Failure to comply with IRS rules could result in a significant taxpayer cost if local governments were forced to make retroactive contributions to Social Security, a concern noted by Pritzkers task force on pension consolidation. The practical effect is that many employees will see a boost in their initial pension check on retirement, which serves as the basis for subsequent annual increases. The multiplier is the percentage of final average salary earned per year of service. Recently, the Firefighter Pension Investment Fund of Illinois ("FPIF") started the first wave of transfers from firefighters' pension funds on October 1, 2021, despite pending litigation. The other two changes are designed, at least in part, to address the safe harbor concerns. Problems include: Statewide, pensions obligations consumed nearly 30% of all government spending. Tier 2 members of the Teachers Retirement System, which covers public school teachers outside of Chicago, pay9% of their salary for pension benefits, the same as Tier 1 members. Working together, we are helping hundreds of cities across the state of Illinois to alleviate their spiraling property tax burdens, and just as importantly, were showing that Illinois can tackle its most intractable problems," Pritzker said at the time. 2019 consolidation legislation. On December 18th, 2019, Governor Pritzker officially signed Public Act 101-0610 into law, which then took effect on January 1st, 2020. Pritzker is certainly overselling the benefits, calling the move a huge bipartisan step, which is concerning given Illinois politicians long history of ignoring the root cause of the pension crisis. Litigation. Protected by Google ReCAPTCHA. This is via the pension protection clause, Article XIII, General Provisions, Section 5, Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.. However, in February 2021 18 police and firefighter pension funds, including active and retired members, filed a complaint against Illinois Governor J. In 2019, the Illinois General Assembly passed a bill that allows for the consolidation of 650 police and firefighter pensions in order to pool their funds into two statewide funds for investment purposesone for police and one for firefighters. Your email address will not be published. Please e-mail[emailprotected]with your query. The two sides last year laid out arguments seeking a summary judgment. Elected officials never sought formal guidance from the Internal Revenue Service. The General Assembly created Tier 2 in 2010 to reduce the States overwhelming pension obligations by significantly lowering benefits for new workers. The league stated it is confident it will beat the legal challenge. I dont think many of us trust the government of Illinois to handle our money given their history, said Jim Kayes, president of the DeKalb Police Pension Fund board, which is among the plaintiffs. Nathan Woodside/Lewis & Clark Community College. Additionally, Tier 2 reduced the final average salary on which a pension is based from the average of the highest four of the last five years of service to the average of the highest eight of the last ten years of service. The unfunded liabilities of Illinois suburban and downstate public safety pensionsrose to $13 billion in the last yearof compiled results reported to the state, soaring over a 29-year climb that underscores the deep strains on local government budgets. However, many of the local pension leaders remain hesitant or are even refusing to merge until they learn the outcome of litigation to block Pritzkers law. Its the sort of thing that seems very nit-picky but is actually very relevant to the situation in Illinois. The move is intended to help improve the financial stability of the pension funds and ease pressure on local governments to raise taxes to fund those pensions. Consolidation has even been previously considered for Illinois' pension systems before (in 2003, 2009, and 2012). J.B. Pritzker on Wednesday signed into law the consolidation of 649 downstate and suburban police and fire pension plans into two new pension funds. By: Matthew J. Schueler. Illinois effort to fix ailing local pensions faces legal hurdle A 2019 law championed by Gov. Problems include: Nicklas and some other city leaders are relived to see their pensions consolidated, noting the underfunded plans weigh on budgets and credit ratings, contributing to a slowed economic recovery from the pandemic. The plaintiffs are seeking to certify the lawsuit as a class action. Three dozen current employees and retirees, along with 18 local retirement plans, filed a lawsuit in February in Illinois circuit court saying the consolidation violates the state. The task force report said the following changes were intended to address concerns about the fairness of Tier 2 and to avoid running afoul of IRS regulations: The first change, involving benefits paid to surviving spouses, is not expected to affect many individuals and reportedly holds great significance for first responders. Illinois has nations worst pension debt. lawsuit filed by a handful of . A limit was also imposed on the amount of earnings used to calculate final average salary. The Plaintiffs have 30 days to appeal the decision. The initial legislation, which affected most public pension funds in the State, was introduced on March 24, 2010 and passed the same day. Since our last newsletter, on November 10, 2021 the t 217.528.8800 f 312.212.5277 e info@illinoispolicy.org, Copyright 2023 Illinois Policy | Illinois' comeback story starts here. Chicago Office | Illinois Policy
J.B. Pritzker championed to consolidate about 650 local police and firefighter pension funds from across Illinois under state management by mid-2022. The Civic Federations recently released Inventory of Local Governments in Illinois report identified a total of 8,923 units of local government in Illinois. A husband or wife of a deceased police officer or firefighter will now be eligible for two-thirds of the deceaseds accrued pension benefits, regardless of how long the person worked before their death. Total downstate police and fire pension debt is only about 5% of Illinois total public pension debt. Some Republican lawmakers who voted against the bill raised the lack of a cost estimate during legislative debates, including Sen. Jason Barickman, R-Bloomington. In other words, lawmakers responded to a problem they had not confirmed existed with changes they had not confirmed would fix the problem, without knowing how much the changes would cost. The firefighters fund is further along in the consolidation process and expects to meet the deadline. Recently, however, the consolidation encountered its first legal challengea class action lawsuit claiming Public Act 101-0610 unconstitutional. An Illinois Circuit Court judge hasdenied a lawsuitthat sought to stop the consolidation of the states 650 firefighter and police officer pension funds, rejecting the plaintiffs claims that a law enacting the move violated the states constitution. Previously, employees hired after 2011 needed to work at least 10 years and vest before survivor benefits were available. The fund said that approximately 90% of local firefighterpension funds have successfully completed the transition process so far, and that it is working with the remaining funds to do the same. There, the plaintiff joined the pension fund in 1969. Although some union leaders supported the move, dozens of police and firefighter pension boards and individual members sued the state and the new funds to stop the consolidation. When Tier 2 was created, public attention was focused on rectifying Illinois worst-in-the-nation pension crisis and assisting local pension funds in distress. In 2013, Illinois passed legislation which aimed to reduce pension liabilities, but various groups representing the affected employees filed suit, and the Supreme Court overturned the legislation in a 2015 decision. The health of some individual funds, however, are far weaker with ratios only in the teens. Police Officers' Pension Investment Fund. But being able to vote for board members, or have a local board control investments, he added, is not of the same nature and essentiality as the ability to participate in the fund, accumulate credited time, or receive health care, disability and life insurance coverage. Consolidation: Attorney Mancini . What the grassroots Illinoisians think about it is another question. The increase for most workers hired before 2011 (but not Chicago public safety and some other employees) is 3% on a compounded basis. He projected the consolidation could yield an extra $2.5 billion in investment returns over five years after the law took effect Jan. 1, 2020. Senate Bill 616 would consolidate the assets of Illinois 649 public safety funds, not including those in Chicago, into two new funds, one for police and one for fire. Once the trial court issues its ruling, the case will likely be appealed by the losing party. . The report, prepared by Chicago-based Anderson Economic. 1970, art. By cutting down on duplicative administrative costs and. The Civic Federation urges the Governors Office and sponsors of Senate Bill 616 to demonstrate the need for the specific Tier 2 enhancements in the legislation. Unions and other Tier 2 critics are also concerned about the relatively low benefits provided to new employees. The task force savings estimates of between $160 million and $288 million annually are almost certainly too optimistic. This committee has developed an enviable record in exposing and investigating fraud as some of the largest companies in this country, including Enron and WorldCom. Senate Bill 616 reinstates the Tier 1 benefit for these surviving spouses. Nicklas and some other city leaders are relived to see their pensions consolidated, noting the underfunded plans weigh on budgets and credit ratings, contributing to a slowed economic recovery from the pandemic. Consolidation of downstate police and fire pension funds made sense by itself, the Illinois Policy Institute previously stated. 802 South 2nd Street | Springfield, IL 62704
Copyright 2023 Asset International, Inc. All Rights Reserved. Illinois Police Officers' Pension Investment Fund; . XIII, 5. In addition, they must ensure that the financial impact of any proposed Tier 2 changes is fully evaluated by pension actuaries and publicly disclosed before any action is taken by the General Assembly. The creation of two new consolidated pension funds in Illinois is providing plan executives with a rare opportunity to build defined benefit plan investment programs from scratch. Any increase in actual returns will be partly due to the consolidated funds ability to invest in riskier investments. The Illinois Municipal League filed a support brief through Clark Baird Smith, of Rosemont, and the Associated Firefighters of Illinois did so through Asher, Gittler & DAlba, of Chicago. 1970, art. Shortly thereafter, a member of the Pension Laws Commission sent a follow-up letter to Delegate Green requesting that he read a statement into the convention record expressing the view that the new provision should not be interpreted as reflecting an intent to withdraw from the legislature the authority to make reasonable adjustments or modifications in respect to employee and employer rates of contribution, qualifying service and benefit conditions, and other changes designed to assure the financial stability of pension and retirement funds and that [i]f the provision is interpreted to preclude any legislative changes which may in some incidental way diminish or impair pension benefits it would unnecessarily interfere with a desirable measure of legislative discretion to adopt necessary amendments occasioned by changing economic conditions or other sound reasons. . The panel explained the amendment allows the Illinois Finance Authority to lend up to $7.5 million to each of the new statewide funds, and if borrowed, it would be repaid with interest. The People ex rel. The Court also rejected the use of the states police power to reduce pensions, that is, the notion that the greater need to provide basic services could justify reducing pensions, noting that other provisions in the constitution included wording qualifying the promises made as subject to affordability, but that the pension protection wording was absolute. The consolidation of Illinois' suburban and downstate police pension fund assets has picked up speed since a May court ruling upholding the law's constitutionality, but a pending appeal. of the board members. Senate Bill 616 requires that contribution changes due to changes in actuarial assumptions be phased in over three years. To the extent that growth in the pensionable salary cap is an issue, it remains to be seen whether Senate Bill 616 solves the problem. Click here to read the full issue brief. The plaintiffs claim that they had a contractual and enforceable right to exclusively manage and control their investment expenditures and income, including interest dividends, capital gains, and other distributions on investments, which the consolidation has infringed upon. Illinois is home to the nation's worst pension crisis, leaving taxpayers on the hook for $317 billion in unfunded pension liabilities for the five statewide retirement systems. Brian Granato Mike Pritchard, Sr. . Further updates will be provided as they become available. PABF's authority, duty, and responsibility is governed by state statute and administered by the Retirement Board of Trustees ("The Board") in compliance with Act 5 of the Illinois Pension Code.The Fund was first created in 1887 through an act of the Illinois legislature. A separate law passed in December 2010 extended Tier 2 to public safety funds. Link: https://www.ai-cio.com/news/court-rejects-legal-challenge-to-illinois-pension-consolidation/. The wage base is adjusted each year by the change in the national average wage index. A legal memo from the Illinois Municipal League had pointed to the pensionable salary cap as a particular area of concern for potential safe harbor violations, because the current salary cap of roughly $115,000 is less than the Social Security wage base of $132,900. Mayor Lori Lightfoot says she will run for second term. Similarly, there is no evidence that those still employed will suffer a similar fate when they eventually retire. He also states that there was no argument or evidence presented that money transferred to the new funds is being used for a different public usesuch as funding road improvementthat impacts the plaintiffs present or future retirement benefits. As a result, Tier 2 members paid about 1.9% of their salary to subsidize Tier 1 benefits. | Illinoiscourts.gov. Youre invited to comment at JaneTheActuary.com! This clause has been construed by our court on numerous occasions, most recently in Kanerva v. Weems, 2014 IL 115811. The pension problem: Illinois Quad-Cities turn to borrowing to pay down unfunded pension liability Cities across Illinois are scrambling to find ways to stockpile the money they'll need to. The lawsuit alleged that the consolidation violates two provisions of the Illinois Constitution: the pension protection clause and the takings clause. . In the task force report, the cost is estimated at $70 million to $95 million over five years, or $14 million to $19 million per year, but there is no supporting documentation for the estimate. Pritzker lawsuit. Consolidation was also proposed in Pennsylvania in 2012 and 2018. Will be used in accordance with our terms of service & privacy policy. Attorney Atwell replied that there currently is a consolidation lawsuit and until the court rules, he would hold off at this time. Illinois' consolidation of suburban and downstate police firefighter pension fund assets cleared a second legal hurdle but it could take a decision from the Illinois Supreme Court to clear the path for full participation in the plan. Heres the key text: The pension protection clause clearly states: [m]embership in any pension or retirement system of the State *** shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired. (Emphasis added [in the decision text].) FPIF recently notified local funds of their asset transfer dates which begin October 1, 2021. Lawmakers justified the changes by pointing to potential violations of a provision of federal law known as safe harbor. The Internal Revenue Code requires state and local government employees to either receive Social Security or be part of a retirement system that is at least as generous. Illinois Second District Appellate Justice Robert McLaren In DeKalb, police and fire pension costs use up about20%of general fund revenue, up from 10% in 2014, said city manager Bill Nicklas. The Illinois Police Officers' Pension Investment Fund told lawmakers during a committee hearing that some individual funds have resisted moving their assets because of pending litigation. A History of Pension Enactments. Five years later, the Illinois General Assembly amended the Pension Code to limit military service credit to those who applied before September 1, 1974. Sklodowski vs. The state's pension consolidation task force reported doing so could earn the funds an extra $2.5 billion altogether over the next five years. Required fields are marked *. . Tier 2 employees are subject to a pensionable salary cap that began at $106,800 and has grown since 2011 at half of inflation or 3% per year, whichever is less. Taxpayers must not allow Springfield to pretend theyve solved the pension problem. The lawsuit contends that pension member benefits are being impaired because the transition costs are being covered by loans through the Illinois Finance Authority that the two new consolidated funds must repay. In fact, the text cites multiple attempts to provide some alternate language to the constitutions blanket statement, which did not succeed: We note, moreover, that after the drafters of the 1970 Constitution initially approved the pension protection clause, a proposal was submitted to Delegate Green by the chairperson of the Illinois Public Employees Pension Laws Commission, an organization established by the General Assembly to, inter alia, offer recommendations regarding the impact of proposed pension legislation. J.B. Pritzker would merge about 650 local police and firefighter pensions, but a lawsuit. Ill. Const. Rather, the Illinois Supreme Court says that the constitution-writers intentionally gave pensions an elevated level of protection beyond what the U.S. Constitution requires via this clause. In addition, because the assumed rate of return is used as the discount rate for pension liabilities, an increase in the expected return rate by the consolidated funds would also reduce statutorily required annual pension contributions. Police accounted for $7.5 billion of the total and firefighters for $5.5 billion, according to the most recent reportfrom the state legislatures Commission on Government Forecasting and Accountability. Tier 2 applied to employees hired on or after January 1, 2011. The Act does nothing more than require one type of government-created pension fund to transfer assets to another type of government-created pension fund. However, in February 2021 18 police and firefighter pension funds, including active and retired members, filed a complaint against Illinois Governor J. Illinois Police Officers Pension Investment Fund 1) Review and possible approval of IPOPIF Exhibit A Resolution . However, many of the local pension leaders remain hesitant or are even refusing to merge until they learn the outcome of litigation to block Pritzkers law. About a month ago, Gov. However, that process may be interrupted if a court issues an order staying the transfer of assets. As the plaintiffs articulate one example, a retired-beneficiary participant previously had the benefit of a 2.1% vote (1 out of 47) for the one beneficiary selected member of his pension fund, and thus, effectively a 0.43% say regarding the Boards selection of an investment manager or advisor. However, [a]s a result of Public Act 101-0610, he will only have the benefit of a 1/8,830 vote (1 out of 8,830) for the one beneficiary-selected member of the nine-person Permanent Board of the Firefighters Pension Investment Fund, which equates to just a 0.0013% say regarding the Permanent Boards selection of an investment manager or advisor. The plaintiffs also claim that their vested benefits have been diminished because the consolidation law requires each downstate pension fund to ultimately bear all costs of transition, up to $15,000,000, plus interest.. Illinois plans to consolidate its 650 police and fire pension funds in the suburbs and downstate. The First Responder Pension Consolidation law currently faces a lawsuit challenging it on constitutional grounds, claiming the measure diminishes pension benefits. Consolidation of downstate police and fire pension funds made sense by itself, the Illinois Policy Institute previously stated. The legislation raises the formula to the lesser of full CPI or 3%. For Tier 1 public safety workers hired before 2011, surviving spouses were already eligible to receive a portion of the deceaseds pension regardless of how many years of service an employee had. Consolidation Lawsuit Update . The decision asserts, in short, that the delegates knew full well that pensions were not properly funded, and intentionally made the choice to guarantee pensions by means of obliging future generations to pay, no matter what, rather than funding them as they are accrued. The lawsuit alleged that the consolidation violates two provisions of the Illinois Constitution: the pension protection clause and the takings clause. The lawsuit alleged that the consolidation violates two provisions of the Illinois Constitution: the pension protection clause and the takings clause. The IRS has issued rules, known as safe harbors, for determining if plans meet the minimum benefit standard. The plaintiffs also argued the consolidation impaired their benefits because it required the local funds to pay up to $15 million, plus interest, to transition, operate and administer the new funds. This decision recapped not merely the 2013 decision, but included more extensive commentary on Illinois pensions, citing, for example, 1917 and 1957 reports characterizing state and local pension plans as in a condition of insolvency, and a 1969 overall funded status of 41.8%. The only real way to fix the pension crisis once and for all and strike a balance between protecting taxpayers, retirees and vulnerable Illinoisans who rely on government services is with a constitutional amendment to allow for structural pension reform. 993 AND H.R. Illinois Supreme Court Justices all stand before, swearing in ceremonies for Justice Lloyd Karmeier as the chief justice of the Illinois Supreme Court Monday, Oct. 31, 2016, in Springfield, Ill. (AP Photo/Seth Perlman), Chicago Mayor Lori Lightfoots vaguely worded statements, Illinois 1970 constitution is one of only in two in the nation, overturned the legislation in a 2015 decision. However, as pointed out by the Civic Federation, lawmakers never definitively established that a safe harbor violation existed for Tier 2 public safety workers, nor that the changes in this bill were the minimum necessary to bring the plans into compliance. comeback
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