City’s history of underfunding pensions results in big costs today

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DANVILLE – In 1989, the city owed the police and fire pension funds about $16 million because the city officials had reportedly underfunded both accounts since 1935.

Today, the combined unfunded liability for the public safety pensions is more than $103 million — for fire it’s at $55,475,022 and for police it’s at $47,695,107.The fire pension fund is only 15.62 percent funded while the police pension fund is only 27.92 percent funded.

The city has seen more than a 371 percent increase in the last 17 years in the now state-mandated amounts the city must put toward the police pension and more than a 277 percent increase during 17 years in the fire pension.

In 2000, the city was paying $645,000 for the police pension and $923,200 for the fire pension. This was 56.8 percent funded in police and 44.7 percent funded in fire at that time. As the city has paid more and into the pension funds — $2.49 million and $2.71 million last year in the police and fire pensions and a projected $3 million and $3.5 million in the police and fire pensions for the 2016 levy — the percentage funded has decreased. It was 34.4 percent and 22.5 percent last year, respectively, and the percentages have decreased more with most recent figures for the city’s 2016 tax levy.

The situation has forced city officials to look at additional revenues, including a utility tax, to offset the almost $1.5 million pension increase from last year to this year. An already established Public Safety Pension Fee also helps offset the costs and helps reduce the city’s property tax rate. The Public Safety Pension Fee raises about $551,000 to help with the approximately $6.6 million in pension costs for the upcoming proposed 2016 city property tax levy.

There weren’t state statutes of what the city had to pay decades ago and the state had given extensions on fully funding pension accounts. City officials also didn’t want to raise taxes.

Mayor Scott Eisenhauer said he sees evidence of underfunding as recently as right before Mayor Bob Jones’ term starting in 1987.

Jones pledged and the council agreed to increase pension payments and fund the pensions more appropriately by about $400,000 early on in his administration.

Jones recalls “we inherited quite a large pension debt. Danville was only worse than one of the Chicago suburbs.”

He said early in his administration officials started to try to pay in what was being paid out and followed actuarial numbers. He said previous administrations would earmark pension allocations of around $100,000 and then not pay that amount at the end of the year.

By the end of his term, Jones recalls the city was putting up to $1 million and several hundred thousand dollars into each pension fund.

“It’s an obligation the city has. A lot of that is mandated by state law,” Jones said, adding that it consumed most of the city’s real estate taxes.

“It’s a heavy obligation,” he said, adding that the state also extended the time the pensions had to be fully funded. “Everyone was given a little longer time to pay for it.”

Ward 7 Alderman Steve Foster, who has been on the city council since the early 1990s, said a first budget he voted on was to make a decision to correct an old problem with pensions under the commissioner form of government.

Foster said past commissioners only paid an amount actually due, not really seeing any percent funded. It was just funded year by year, he said.

Then the city started paying the actuarial figures, which he doesn’t think was required when first started, but city officials knew it was coming.

Foster said today the pension liability accounts to a little more than $3,000 per resident.

He said the city is doing now what should have been done more in the past in paying the pensions.

More Pension History

The 1987 levy had city property taxes staying the same for the eighth straight year. The new mayor/alderman form of government replaced the commission system in September 1987. The levy then had $250,000 for payment to the fire pension fund and $200,000 to the police pension fund, but about $1 million and $684,000 were required for the pensions, respectively that year.

In 1988-1989, the city council added to each fund without raising property taxes. Jones in 1989 noted the city council had increased its pension contribution from $450,000 to $850,000.

Independent auditors in 1988 warned the city council that both funds were severely underfunded, posing a threat to the city’s financial health.

City officials said state extensions to fully fund the pension accounts put less pressure on past city councils to do anything. The problem has snowballed. Funding can be postponed, but eventually someone has to pay.

If the city provided the full amount, as determined by the Illinois Department of Insurance, it would have meant about a 50 percent increase in property taxes, city officials said in 1989.

Also affecting the pensions has been lower rate of returns on investments with the depression in 2008 and the 9-11 tragedy, and state legislation increasing benefits for police officers and firefighters and their surviving spouses, and the mortality table changing because people are living longer.

By underfunding the accounts in the 1970s, Danville missed out on the days when interest rates of about 20 percent were paid on invested funds.

Normal costs each year are about $900,000 for the two pensions, based on current employees and benefactors.

Each year, unfunded liabilities can be added to the increasing costs if the city doesn’t meet or exceed all of the assumptions. This can include increased salaries, lower interest rates, benefit package changes for active and inactive city employees, marriages or anything else not fully covered by what the city contributes each year.

Five factors make up the Public Safety Pension calculation: number of active employees; number of inactive or disabled employees and other beneficiaries; salaries; rate of return on investments; and benefits.

Eisenhauer said the only factor the city can control is the number of active employees. The city has partial control over salaries.

For 2016, the city has 64 active police officers and 73 inactive employees who include 52 retirees, one terminated employee, eight disabled employees and 12 other beneficiaries.

The police pension fund has $901,913 in normal costs, $436,954 in employee contributions, $45.69 million in unfunded accrued liability, $2.57 million in amortization of unfunded liability, $3 million in required contribution and a 30.95 percent funded ratio.

For the fire pension fund, there are 44 active firefighters, 82 inactive employees — 55 retirees, eight disabled employees and 19 other beneficiaries.

The 2016 fire pension fund has $718,638 in normal costs, $293,656 in employee contributions, $53.34 million in unfunded accrued liability, $3.05 million in amortization of unfunded liability, $3.48 million in required contribution and an 18.87 percent funded ratio.

The city uses a third party actuary for pension numbers. This year they were prepared by Lauterbauch & Amen, LLP. In the past the city has used Tim Sharpe.

Combined, the police and fire pension required contributions this year total $6.6 million over last year’s $5.2 million.

DOI, actuarial statistics

According to the Illinois Department of Insurance, Hoopeston takes the top spot in funded police pension funds.

Hoopeston is at 114.9 percent funded.

Danville is in the No. 316 spot out of No. 352, and Danville’s fire pension fund is No. 274 out of 282 Illinois fire pension funds.

Danville’s police pension was at 35 percent funded as of 2015, the DOI’s latest report. The Danville fire pension fund is 21.8 percent funded.

Hoopeston City Council’s Finance Committee Chairman Bill Goodwine said “I’m 76 years old. I’m old-fashioned.” But he said they should open up a bottle of champagne for being No. 1.

He said he and the other city officials have a history of being fiscally conservative. It’s critical, he said.

That’s in general what Goodwine says they’ve done right over the years to be more than 100 percent funded.

Goodwine said about Hoopeston’s investment policy, one can do whatever they want with their own investments, but with someone else’s money, such as taxpayer dollars, “you don’t gamble.”

“We’ve never bought stock,” he said about pension investments.

When the market crashed in 2008, others who had money in stocks lost a lot.

“We didn’t lose a penny,” he said.

Goodwine said they’ve also just always put in how much they needed to with the tax levy, combined with the police officers’ contributions. The police force is made up of about 10 employees.

The DOI tells them what to levy and they do it, he said.

“We’ve always levied that to keep it fully funded,” he said.

The tax levy has had to be raised as needed.

Hoopeston City Treasurer Edye Bookwalter said, “We’re doing very well in it, but we are levying more.”

Todd Schroeder with the City of Danville’s actuary, Lauterbach and Amen, said they work with Illinois municipalities with police and fire pension funds funded on average of 52-54 percent.

Schroeder said a couple has pension funds around 10 percent funded while some are 80-90 percent funded. Fire protection districts can be 60-62 percent funded, he said.

Investment returns also were flat to a little bit negative based on the markets such as the City of Danville’s 3.4 percent decrease this year.

Lauterbach and Amen is working with the city on a three-year transition plan with state minimum numbers and looking out further on where the city needs to be.

Benefits payments are driving funding with about $7.1 million in recommend contributions this year. That is about $1.9 million ahead of last year, Schroeder said, largely based on assumptions such as mortality tables.

This year the city would pay about $6.5 million in pension benefit payments. In five years the amount will approach $8 million and in 10 years the amount will approach $10 million in annual payouts from the two pension funds.

On a regular basis a municipality can expect a 4-5 percent increase coming through standard pension increases absent any other factors, Schroeder said.

Also for a new hire, the pension costs is estimated at 25 percent of pay — 10 percent paid into the fund by the employee and the city picks up the rest, according to Schroeder.

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