Consolidation promises to cuts costs and improve investment returns. But public safety retirement funds prefer local control and clout, a BGA Rescuing Illinois report finds.

It’s been more than four years since a bipartisan, government-backed study recommended that hundreds of Illinois small police and fire pensions be fused into a single, unified investment group.

And what’s happened since? Nothing. Inertia has set in, despite the backing of Gov. Bruce Rauner, key lawmakers, public pension experts and municipal finance professionals who contend consolidation is the preeminent way for public safety pension funds to cut costs, improve investment returns and become more financially viable, a Better Government Association report finds.

Yet even as the funding levels and investment returns for public safety pensions lag those of other municipal retirement plans, the local police and fire pension bosses adamantly oppose any merger. They argue it will wrest decision-making control from them and potentially allow fiscally weak funds to contaminate the pool of stronger pension players.

“I don’t want to be a little fish in a big pond,” said Theodore “Ted” Sanders, president of the Sauk Village Police Pension Fund and a retired police sergeant. “The pension is my source of income. A takeover would be a disaster.”

Others strongly disagree with that rationale and cite the 2012 study’s finding as proof that big changes are needed.

Logic of consolidation The Illinois General Assembly’s Commission on Government Forecasting and Accountability (COGFA) hired Chicago-based Marquette Associates to conduct the research. The study found that consolidation could:

• Eliminate duplicate operational costs and trustee-related expenses.  Currently, each of the 600-plus funds has its own board of trustees (estimated by pension experts to be nearly 3,000 trustees in total) and professionals to assist in fulfill ing operational responsibilities, such as assessing disability claims. The largest trustee-related expense involves mandatory continuing education of pension rules and regulations.

• Cut investment-related fees. Each fund retains investment professionals to manage pension fund assets. On average, investment-related costs account for nearly 62 percent of downstate pension fund expenses – the largest single cost.

• Improve market clout. Larger accounts benefit from more competitive pricing. Investment professionals charge a reduced rate when they manage larger pools of money.

• Diversify investment portfolios.

Smaller funds by law are limited in the amount of stocks that can be included because they are more volatile. A larger fund could expand the investment mix, thereby opening the possibility of better returns.

Marquette noted in its report that based on its estimate of investment expenses, it wouldn’t be cost effective to merge all funds, or leave consolidation to the discretion of each fund.

Instead, it recommended a partial consolidation of funds with assets under $10 million, which would yield savings of $210.6 million over 30 years with a payback of costs starting in one year.

The study’s cautious endorsement may explain the initial lack of action by the General Assembly. But the state budget crisis, which is having a ripple effect on municipalities’ finances, is adding new urgency in the quest for efficiency, lower costs and better returns

Gaining fresh momentum Overall, funding levels for police and fire funds have lagged the Illinois Municipal Retirement Fund (IMRF), which manages the pensions for municipal employees outside Chicago and Cook County.

The aggregated police and fire funds were 55.96-percent funded as of 2012 – according to the most recent report from the COGFA. That’s far short of the 80 percent funding level that is considered safe and a widely held standard based on corporate plans. Some police and fire funds are funded as low as 18 to 25 percent.

In contrast, IMRF is 88-percent funded, according to Executive Director Louis Kosiba.

Municipal advocacy groups such as the Illinois Municipal League and Northwest Municipal Conference have long advocated a public safety pension consolidation.

The issue gained fresh momentum last year when a state task force on local government consolidation and unfunded mandates, led by Lt. Governor Evelyn Sanguinetti, recommended the public safety funds be combined into a single investment authority.

Rauner had earlier proposed a consolidation under IMRF as part of a broad pension reform package. Kosiba said that while he supports a consolidation, he is “not keen” on the funds being absorbed by IMRF, saying a separate public safety pension fund is a better option than jamming them under the IMRF tent.

In February, Sen. Dan Duffy, R-Lake Barrington, introduced a bill that would consolidate the funds and transfer management to the Illinois State Board of Investment (ISBI), which oversees the pension assets of the General Assembly Retirement System, the Judges’ Retirement System of Illinois and the State E mployees’ Retirement System of Illinois.

The police and fire pension funds that pay different investment consultants earn a substandard return on investment due to the small nature of the funds and the restrictions on investment, Duffy said.

“There will be a small initial cost associated with this, but taxpayers and beneficiaries will benefit from professional investment management and great returns,” he added.

“This is an easy move to save substantial taxpayer dollars through efficiency while many of our local governments are struggling to pay pension costs,” a Rauner spokeswoman said.

However similar proposals have been put forward in the past but none have progressed, mostly as a result of strong opposition by the public safety funds that want to maintain local control.

Fear of losing power “Is there a problem?” asked Cary Collins, a Hoffman Estates attorney who represents Illinois police and fire pension funds. “Pension funds are well managed on an individual basis within the villages,” he said. “Any costs associated with consolidation would exceed the improvement in investments.”

Collins said some trustees worry the funds will be commingled so that a wellfunded district ultimately rescues a starving one – although big funds such as IMRF prevent that by segregating municipal accounts.

Consolidation won’t solve the problem of underfunding, but market power can improve returns, which would in turn ease a municipality’s liability, consolidation proponents say.

There’s room for the Downstate fire and pension funds to improve their performance.

These funds, in the aggregate, have posted returns ranging from .3 percent to 5 percent in most years, according to COGFA. That trails returns of 5.6 percent at ISBI and 6.69 percent at IMRF for the 10 years ending December 2015.

The problem of substandard returns could be solved if the legislature offered more latitude for the funds to invest in stocks, Collins said. It would also help if municipalities fully funded the plans, he added.

Judith Crown is a veteran business journalist, who has worked for major news outlets including BusinessWeek Chicago and Crain’s Chicago Business. She can be contacted at info@bettergov.org.