishment.”

The governor issued a task force earlier this year to study the benefits and feasibility of pulling off such a feat. The task force concluded that by remaining partitioned entities, the pensions were missing out on potential for investment opportunities and operational efficiencies.

“This [assembly] has achieved what none of their predecessors have been able to do: Consolidate 650 downstate and suburban pension funds into just two, amplifying their investment power, and reducing the burden on property taxpayers,” Pritzker said during a news conference coupled with the bill’s signing.

The task force conducted simulation runs of investment gains under a hypothetical consolidation, and found that together, the pensions would generate an additional $160 million to $288 million in investment returns, or 6.73% to 7.62%, a comfortable lead over a measured 5.61% over the same period.

The funds collectively stand at 55% funded, with $11.5 billion in unfunded liabilities.

“Once the consolidation is completed, we’re going to be saving $160 million annually, which will allow that money to be better invested in the services of which the people of Illinois can rely on,” said state Sen. Cristina Castro.

Pritzker earlier this year denounced the idea of consolidating the downstate pensions into the state’s funds, citing that the state’s credit rating was already sitting just above junk status and was sensitive to being downgraded. Moody’s rates the city of Chicago at the Ba1 junk level due to uncertainty over the long-term affordability of its ballooning pension burdens.

“The greatest financial issue facing these systems is that the growth in liabilities has been consistently diverging from the growth in assets. … A fixed 90% funded level target date, market experiences vastly different from actuarial assumptions, and insufficient contributions into the system, have compressed remaining unfunded actuarial accrued liabilities into a shorter and shorter timeframe,” the task force said. “This has led to unsustainable growth in required employer contributions and has consistently increased the burden on state and local government operating revenues.”

“Decades of underperformance, high administrative expenses, and duplication demanded change. The status quo was unacceptable,” said William Brodsky, former chairman of the Chicago Board Options Exchange. “While there’s more to do, we strongly believe that these recommendations are a significant step in improving the performance of these funds and hence the funding of these many pension funds.”

The legislation garnered overwhelming bipartisan support from both chambers of the Illinois General Assembly. The average number of participants per plan is 67, with 24 plans having only one active participant. Only five plans have more than 500 active members.