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Local pension fix could backfire, S&P says

Crain's Chicago Business

Wednesday, May 16, 2018  |  Article  |  Greg Hinz

Pensions (70)
A little-noticed law that allows Illinois to force municipalities to fully fund their public-safety pension plans or lose often substantial state funding has caught the eye of Wall

Street, with a major ratings agency warning that it could cause "significant credit pressures" on hundreds of towns and villages.

 

In a report, S&P Global said it's "too early to determine" whether the 2011 "intercept law," which just now is being implemented, will be employed frequently or only as a last resort against municipalities that refuse to deal with their liabilities. But the agency did more than clear its throat.

 

"We see some potential for broad use of the intercept mechanism given chronic underfunding among a substantial share of the state's approximately 656 suburban and downstate public-safety pension plans," the report states. "Should use of the intercept law become commonplace, it could cause significant credit pressures across a sector that has already struggled to effectively deal with rising pension costs."

 

In ratings-agency-speak, "significant credit pressures" generally means affected towns would have to pay higher interest rates to borrow money.

 

The 2011 law, which directs the state to seize income tax, sales tax and other money that should go to a municipality and redirect it to underfunded police and fire pension funds, had received little attention until south suburban Harvey began laying off dozens of uniformed personnel earlier this year after its pension fund got a court order that state aid be intercepted.

 

The order was reversed on appeal, but the action and the weak condition of similar funds—S&P pointed to shortfalls in communities including Palatine, Hoffman Estates, Riverdale and Aurora—set off quite a reaction, with groups such as the Illinois Municipal League warning of the eventual impact and Springfield conservatives such as Rep. Jeanne Ives, R-Wheaton, renewing their push to allow municipal bankruptcy, which now is illegal in the state.

 

"This is huge. I think it's the start of the tipping point," Ives told me. "Even Democrats now are filing bills to lessen the impact of the intercept bill," she added, referring in part to suggestions by Sen. Napoleon Harris, D-Flossmoor, that troubled municipalities need to be given more time to deal with pension woes.

 

Beyond that, it's not clear exactly who is responsible for enforcing the 2011 law. Illinois Comptroller Susana Mendoza's spokesman says her department, which enforces it, does so by relying on official findings from the Illinois Department of Insurance that a village is out of compliance. The insurance department has not yet responded to my questions about what standards it uses, and Ives says what exactly a municipality would have to do to be subject to the intercept "is not clear at all."

 

Most regular, non-public-safety pension plans now have such a state intercept feature. In general, municipalities are forced to annually re-evaluate what they contribute, and if it falls below the actuarial funding level, they have to pay more.

 

Police and fire funds never have been on such a tight schedule. If they were, eventually the pension problem would ease, S&P's report notes. But getting to that point could create lots of financial woes in the meantime.

 

Update— The insurance department got back to me and says it's not responsible for determining when the intercept law can be invoked. Mendoza's spokesman now is conceding that, while the Department of Insurance regulates pension funds, her office makes the final decision about whether a town is or is not out of compliance and subject to intercept. I'm awaiting more information on what standards it uses to decide.

 

Update—After further discussion, the comptroller’s office now concedes that, while it urges municipalities and labor to work things out without a fund intercept and will use its good offices to accomplish that, it has “no discretion” under law except to withhold money if a retirement system so requests. The only exception is if a court intervenes and blocks an intercept.

 

All of this leaves the matter in the hands of the folks who wrote the law, the Illinois General Assembly. We’ll see if they decide to order a change, given the recent flap. I’m told that’s a possibility.