DOBROVOLNY LAW OFFICES
JAMES
L. DOBROVOLNY
ATTORNEY
AT
LAW
306
TELEPHONE:
(217) 344-2376
TELECOPIER: (217) 344-2382
Letters
to the Editor
The
News Gazette
Re:
Municipal Pensions article by
Dear
Editor,
This letter exceeds your Letter to the Editor
requirements. I would ask that you publish it a Guest Opinion or other such
means. I have background and experience with the public pensions and their
issues referred to in the article of
The front page article in
Sunday’s paper about Municipal Pensions displayed little research into or
understanding of the Public Pension System for municipalities in
We have been hearing a lot from
municipal groups that our local public pension system is unsustainable and
there needs to be reform. The article parrots those groups and infers that new
retirement benefits are the main cause of these increasing amounts the
municipality must pay the retirement system and the increasing unfunded
liability. So what is the truth?
Is it the benefit changes that caused the unfunded liability to
increase, or are they scapegoating public safety employees for a misguided
actuarial funding method that they proposed? First we need a little history lesson. Back
in July 1993 the funding method that was being used was changed at the Illinois
Municipal League’s request. The new
funding law that went into affect changed our actuarial method from equal
annual payments to a method called a level percentage of payroll. OK what does that mean? Well,
let’s put it in mortgage terms. Let’s look at the pension fund like a home we
bought. There are many different ways to finance that home. But most people use
a 30 year fixed mortgage. It gives you equal monthly payments, which is easier
to budget for. There are also other types of loans out there. The type of loan
the municipalities went for, to pay off their unfunded liability to the pension
fund, was an adjustable rate mortgage with negative amortization for the first
16 years so far. What’s that?
Well, under negative amortization, payments are initially determined to be
artificially low amounts, which are to increase dramatically in future years,
but which currently are insufficient to fund the interest portion of the
unfunded liability. So from 1993 to today the pensions were being funded at a
level that, in and of itself, increases the unfunded liability, and increases
it dramatically. The adjustments up we are now seeing, in funding the pensions,
were known and designed to act the way it is. Adding a market downturn
increased the problem.
So why blame benefits? Well it’s an easy way to take
the heat off municipal officials. Some of them didn’t know or understand this
current dysfunctional funding mechanism. Many did know. Studies done by the
staff of the Illinois Department of Insurance, Pension Division, which
regulates these funds, at the time the funding formula was to be changed
calculated that this change in methodology would result in the following
outcome: If every actuarial assumption used in funding were exactly realized (a
virtually impossible scenario), then the unfunded actuarial liability would
increase 300% in 12 –years (simply because of the lower payments). So it’s just
easier to blame the employees and retirees who receive these benefits. It is interesting to note that this current
actuarial method was declared illegal in
The
article blames a benefit that firefighters received in 2004 as being the main
culprit in why a new fire station was funded by tax increases. The benefit in question
was an increase for surviving firefighters’ spouses so that they would receive
100% of what their spouse’s retirement pension was. The police have received
this benefit for years. Previously, upon the death of the firefighter, the
surviving spouse’s retirement would immediately be cut to 54% of the monthly
salary! Prior to 2000, we had firefighter widows in all of our local
communities living on $600 a month! Couple that with the fact that our police
and firefighters do not contribute to, nor do they receive social security as
the rest of the municipality’s employees do, and maybe one can appreciate the
necessity of such a benefit. Even if a public safety officer holds down a
second job (as many must) and contributes to Social Security, when it comes
time to retire and draw on that, they do so at a drastically reduced rate. For most
Shame on those who would begrudge this benefit
to a firefighter‘s surviving spouse and blame them and their benefit rather
than the cities’ leaders’ lack of backbone and foresight when they demanded the
current funding mechanism in 1993. They got precisely what was asked for –
extremely low payments up front with higher payments at the end, almost
exponentially higher.
Frequently,
fully funded
defined benefit plans attain high enough investment returns that public sector
employers are able to reduce the amount of normal cost paid from tax
collections, freeing taxpayer revenue to cover services. This cost savings can
be significant, as the experience of the Illinois Municipal Retirement Fund
(“IMRF”) demonstrates. The IMRF, the second largest pension fund in Illinois
covering public employees such as bus drivers, sewer workers, office staff, and
municipal administrators, has enjoyed a funding advantage for years, in large
part because it demands full and on time payments from member government
employers and employees. As a result, the IMRF has consistently maintained high
levels of funding. But for police and firefighters,
I am not unsympathetic to the burden
passed on to taxpayers for properly funding the municipal pension programs.
Managing a municipality is a difficult task requiring trade-offs within the
budget. However, strong management requires a recognition that pension funding
should occur while the pensions are being earned and not passed off to future
generations of taxpayers. As noted earlier, the system for proper funding of
municipal pension plans was altered in 1993 when the contribution methodology
was changed at the behest of the municipalities to lower their then current
costs. It is now unseemly for these same municipalities or politicians running
for office to raise an alarm about issues which were anticipated and attempt to
blame the beneficiaries of the system as the system performs exactly as
anticipated!
Part of the Moral Contract we have
with Public Safety Employees is that in exchange for them going out and risking
their life and limb every day for us, we will guarantee them a good pension.
Not a great pension, a good pension. They are the only public employees that
when they leave their family at the door in the morning, they don’t know if
they will come home whole or in a box. It is something few contemplate. When we
enter into that Moral Contract we owe it to those police and firefighters to be
responsible and live up to our end of the bargain and make certain that their pension
is there when they need it, no quibbling about it – no whining about it, “I
didn’t save for it. I thought my kids should.”
So what needs to be done here? I believe that we need to
refinance the pension system using the prior actuarial method of equal annual
payments over a new funding schedule, just like you would for a mortgage on
your house. This would place a stable funding system in place. We need to educate our elected leaders about
how the pensions are funded and what really caused this underfunded issue.
Allowing individuals or groups who are ideologically driven against defined
benefits for police and fire to misrepresent or outright deceive the public and
elected officials is a recipe for disaster for our Community and for
Please call me if you have any questions.
Sincerely,
Attorney at Law
JLD