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campbell 01-02-2019 09:18 AM

Public Pensions Watch 2019
Whups, meant to do this yesterday. Ah well.

The 2018 thread got to over 2000 posts... let's see where we land this year!

prior years' threads:

campbell 01-02-2019 09:42 AM



Public Pensions Turn to Private Assets in 2018
Expected lower return environment spurs interest in private equity, real assets.

Public pension plans continued to increase allocations to alternatives and private assets during 2018, particularly to private equity, real assets, and other private market securities, according to a report from Goldman Sachs Asset Management (GSAM).

“These adjustments may be motivated by a need for exposure to higher-returning asset classes to achieve a plan’s long-term expected return target,” said GSAM in its report, “given we are likely entering a period of lower returns across a wide swath of asset classes.”

The report said that increased allocations to real assets may also signal increased concern about inflation, which “has shown signs of life in recent quarters after being dormant for several years.”

In compiling the report, GSAM said it analyzed board minutes and publicly available documents to determine where public pension plans enacted changes to strategic target allocations during the past year.

GSAM noted that while public pensions boosted their allocation to private assets in 2018, they also reduced their allocations to US equities with many rotating to non-US equities. The report said this change was “potentially driven by the outperformance of US equities over non-US equities in recent years.”

The report also found that public pensions increased their allocations to emerging market debt during the past year. It said that an analysis of emerging market debt allocations by large US public defined benefit plans reveals wide adoption either as standalone mandates, or as part of other fixed-income allocations.

“We see [emerging market] debt as undervalued compared to areas such as US corporate bonds,” said the report. “Global growth may have decelerated, but remains above-trend in key economies,” as 97% of world economies currently report expansionary conditions.

However, GSAM added that it is closely monitoring ongoing trade negotiations and elevated risk from higher interest rates in the US, both of which are headwinds for the asset class.

Meanwhile, public pensions’ strategic allocation changes involving fixed income were “all over the board,” according to GSAM. Some plans reduced their exposure to investment grade and longer-duration instruments, while others increased allocations to emerging market debt, Treasury Inflation-Protected Securities (TIPS), and shorter-duration fixed income.

“As plans contemplate the composition of their fixed income allocations, many are grappling with the competing forces of Fed tightening, potentially higher inflation in the future, liquidity needs for benefit payments and the need to find incremental return,” said GSAM.

The report also said that while the market expects a total of two rate hikes in the next two years, GSAM expects three rate hikes in 2019 alone.

campbell 01-02-2019 09:42 AM



New York Allocates over $1.9 Billion of Capital
Particular focus given to Asia-specific strategies.

The New York State Common Retirement Fund committed over $1.9 billion of capital to fund managers in October, according to a recently released report from the country’s third-largest public pension plan.

The investor most significantly built out its private equity portfolio, adding four new regional funds to its lineup in the asset class. Hellman & Friedman IX received $325 million from the investor to carry out its strategy targeting large-cap companies primarily in the United States and Europe, and KSL Partners V took home $300 million to invest in the travel and leisure industry.

Subsequently, New York Common put a particular focus on Asian private equity, committing $500 million to strategies spanning the region. New York Balanced Pool Asia Investors III and New York Co-Investment Pool Asia III received $200 million and $300 million, respectively.

Ariel Investments, a global equities manager, received mixed attention.. The Ariel Investments Micro Cap account was terminated on October 3. The account value of approximately $54 million was allocated to cash. Following that, Ariel was hired and funded with $300 million for a separate investment strategy.

The fund then continued its regional focus on the Asia markets with a $225 million commitment to ARA Real Estate Partners Asia II, a closed-end, diversified pan-Asia commingled real estate fund managed by ARA Private Fund Platform.

EQT Partners then received a €250 million ($286 million) commitment for the EQT Empire Credit Solutions SCSp entity. The fund is expected to target investment strategies across the credit spectrum ranging from stressed and distressed debt, middle market finance to “high-quality business,” and senior secured and second lien financing.

There was no activity across the $207.4 billion institutional investor’s emerging manager, real assets, absolute return, and fixed income portfolios, the report added.

Alex Do recently took the helm as the new chief investment officer of the Bureau of Asset Management, providing direct investment advice and direction to the five New York City’s retirement systems.

campbell 01-02-2019 09:49 AM



Major pension overhaul — with reduced benefits — going into effect for new state workers, teachers

Pennsylvania’s pension overhaul law goes into effect today for most new state government employees and on July 1 for all new school employees.

Under the law, known as Act 5, the affected new public workers no longer will receive full guaranteed pensions backed by taxpayers and immune to the ups and downs of national and world economies.


inRead invented by Teads
The law creates two new retirement plans that carry less risk for taxpayers and therefore lower retirement benefits for workers who enroll in them.

One plan is a hybrid. It puts about half the retirement savings in a traditional, taxpayer-backed fund. The other half goes into a private sector 401(k) that rides the stock market’s ups and downs.

The other option lets workers put all their retirement money into a 401(k) account.

“These changes will reduce future risk to taxpayers and Act 5 will result in lower costs overall,” said Dan Egan, spokesman for Gov. Tom Wolf’s Office of Administration, which handles personnel.

The new pension options will save taxpayers $43.3 million to $140 million annually over 30 years, according to a financial analysis conducted by the Senate.

Retirement benefits would fall 18 percent for new school employees, and 6 percent for affected state workers, compared to employees hired since 2010.

That translates into retirement reductions of $7,327 to $33,173 for school workers served by the Public School Employees Retirement System (PSERS). Benefits would fall $6,452 to $34,048 for new state workers covered by the State Employees Retirement System (SERS).

Those figures are for a 65-year-old who retires with 35 years of service and an average annual final salary of $60,000.

The 401(k) is not free, either.

Future state workers will be charged $24 a year, plus an annual asset fee of 0.07 percent, from the company SERS hired to run the 401(k), according to the contract. That company is Great-West Life & Annuity Insurance of Denver.

Future school employees also will be charged operational fees for their 401(k) accounts through PSERS’ contractor, Voya Financial. The Morning Call could not determine annual costs.

Not every new public servant is affected by the law.

Lawmakers, who are sworn into office today for the 2019-20 legislative session, excluded themselves from mandatory participation in the reduced plans when they passed the pension bill in June 2017. Lawmakers also excluded state law enforcement and corrections officers.

Rather, lawmakers gave themselves and all existing employees the option of freezing their old plans, and then opening one of the new plans. Those eligible have until March 31 to decide.

Because the plans are not mandatory for existing elected officials and personnel, they will not lower PSERS’ and SERS’ combined $72 billion debt taxpayers must pay for pension plans obligated to future workers and retirees.

The debt was caused by three main factors. From the mid-1990s until 2010, governors and lawmakers in both parties decided not pay the employers’ full annual share of workers’ retirement benefits and they permitted school boards to do the same thing. In that time, lawmakers also gave themselves and all other employees and retirees retroactive pension bumps that sapped assets. Then market downturns crushed those assets further.

It’s true the law will not impact the debt, said Rep. Mike Tobash, R-Schuylkill, one of the law’s main architects. However, he said, taxpayers will experience less risk of higher debt because the plans are not fully backed by taxpayers.

“It’s shifting the risk,” Tobash said recently.

Tobash declined to say whether he would drop his fully backed retirement plan for one of new plans, saying he will weigh the personal and political exposure of that decision by the deadline.

There’s no chance all or even a majority of the state’s 253 lawmakers will line up for the new pension plans, said Barry Shutt, a retired Agriculture Department worker from Lower Paxton Township, Dauphin County, who advocates for lawmakers to pay off the state’s full pension debt.

“They are not inclined to do anything to damage their future benefits,” Shutt said.

As of mid-November, the state had 72,677 employees, the lowest level since the 1960s, according to the Office of Administration. That reduction is caused in part by attrition. The number of retirements and resignations has been nearly double each year since 2009, records show.

The administration has not forecast how many employees may need to be hired next year, Egan said. But the governor does not believe prospective employees will be scared off by the new retirement options, he said.

“The changes provide some more flexibility for people passionate about public service but prefer a shorter tenure in state government,” Egan said.

On Dec. 14, SERS mailed letters to its active members informing them of the option of switching plans, but it’s doubtful many will exercise that option, said Joe Torta, the agency’s director of member services.

“I’m not anticipating a lot of shifting into hybrid because the current benefit structure is higher,” he said.

Still, the law has required SERS to reorganize its operations, Tobash said. Staff rewrote brochures for how the plans work and compare so current and prospective employees can make the best decisions for themselves, he said. It also had to make other changes to ensure the 102 government agencies that are part of SERS file employees’ paycheck information correctly.

SERS also got approval to hire 13 more employees to help with the roll out, SERS spokeswoman Pam Hile added.

PSERS also is scrambling to get the new accounts.

“It is an enormous task for us with a very tight deadline, educating all 700 [plus] employers on the new reporting and benefits, updating business processes, computer systems and educating members,” PSERS spokeswoman Evelyn Tatkovski Williams said.

New pension plan for Pa workers goes into effect

A new pension plan for government workers in Pennsylvania is now in effect.

The new law creates a new retirement plan that will put half of the savings into a fund backed by taxpayers.

The other half will go into a 401K.

Governor Wolf says it will reduce risk to taxpayers and lower costs.

It's expected to save taxpayers at least $43 million per year for the next 3 decades.

campbell 01-02-2019 09:50 AM


EDITORIAL: Time for Nevada public pension system to produce the data

It appears that Nevada pension officials have exhausted all judicial avenues in their cynical effort to conceal information from taxpayers about the retirement benefits they fund for public employees. But given their well-established preference for ignoring the law, such an assessment may prove premature.

Last week, the state Supreme Court rejected a request from the Public Employees Retirement System to reconsider an October ruling that details of public pension payments are not exempt from state open record laws. It was an easy call.

The case was brought by the Nevada Policy Research Institute, a free-market think tank in Las Vegas that has fought for two years to gain access to information about pension payouts. The ruling marked the second time in five years that lower courts and the state’s highest tribunal had turned away efforts by PERS to keep the data confidential.

But even though retirement system officials have lost in court at every turn, history indicates they will continue to delay and deflect — and potentially seek legislative redress. A top-ranking PERS official at one point even offered misleading testimony to a judge about the system’s ability to produce the data. To make matters worse, PERS has farmed out much of its legal work to a private law firm at a cost of tens of thousands of dollars. Thus the agency uses taxpayer money to wage war against those very same taxpayers, who have a right to know how their contributions are being spent.

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PERS controls assets worth more than $35 billion and has an unfunded liability of about $13 billion, depending on who’s counting. Many public-sector pension funds throughout the country are in precarious financial condition, and a lack of transparency only exacerbates the problem by preventing private-sector taxpayers from accessing information necessary to adequately assess decisions made on their behalf.

With PERS now out of options at the Supreme Court, the matter will go back to Carson District Court Judge James Wilson, who initially ruled against the retirement system in July 2016. The time has come for PERS officials to accept the court decisions and follow the law. The system’s animosity toward accountability and its refusal to comply with state statutes are affronts to democracy and the rule of law. Judge Wilson should quickly schedule a hearing on the matter, make clear that any further obfuscation on the part of PERS officials or attorneys will result in sanctions and institute a hard deadline for the release of the records.

campbell 01-02-2019 05:06 PM


Significant Reforms to State Retirement Systems
Keith Brainard & Alex Brown
National Association of State Retirement Administrators
December 2018

Executive Summary

Although states have a history of making adjustments to their workforce retirement programs, changes to public pension plan design and financing have never been more numerous or significant than in the years following the Great Recession.1 The global stock market crash sharply reduced state and local pension fund asset values, from $3.15 trillion at the end of 2007 to $2.17 trillion in March 2009,2 and due to this loss, pension costs increased. These higher costs hit state and local governments right as the economic recession began to severely lower their revenues.3 These events played a major role in prompting changes to public pension plans and financing that were unprecedented in number, scope, and magnitude.

Since 2009, nearly every state passed meaningful reform to one, or more, of its pension plans. Although the global market crash and recession affected all plans, differing plan designs, budgets, and legal frameworks across the country defied a single solution; instead, each state met its challenges with tailored changes specific to its unique circumstances. For example, some states faced legal limitations on how much modification could be made to their existing retirement plans. Other states did not require major law changes due to their financial condition or the presence of automatic adjustments in their plan designs.

campbell 01-03-2019 05:03 AM



Annual levy to go up to help pay for pensions

Having been put in an unenviable position, the Pontiac City Council took a step at its Dec. 3 meeting that it was unwilling to take the year prior — the body voted to increase its annual levy beyond the 2.1 percent rate of inflation in order to combat the growing costs of local pensions. Despite some dissent in 2017, the more palatable choice then was to not raise taxes.

Avoiding the ire of taxpayers did not allow the city to cut into its ballooning pension deficit for public jobs, which have hurt municipalities as much as they’ve hurt the state government. But a recently released study suggests that there’s a way to help curtail the pension crisis without risking an incensed public.

Part of the trouble, City Administrator Bob Karls has noted, is the tight restrictions on how pension boards, such as the local fire and police pension boards, are allowed to invest.

Pension boards are allowed to put 40 percent of its allocations in the stock market, which makes hitting the 6 percent rate of return factored into the state’s actuarial calculations difficult. The success of this measure has been mixed, predicated on a pension board’s chosen investment firm’s ability to accurately forecast the stock market. Some pension boards of smaller municipalities might not have the same talent pool of those with market acuity that larger cities might.

Yet the pension problem remains significant enough locally to require a property tax hike, albeit a small one. The increased levy, which would tack on about $37,000 from the new equalized assessed valuation, amounted to about an extra $7 a homeowner would have to pay — provided they possessed a $100,000 property.

Beating the pension problem will require more than very modest tax increases. A study commissioned by the Illinois Public Pension Fund Association argues that there’s merit in easing a pension fund investment restriction.

Doing this would increase average annual pension fund returns statewide by at least $418 million over 20 years, the study’s authors, Anderson Economic Group, LLC, argued. This would go a long way in helping municipalities meet the state’s goal of pensions being 90 percent funded by 2040. At present, for example, the fire and police pensions are both below 70 percent.

Anderson Economic Group examined what would happen if the state government voted to ease the investment restrictions on local pension funds with less than $10 million in assets — that is, allow them to invest more than the 40 percent of its funds in the stock market or to be able to diversify portfolios more liberally. The study showed that gains for the 228 smallest funds in Illinois would average as much as 5 to 6.8 percent per year if the restrictions were eased.

Yearly returns for the Pontiac pension boards have typically been much more meager: in their joint January report from last year, the fire pension fund had received a return of 6.5 percent while the police pension fund had an investment return of 6.3 percent. These rates of return were much healthier than their respective 0.8 and 0.7 percent returns the year prior.

Something that has been suggested to reverse ballooning deficits is for consolidation of police and fire pensions with the statewide Illinois Municipal Retirement Fund, which currently provides pensions for many city and county workers who do not fall under the umbrella of fire and police employees. Since it is structured differently and subject to different investment rules, it is at present about 97 percent funded.

Anderson Economic Group warns against such consolidation in its study, however. Such a consolidation would require that all assets from each local fund be liquidated and then re-invested in the larger fund, the group stated, noting that this move would generate a one-time cost of up to $155 million in commissions, taxes and other fees, which would increase the pension funds’ unfunded liability by that amount as well.

Moreover, consolidation poses an even higher risk if the transfer occurs during a period of stock market growth and the local pension funds miss out on the resulting dividends from their existing investments, the study found. IPPFA President James McNamee argued that consolidation would also take control away from local municipalities; however, given that some municipalities are less than 50 percent funded at present, taking control might bring some measure of relief from the pension burden.

campbell 01-03-2019 05:07 AM


As Kentucky pension battle rages on, here's why Tennessee government workers are secure

Kentucky has been gripped in a years-long debate about how to shore up public employee retirement funds and slow ballooning pension costs that are crowding out other government services.

Its neighbor to the south has no such worries.

The Tennessee Consolidated Retirement System is one of the healthiest pension plans in the nation. It has enough assets to cover more than 93 percent of its promised pensions for teachers, state and higher education workers, and many local government workers — ranking it among the five best-funded state plans in the U.S. The national average is 66 percent, according to research by the Pew Charitable Trusts.

Kentucky, on the other hand, has just a third of its liabilities covered, leaving $33 billion unfunded.

“Tennessee is one of the states that just stands out as one of the best run in the country,” said Greg Mennis, director of Public Sector Retirement Systems for The Pew Charitable Trusts.

So how did it get on such solid footing? We take a look at some key moves taken by state officials.

Tennessee politicians paid their bills
Every year, since at least 1972, the state has made its full pension payments recommended by actuaries.

“Part of it is an institutional discipline,” said state Sen. Bo Watson, R-Hixson, who chairs the Joint Pensions and Insurance Committee. “Regardless of who’s been in the majority, there is a sense of responsibility.”

In other states, such as Kentucky and Illinois, politicians short-changed the annual pension payments. Facing recessions, they chose to fund schools and other services instead.

“Tennessee is a conservatively managed state,” said Marcia Van Wagner, vice president at Moody's Investors Service. “Basically they just don’t like having outstanding liabilities.”

The state legislature passed pension reforms in 2013
Tennessee's investments had suffered losses during the Great Recession and the annual required pension payments were climbing — a scenario that played out across the country. When investment returns fall short, governments have to set aside more funds to meet future retirement benefits.

By the time Tennessee Treasurer David Lillard took office in 2009, the yearly pension cost had climbed hundreds of millions of dollars over the previous decade.

“That was not a sustainable path,” he said.

Lillard proposed a “hybrid” retirement plan for new state employees that combined a 401(K)-style savings account with a traditional “defined benefit” pension. While existing employees would still get their promised pension benefits, workers hired on or after July 1, 2014 would be subject to the new rules.

Tennessee Treasurer David Lillard
Tennessee Treasurer David Lillard (Photo: Submitted)

Under the hybrid plan, employees pay 5 percent of their paychecks into the pension plan. Previously, state workers paid none and teachers paid 5 percent. Employees also now bear more of the risk if investments underperform.

With their individual retirement savings accounts, younger and mid-tier workers are better off under this system because they can take the funds to new jobs, said Mennis from Pew, but “the overall benefit is somewhat lower for career workers.”

The new arrangement caused the state’s annual pension contributions to level off in 2011.

In Kentucky, meanwhile, the annual pension cost climbed from $624 million in 2008 to $1.5 billion in 2017. The legislature passed a reform bill in 2013 that moved some employees to a hybrid plan, but the changes were not enough.

Gov. Matt Bevin proposed another set of reforms in 2017 that would have moved teachers into 401-K style plans and cut benefits, but it was met with stiff resistance from labor. Then in early 2018 the legislature passed a pension reform bill, essentially in secret. Labor leaders sued and the Supreme Court stuck down the bill in December. Bevin then called a special session of the legislature, but it was cut short. The General Assembly is expected to take up pension reform again in 2019.

Controlling benefits and avoiding risky investments
A few other decisions helped set Tennessee on the right path.

The state hasn’t taken on too many high-risk investments such as hedge funds, junk bonds, private equity and other alternatives to traditional stocks and bonds. Kentucky, on the other hand, invested heavily in hedge funds, which under performed and further eroded the pension fund’s assets.

Tennessee lawmakers have also resisted changes to employee benefits that could further increase liabilities. In Kentucky, the legislature approved an expensive cost-of-living increase in the 1990s, when the state’s pension plans were fully funded.

But really, the key has been consistent funding and reforms that slowed the costs: “Tennessee is one of very few states that has done both of those things,” said Mennis from Pew.

campbell 01-03-2019 08:58 AM



Kentucky Court Moves Forward Claims Over KRS Hedge Fund Investments
The lawsuit claims the Kentucky Retirement Systems (KRS) lost money on more than $1.5 billion in hedge fund investments in recent years, although its own advisers privately urged it to stay away from the risky investments.

A lawsuit claiming the Kentucky Retirement Systems (KRS) lost money on more than $1.5 billion in hedge fund investments in recent years, although its own advisers privately urged it to stay away from such “unacceptable risks,” has been moved forward by a Franklin County judge.

The lawsuit was filed against investment firms and current and former trustees and officials of the KRS. The investment firms named in the suit are KKR & Co., Prisma Capital Partners, The Blackstone Group and Pacific Alternative Asset Management.

According to the Courier Journal, the defendants asked that the lawsuit be dismissed on the grounds that the eight plaintiffs lacked standing. Franklin Circuit Judge Phillip Shepherd ruled that the plaintiffs “have a property interest” in the pension funds and that they “allege sufficient facts to demonstrate taxpayer standing,” the news report says.

The judge also ruled that the allegations of the plaintiffs against former KRS officials and the investment firms were sufficient for the case to proceed. “For example, plaintiffs reference the massive fees collected by these defendants in breach of the common law fiduciary duty not to charge excessive fees,” Shepherd wrote, according to the Courier Journal. “After factual discovery is completed, those allegations may be disputed or disproven. At this time, however, without full disclosure of all fees, costs, and other expenses related to the management of these hedge funds, the court cannot dismiss these defendants.”

Only one defendant—the Government Financial Officers Association—was dismissed from the case.

campbell 01-03-2019 09:05 AM



Moody’s vs. Illinois politicians: $100 billion difference in pension debts
Moody’s recently released what fiscal realists would say is the true estimate of Illinois’ unfunded state pension liability – $234 billion. The rating agency’s calculation dwarfs Illinois’ official shortfall estimate of $134 billion – the amount Illinois politicians say is needed to fully fund its five state-run pension plans.

Moody’s uses more realistic assumptions than the state does to arrive at Illinois’ debt total, resulting in the $100 billion difference.

That’s a huge problem for ordinary residents and pensioners. If Illinois already can’t pay its debts under the state’s rosey assumptions, it will never be solvent under more realistic assumptions.

The problem is even bigger than that. Moody’s numbers for Chicago and the Chicago Public Schools are nearly double what the official numbers say.

Politicians can continue to underreport reality, but they can’t escape what everybody else is saying – from Moody’s to J.P. Morgan to the Hoover Institution – that Illinois has far more debt than the political class says it does.

More realistic assumptions

The biggest driver of the difference between Moody’s calculation and the state’s official numbers is the discount rate – the rate used to determine just how much the state owes in pension benefits. Moody’s most recent analysis used a rate of 4.14 percent – what it says is a far more appropriate measure of Illinois’ risk.

Moody’s methodology is broadly accepted by fiscal realists, including Nobel-winning economists and other pension experts. In contrast, Illinois’ state government uses a rate of about 7 percent to calculate its pension debt.

Not surprisingly, some politicians, the unions and many in the actuarial industry dispute the use of lower rates. They see any attack on assumptions as an attack on pensions themselves. Regardless, the public pension industry is slowly but surely lowering their discount assumptions. The changes reflect the pressure brought on by requirements to more properly report pension debts and by more critical reporting by financial institutions like Moody’s.

The Illinois Auditor General’s recent pension report highlights how rates used by pension funds across the nation are on their way down.

In 2001, more than 100 of the nation’s 128 largest pension plans used discount rates above 8 percent. Today, just six plans use rates above 8 percent.

Illinois is one of those states that’s dropped its rates below 8 percent in more recent years. However, the state’s official rates continue to be far higher than the discount rate used by Moody’s. Hence the $100 billion reporting difference.

Chicago’s pension debt

It’s not just the state debt that’s being underreported. The same goes for municipal pension funds across the state.

Take Chicago, for example. Or more importantly, what a Chicagoan owes. The official burden versus the more truthful burden is dramatic. Under official numbers, Chicagoans’ share of overlapping Illinois retirement debts totals $86 billion.

But under Moody’s pension numbers, the total debt jumps to $145 billion (that number includes Chicago’s share of the state’s $73 billion in retiree health debts, shown below).

Implications for policy

The debt numbers have become so untenable that Illinois politicians and unions are underplaying them. It’s the only way they can peddle the “fixes” they want – like pension obligation bonds, debt reamortizations and tax hikes – rather than policies that actually address the underlying problem of too many promises and too much debt.

Politicians can try and ignore reality, but the rating agencies, the bond market and the stock market won’t let that denial go on forever. Moody’s is just one of what’s becoming an ever-louder chorus.

The bottom line is Illinois has more debt than it can handle. Illinois needs a constitutional amendment to its pension protection clause that will allow those debts to be reduced in an orderly matter. If not, the markets will force chaos, and that won’t be pretty for anybody.


Pension challenges widespread among Illinois local governments

CHICAGO — Illinois municipalities outside Chicago are looking for relief from their considerable pension burdens as Gov.-elect J.B. Pritzker and the new legislature get to work in the coming weeks.

Chicago and the state government get the lion's share of attention for their pension liabilities, but the weight of retirement burdens has dragged down the ratings of local governments across Illinois, driving up property tax bills and prompting some to look for alternative revenue sources to meet growing payment demands.

Downgrades have stretched from governments in the Quad Cities region on the banks of the Mississippi and Peoria in central Illinois to both wealthy and impoverished Chicago suburbs. They’ve struck both home-rule and non-home rule governments that range on the ratings scale from high to low-grade.

Since 2017, Moody’s Investors Service has stung more than three dozen local governments with downgrades in which pension burdens were cited as a primary driver.

The latest came Dec. 21st when Moody’s lowered Elgin, a city of more than 100,000 35 miles northwest of Chicago, to Aa2 from Aa1. The downgrade that affects $77 million of debt “is based on the city's high pension burden and incorporates likelihood of further growth given current contribution practices,” Moody’s said.

On Dec. 4, the Chicago suburb of Hoffman Estates and its $90 million of debt suffered a cut to Aa3 from Aa2 over “the village's high pension burden that will likely continue to grow given current contribution practices.”

The affluent Chicago suburb of Buffalo Grove is increasing contributions but that couldn’t stave off the loss of its Aaa rating in October when Moody’s lowered its $14.4 million of debt to Aa1 due to a “the village's high pension burden that is expected to remain elevated relative to other Aaa rated local governments despite increased pension contributions.”

In November, Moody’s dropped Rock Island and its $63 million of general obligation debt to A2 from A1, a move that ‘reflects the city's elevated leverage from debt and pensions, which remain well above sector medians given current contribution practices, as well as the rising risk of budgetary pressure related to growing fixed costs.”

Some governments are at risk of losing their investment-grade status.

In October, Moody’s cut the Chicago suburb of Oak Lawn's $75 million of debt to Baa3 from Baa2 and left the outlook at negative “based on heightened operating risk associated with the village's high and growing pension burden. The outlook also considers the direct risk to liquidity created by current funding levels given the village is not in compliance with state law.”

In 2018, Illinois Comptroller Susana Mendoza’s office began enforcing a law that allows pension funds to intercept a local government’s share of state-collected taxes if the government's annual contribution falls short of actuarially required levels. State law requires most local governments to reach 90% funding by 2040 on their public safety funds.

The impoverished Chicago suburb of Harvey was the first to be hit such an intercept request and a handful of others including Chicago have since faced such collection measures.

While a flood of requests has not occurred, many municipal market participants are watching closely because such diversions could hurt a distressed government’s ability to provide critical services or push it to raise taxes to a level that drives residents out. Local governments can’t file Chapter 9 in Illinois.

When Harvey was hit with the diversion, it cut its public safety staff. The city already levies high property tax rates and has poor collection rates. It eventually reached a court settlement with its police and firefighter funds that eased the diversion’s impact.

The escalating pressures mostly stem from obligations owed to local government public safety funds. Most local municipalities with the exception of Chicago participate in the Illinois Municipal Retirement Fund but manage their own public safety funds.

The IMRF is 89% funded and most local governments are up-to-date on actuarial payments. While the fund can now intercept state collected taxes like the public safety funds, it has long had the ability to enforce the payment of actuarial contributions by intercepting a single revenue source.

In comparison, the 656 downstate and suburban firefighter and police funds are only 57.6% funded, according to pension data compiled for fiscal 2016 by the Illinois Department of Insurance.

The state analysis reported that the combined shortfall for the funds of more than $9.9 billion had doubled from $4.8 billion a decade ago. Chicago’s net pension liabilities are $28 billion and Illinois’ are at $133.7 billion.

"We have already observed pressure from rising pension costs for many of the issuers that we rate, as demonstrated by more frequent structural budget deficits, large tax hikes, and budget cuts that in many cases limit future operational flexibility, as well as reliance on reserves and other one-shot measures to address budgetary imbalance," S&P wrote in a report about the potential credit impact of the intercept law.

About 34% of municipalities’ contributions are materially below actuarially sound levels and rising payments are expected to absorb a larger share of Illinois municipal budgets over time that will require higher taxes, spending cuts, or a combination.

Some governments are looking for alternatives, including Alton, which is selling its wastewater treatment system to bolster pensions. The increased funding didn’t stave off a rating cut to A from A-plus from S&P in September.

"While we recognize the sale presents a measure of budget predictability in the near term, the city will still have a significantly high pension liability and exposure to escalating pension contributions, and we believe it will need to devise a long-term plan to stabilize its policemen's and firefighters' pension funds," S&P analyst Helen Samuelson warned.

The Illinois Municipal League and Chicago Civic Federation believe public safety pension fund consolidation would help.

“IML’s top priority is working with the General Assembly to pass legislation to consolidate the more than 650 downstate public safety pension funds for the purpose of creating efficiencies, improving processes and reducing administrative and investment costs,” the league says on its website.

Six proposals have been developed so far, according to the league. A seventh proposal, not yet in bill form, would maintain all current characteristics of each local pension fund, extend the amortization period to 2050 and reduce the required funded ratio target to 80%, and direct a study to examine the costs and benefits of full consolidation.

Some proposals call for the various funds to be merged into the IMRF with differing levels of control and changes and others would establish a single police fund and a single firefighters’ fund.

Consolidation is among reform proposals the Chicago Civic Federation will advocate for as part of its 2019 legislative priorities.

“While these funds may enjoy local control over investing and disability decisions, the federation believes that overall investment performance and administrative efficiency generated by economies of scale would greatly improve if funds were consolidated,” the federation wrote.

The federation also supports putting a constitutional amendment before voters in 2020 seeking to ease the state constitution’s stringent constitutional provision that prohibits any benefit cuts.

Consolidation isn't universally popular.

The Illinois Public Pension Fund Association released a study last week that contends consolidation poses a risk and recommends easing investment guidelines for the state’s smallest funds.

The study, performed by Anderson Economic Group LLC, contends 228 of the state’s smallest funds with less than $10 million in assets would average as much as 5% to 6.8% annually if the restrictions were eased, and this action would increase average annual pension fund returns statewide by at least $418 million over 20 years.

“Expanded investment authority is the least cumbersome and most effective way to ease the local contribution responsibility,” IPPFA President James McNamee said.

The study concluded consolidation would require asset liquidation and reinvestment fees of up to $155 million which would increase the pension funds' unfunded liability. The timing also poses risks if it occurs during a period of stock market growth and the local pension funds miss out on the resulting dividends.

“There's also the issue of local control,” McNamee said. “A consolidated fund means community residents have much less input on how their tax dollars are spent.”

While heavy pension burdens have damaged the credit quality of many Illinois cities, towns, and villages in recent years, some have managed to withstand the pressure and maintain their “exceptional credit quality” despite the rising costs, according to a recent report from Moody’s.

“Such cities typically have drawn on their strong legal revenue-raising flexibility and high median family incomes to support increased pension contributions while maintaining strong reserves,” Moody’s said.

That flexibility stems from the home rule status of most cities which gives them broad revenue raising options and many benefit from strong income levels.

Among the 13 Aaa-rated cities in Illinois, 11 have home rule authority. Home rule status is determined by population or a municipality can vote for home rule. Among all rated Illinois cities, 69% have home rule status.

Most Illinois cities with exceptional credit quality are exceeding state required minimum pension payments and are doing it without draining reserves. The median Moody's (MCO) adjusted net pension burden liability for Aaa cities in Illinois is 2.7 times revenues, compared with 1.5 times for Aaa cities nationwide.

Worries persist. “If Illinois cities with large unfunded pension liabilities do not continue to absorb growing pension contributions—including costs that could arise should pension plan investment performance fall short of plan assumptions—these cities could face credit pressure,” Moody’s wrote.

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