City of Evanston Blog
Public Safety Pension Reforms Pass Illinois General Assembly
Here is a summary of the bill passed by the Illinois General Assembly today as prepared by Intergovernmental Affairs Coordinator Matt Swentkofske:
By a vote of 95 – 18 in the House and 47 to 4 in the Senate, the Illinois General Assembly passed Senate Bill 3538 enacting some much needed Public Safety Pension reforms.
Assuming the city keeps properly funding its police and fire pension funds, this enforcement measure will have little impact. If the city does not fund them properly, according to actuarial standards, then it could lose state shared revenue dollars based on what is owed to the pension funds: one third in 2016, two thirds in 2017 and the full difference in 2018.
One important solution not included in Senate Bill (SB) 3538 was a 30 year rolling amortization which would help the city fund pensions over a longer period of time. The bill includes a 30 year closed amortization period with a funding goal of 90% by 2041. Although it extends the amortization period by eight years, which has a larger significance for under funded plans as municipalities get eight more years to pay liabilities, it places an arbitrary end date as if to say the city’s obligation to pay police officers and firefighters will eventually end. A 30 year rolling amortization at 90% funding level would have provided municipalities more permanent relief.
Nevertheless, the legislation does include other changes that will be beneficial to the City of Evanston as well as other municipalities for employees hired after January 1, 2011 including:
• Normal retirement age of 55;
• Early retirement at age 50 with a 6% reduction for each year prior to age 55;
• A pensionable salary cap of $106,800 indexed to 1/2 of the Consumer Price Index-Urban;
• A final average salary calculated using the last 8 of 10 years;
• A survivor benefit of 66 2/3;
• Cost-of-living adjustments beginning at age 60 for retirees and survivors;
Senate Bill 3538 Fact Sheet and its Impact to the City of Evanston
Modified Pension Benefits for Police Officers and Firefighters hired After January 1, 2011.
These benefits will only impact the City of Evanston if the city has retirements, replacements or if the city has an expansion of sworn staff after January 1, 2011. As such, these benefits will build slowly over time and will not impact the fund in a significant way in the near future.
Normal retirement age 55 (Age 50 under current law)
• Impact to the City of Evanston: This change will have a positive impact on the long term pension costs as there is the potential for five more years of contributions with no potential for retirement without penalty. This also reduces the expected term of a given retirement assuming the same life expectancy of the police officerman or firefighter.
Early retirement age 50 with .5 reduction for each month prior to age 55 (up to 30 reduction if pension taken at age 50 - There is currently no early retirement penalty)
• Impact to the City of Evanston: This change will have a positive long-term impact on pension costs by reducing the total costs for a given pension on a monthly basis.
Ten year vesting (currently 8/10 year vesting)
• Impact to the City of Evanston: This change will have a positive impact on pensions and could be significant in future years as new officers hired after 1/1/2011 approach promotional opportunities in later years of service.
Earn 2.5% pension for each year of service with maximum of 75% at 30 years (slight change in formula for earlier years for fire)
• Impact to the City of Evanston: City staff needs to review the detail on this further, as the current rate is 2.5%.
Pension salary cap of $106,800 with annual CPI adjustments (no current cap)
• Impact to the City of Evanston: This is a positive impact to the city in two ways. This cap prevents spiking, which is boosting pay right before retirement, (along with the eight year calculation period listed immediately below). It also reduces the impact of high ranking personnel salaries. In this example, the highest salary that is pension eligible would be $106,800 divided by 75% or $142,400. This may not be a large benefit as city wages may not increase by the CPI over time and the city currently has no one on the force that qualifies.
Final Average Salary for pension is average of final best eight of ten years of service (now final day/month)
• Impact to the City of Evanston: This has a positive impact to pension costs and could be significant when current new hires reach pension age. If a new hire pensioned out at a $100,000 salary and this salary was reached by 3% increases over the last eight years of service, then the pension eligible salary would be $90,446. This equals a pension savings of just under $7,200 a year, and over 25 years this would be a savings of $180,000 (excluding inflation) for the city.
Cost of Living Adjustment is lesser of 3% or ½ CPI-U, non-compounded (was 3% compounded)
• Impact to the City of Evanston: This has a positive impact on pension costs which increases with the duration of pension. For a 25 year pension, the increase in annual pension will be 75% under the new formula, but is 110% under the current compounding formula.
COLA begins at age 60 (was 55)
• Impact to the City of Evanston: This has a positive impact on pension costs. Existing law dictates that after age 55 firefighters and police officer officers gain an automatic 3% compounded interest COLA. SB 3538 would make the COLA simple interest at the lesser of 50 of the CPI-U or 3.
Surviving spouse benefit 66.6% of pension at time of annuitant death with new COLA formula also beginning at age 60 (currently 100% of the pension goes to survivors)
• Impact to the City of Evanston: This has a positive impact by reducing the pension amount and by delaying the cost of living increase.
Actuarial Changes – These changes will have an impact on the entire fund starting with next year’s analysis. 30 year closed amortization period with funding goal of 90% by 2041 (was 40 year closed with goal of 100% due by 2033)
• Impact to the City of Evanston: This has a positive impact in two ways. It extends the amortization period by eight years, which has a larger significance for under funded plans as the city gets eight more years to pay off our liability. The city also only needs to reach a 90% funding level, which will also reduce the unfunded liability calculation.
Level percent of payroll formula remains in effect
• Impact to the City of Evanston: None
Allows five year smoothing of investment gains and losses. This smoothing can reduce the fluctuations in the city’s tax levy.
• Impact to the City of Evanston: None – the city currently practices smoothing.
Compliance Mechanism
State-shared revenue diversions to pension funds beginning in 2016 equaling any difference between the employer contribution and the required actuarial contribution.
• Impact to the City of Evanston: Given that the city can continue to use current assumptions or change them based on acceptable parameters, the only impact will be the timing of the study being used. The city currently uses the 2009 study for the 2010 levy. If the city needs to use the 2010 study, this would increase the funding costs. Presently, the State Department of Insurance has not always released their actuarial analysis in time for the municipalities to use its tax levy. The non-inclusion of the proposed 50% funding level penalty provision in this area was a major change in the impact of this bill.
Three year phase-in with up to one third of state-shared revenue diverted in 2016, up to two thirds in 2017 and up to the full contribution difference beginning in 2018.
• Impact to the City of Evanston: Assuming the city properly funds, this will have no impact.
Expanded Investment Authority
Allows funds with over $10 million in assets to expand exposure to equities
• Impact to the City of Evanston: The impact of this change depends on the performance of the equity market. Assuming better performance in equities compared to fixed income securities, this will increase returns on investment, albeit with greater risk to the fund’s assets.
Commission on Government Forecasting and Accountability Studies
Investment pooling
• Impact to the City of Evanston: This will have a positive impact by reducing administrative costs and potentially reducing risk through a more professional and consistent review of investment choices. This is not a statement of current board expertise, it is a reflection on the fact that a larger pool of assets would have overall greater supervision and will attract more highly qualified managers in the investment community.
In-depth study on each pension fund including: fund balances, historical contribution rates, actuarial formulas used, available funding sources, impact of revenue limitations including tax caps and existing compliance measures. Required to be released in 2013.
• Impact to the City of Evanston: Could be positive, if the analysis includes both a review of funding and benefit changes over time.
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