Excerpts from the ChicagoTribune.com:

Gov. J.B. Pritzker on Thursday unveiled a plan to merge roughly 650 local pension funds for suburban and downstate police officers and firefighters into two statewide funds in an effort to narrow a widening funding gap and ease the property tax burden on homeowners. The idea of consolidating the public safety pension funds — which together have roughly $11.5 billion in unfunded liabilities — is not new, but many previous attempts have failed to gain traction in the General Assembly as police and firefighter unions and other interests have pushed to retain local control. The governor is now calling on lawmakers to take swift action to require the funds to combine under a plan recommended by a task force he assembled shortly after taking office in January.

According to the 22-page report, each day the funds remain separate, they collectively forfeit nearly $1 million in potential investment returns, … forcing most municipalities to rely on a never-ending cycle of increasing local property taxes or cutting services to meet their pension obligations … that’s a hole that these funds are digging deeper every year, and then municipalities have to ask taxpayers to fill the hole.”

If the funds were to perform similarly to larger Illinois pension plans over the next five years, it would mean additional investment returns of $820 million to $2.5 billion over the next five years, according to the report, which cites a state Department of Insurance analysis.

Under the plan, there would be separate statewide funds for police officers and firefighters, each managed by an eight-member board with equal representation of municipalities and police officers or firefighters. Each police or fire department would maintain a separate account within the funds, and the money would be held in a pair of trusts separate from the state treasury. Assets and liabilities would not be shifted from one municipality’s plan to another. But the funds would be able to pool their assets for investment purposes and cut down on administrative fees currently paid separately by each local fund.

The plan has picked up a key backer in the state’s firefighters union. But winning support for such a monumental change over the next month won’t be an easy task, and consolidation will face strong pushback from police unions and a statewide association that represents trustees of the existing funds.

Not dealt with in the report are $134 billion in unfunded liabilities in statewide retirement systems covering teachers, university employees, state workers, legislators and judges; and Chicago’s nearly $30 billion in unfunded liabilities across four funds.

Mayor Lori Lightfoot at one point had floated the idea of Chicago being part of a consolidation, but her latest legislative asks don’t include that idea. Pritzker said examining the potential benefits of consolidating the state and city funds will be among the next jobs for the task force, though the report says consolidation would not achieve material improvement of their investment returns for the much larger funds.

Over the past decade, the annual investment returns reaped by the suburban and downstate police and fire funds, on average, have been about 2 percentage points lower than those of the Illinois Municipal Retirement Fund, which has more than 429,000 members across 3,000 units of local government, excluding Chicago. IMRF — the state’s best-funded public pension fund — is a model for the proposed consolidation.

Opponents of consolidation have argued for the importance of local control and pushed for fewer restrictions on how small funds invest their money. Given the opposition to pension fund consolidation, the task force found mandatory consolidation would be the sensible approach. Better performing plans would perform at least as well in the long term under a consolidated model, while the worst performing plans would perform substantially better.

The new statewide police fund would have $8.7 billion in assets while the firefighter fund would have roughly $6.3 billion. Currently, 65% of the local funds have less than $20 million in assets and 44% have less than $10 million, which creates limitations on the types of investments available to them.

Collectively, the existing funds have enough assets to cover only 55% of liabilities, far short of the state-mandated target of 90% funding by 2040 and a figure that has dropped since it was at nearly 63% before the Great Recession, according to a report. In all, the funds — which are required for any town with at least 5,000 residents and one full-time police officer or firefighter — cover about 20,000 police and 14,000 fire department employees and retirees.

The task force is also proposing a costly series of changes for police and fire pensioners hired after 2011, in response to concerns that the current setup may violate federal rules for workers who are exempt from Social Security that would reinstate surviving spouse benefits for that group of police officers and firefighters, increase their pensionable salary cap and amend their final average salary calculation. The report estimates these changes to suburban and downstate plans would offset between $70 million and $95 million of the projected $820 million to $2.5 billion in investment return gains over a five-year period.

The task force also will continue to look at whether even more money could be saved by centralizing the administration of benefits rather than leaving that in the hands of the local pension boards.

The report acknowledges initial costs for transitioning assets into the consolidated pool, but said that would be substantially less than the upside from stronger investment returns over a matter of a few years.

thanks Asher