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  #661  
Old 04-17-2018, 02:19 PM
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http://crr.bc.edu/briefs/how-have-pe...mpetitiveness/

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How Have Pension Cuts Affected Public Sector Competitiveness?

SLP#59
The brief’s key findings are:

To improve the funded status of state and local pensions, many plan sponsors have cut benefits, particularly for new hires.

Such cuts, without offsetting increases in wages, could potentially make government employment less attractive to workers.

The analysis found that workers joining the public sector after benefit cuts had earned less in the private sector than those hired before the cuts.

This result suggests that pension cuts may have hurt governments’ ability to compete with the private sector for workers.
http://crr.bc.edu/wp-content/uploads/2018/04/slp_59.pdf
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https://www.bloomberg.com/view/artic...stant-prospect

Quote:
Collapse of Public Pension Funds Is No Longer a Distant Prospect
Some states are going to face insolvency within five years.
Spoiler:
Warnings about looming public pension disasters have regularly cropped up since the 1950s, pointing to problems 25 years or more down the line. To politicians and union leaders, 1 the troubles were someone else's predicament. Then crisis fatigue set in as the big problem remained down the road.

Today, the hard stop is five to 10 years away, 2 within the career plans of current officials. 3 In the next decade, and probably within five years, some large states are going to face insolvency 4 due to pensions, absent major changes. 5

There are some reassuring facts. 6 Many states are in pretty good shape, and many others still have time and resources to fix things. 7 There is no serious chance of retirees being impoverished. What's in doubt is whether states will pay promised benefits to retirees with large pensions or significant outside income or assets. 8 Also, although most of the problem is created by politicians and union leaders cutting deals to promise future unfunded benefits to keep voters 9 happy, there are also plenty of stories of politicians and union leaders risking their careers to stand up for honest pensions. 10

It's important to distinguish between actuarial problems (the present value of projected future benefit payments exceeds the funds set aside to pay them plus projected future contributions) and cash problems (not having the money to send out this month's checks). Actuarial problems are always debatable and usually involve the distant future. Cash shortfalls are undeniable and immediate.

New Jersey 11 has $78 billion in its state pension fund, which is supposed to cover future payments with a present value of $280 billion. But that latter number is a projection. 12 You can ignore it if you wish, 13 or hope that soaring investment returns or a pandemic among retired workers will fix it. A more certain figure is that the $78 billion represents less than seven years of required cash payments.

If we extrapolate from the past, rather than use promises in the state budget, current employees plus the state will contribute about $25 billion over those seven years, which could provide another few years before the till is empty. But it will also add around $60 billion of future liabilities to current employees. The system probably breaks down before the pension fund gets to zero, for example if assets were to fall below $30 billion while projected future liabilities exceeded $300 billion. Even the most optimistic people would have to admit the situation is unsustainable. This could happen in three years in a bad stock market, or perhaps 10 with good stock returns. But fund assets are so low relative to payouts that good returns aren't that helpful.

The next phase of public pension reform will likely be touched off by a stock market decline 14 that creates the real possibility of at least one state fund running out of cash within a couple of years. The math says that tax increases and spending cuts cannot do much. For one thing, as we learned from Detroit, at a certain point high taxes and poor services force people and businesses out. The numbers are just too big in some states to come out of the budgets. For another, voters won't stand for it. The voters in these states have refused for decades to pay the full costs of the services they were already enjoying; they're not going to have sudden conversions to paying full costs, plus the accumulated costs from the past. State constitutions will be amended if necessary and big legal battles will be fought. I cannot see any plausible scenario in which full promised benefits are paid.

I hope that the problems of the least responsible states will shock the rest of the country into more rational reforms. Actuarial problems 25 years in the future can be solved with only moderate pain today. Cash flow problems three years in the future require chainsaws, not pens. But history does not inspire confidence that warnings will be heeded.

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Professionals offering actionable insights on markets, the economy and monetary policy. Contributors may have a stake in the areas they write about.

NOTES:
1. Remember that they were elected by taxpayers and workers who could have voted for more responsible policies.

2. In 2016, state pension funds took in $37 billion from employees plus $93 billion from employers and paid out $214 billion in benefits. This does not factor in the additional benefits that employees earned and that are promised to be paid in the future. Total state pension assets could last for almost 20 years without investment earnings at that rate, but individual states are in much worse positions than average. The trouble is that an average state with a 20-year cushion can reasonably count of significant positive investment returns. A state with a seven-year cushion is more vulnerable to a market decline, and doesn't hold enough assets to benefit significantly from good returns.

3. The last decade has seen almost 100 municipal bankruptcy filings, and about an equal number of cities were placed under control of emergency managers. In all cases there were multiple sources of trouble: Municipal pensions were sometimes a minor and sometimes a major contributor.

4. The current federal bankruptcy code does not allow states to declare bankruptcy. So either some new process will be invented, or states will repudiate promises using legislation, non-bankruptcy legal proceedings and possibly changes to constitutions.

5. The federal government has problems that are much bigger than any state's, but can be probably be finessed for another 20 or 25 years. In addition, the federal government has much greater resources and flexibility to deal with problems. Entitlement reform is still an important issue, but if ignored will not cause immediate problems.

6. Pensions are sometimes debated between two camps: those who claim the end of the world is nigh, and the other that denies any problem.

7. Also, health care is the big problem and costs may not increase as fast as they have in the past. Perhaps they will even fall as technology improves. Moreover, there's no serious chance of any retirees being denied minimally decent health care coverage, just whether high-quality coverage will be available, or any coverage for middle- or upper-income retirees.

8. Or states could pay the benefits, and then tax almost all of them back.

9. Voters who knew, or could have known, exactly what they were voting for.

10. Roger Lowenstein's excellent book "While America Aged" tells the good, the bad and the ugly of this story.

11. Michigan, Pennsylvania, Florida, Ohio, Oregon, Colorado, Kentucky and Rhode Island are in similar shape. These are not the states with the biggest actuarial problems, but those likely to run out of cash first. California has almost as big a funding gap as New Jersey, but its plan is five times as big. Connecticut and Illinois are not much better funded than New Jersey, but they have longer before cash flow problems kick in.

12. Unfortunately, this is a conservative projection. The actual present value is probably considerably higher.

13. That's not entirely true. It affects the interest rate New Jersey must pay on borrowings, and the state's ability to attract workers -- especially teachers -- and property values and decisions of people to move into or out of the state.

14. You can hope for a stock market boom, but that doesn't help much because (a) the pension fund assets are low relative to required payouts so even a high return on those assets doesn't extend the solvency period much, and (b) the troubled states have been quick to give away gains from above-average investment returns.
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Old Yesterday, 11:41 AM
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https://muninetguide.com/creating-su...blic-pensions/

Quote:
Embracing Shared Risk and Chapter 9 to Create Sustainable Public Pensions
Apr 16, 2018
Categories: Fiscal Distress, Municipal Bankruptcy, Municipal Finance, Public Pensions

Unsustainable and Unaffordable Public Pensions Cannot be Solved by Raising Taxes or the Passage of Time, but There are Some Practical Solutions
W. Gordon Hamlin, Jr.; Mary Pat Campbell; Andrew M. Silton; and James E. Spiotto
Spoiler:
To date, no American state or local government has adopted a realistic solution to the public pension crisis. To date, they’ve failed to follow New Brunswick’s path-breaking shared risk public pension system. To date, no local government has proposed a prepackaged Chapter 9 bankruptcy. To date, public employees and retirees have insisted that increased taxes are the only pathway to achieving full funded status, even if that is thirty or more years away. To date, constitutional provisions prohibiting legislatures from impairing contracts have forced legislatures to target only future employees. To date, many legislatures have focused on switching as many employees and retirees as possible to the 401(k) world, which has left an entire generation of Americans unprepared for retirement and the problem unsolved.

It’s time to solve this policy dilemma, which is straining state and local budgets and crowding out vital investments in education, healthcare, and infrastructure. It’s time to stop believing that anything less than 100% funding is realistic and that future legislatures and taxpayers will fund any shortfall. It is time to account properly for future liabilities by adopting a risk-adjusted rate of return and budget with realistic contributions.


Real reform needs to begin with a task force of affected stakeholders (employees, teachers, retirees, school districts and local governments) who work with an independent actuary and an independent facilitator/mediator to design a new pension plan along the lines of the New Brunswick shared risk model. Second, the legislature has to adopt that model through enabling legislation and then require school districts and local governments to contribute on a one-time basis an amount sufficient to bring the relevant plan up to 120% funded status (calculated with a discount rate of less than 5%), an amount that none of those entities could afford.

Having created a framework for reform, the Chapter 9 bankruptcy process can provide the vehicle for transitioning to a shared risk model. Having satisfied the “insolvency” criteria of the Bankruptcy Act, the local entities would inform bondholders and other creditors that the upcoming Chapter 9 bankruptcy will not impair them and will only address pension liabilities. The local entities would begin the process of disclosure and voting with the three classes of unsecured creditors (current employees, inactive employees, and retirees) to try to reach agreement on a new shared risk model. Once these negotiations and voting by the impaired classes are complete, the Chapter 9 petition, the prepackaged Plan of Debt Adjustment, can be filed, indicating that a majority by number and two-thirds (2/3) by amount of the claims voted (of at least one of the classes of impaired creditors) have voted in favor of the plan. The Bankruptcy Court then approves the reform plan transitioning all the local employees and retirees into the shared risk plan. Direct state employees and retirees would transition voluntarily, perhaps with the incentive that COLAs would only be available within the shared risk plan. Assets would then be transferred to the new shared risk plan.

The task force we described earlier would be charged with producing a legislative blueprint along the following lines:

Base the pension benefit calculation solely on base salary (thereby eliminating pension spiking as a common practice);
Incorporating a cap on earnings for pension calculation purposes (much like the cap on maximum taxable earnings in social security);
Achieving a 75-80% replacement of the five highest years of substantial earnings over at least a full 35-year working career, subject to the cap on earnings and considering the likely range of social security benefits for the employee (thereby using the social security administration’s 35-year formula for calculating benefits);
Moving away from end of career formulas, such as high-three, for purposes of calculating the pension benefit, thereby at least partially encouraging the expansion of partial employment options toward the end of one’s career;
Extending working careers for non-public safety employees so that the normal retirement age coincides with the social security retirement ages, possibly indexed to future longevity trends;
Studying the best available evidence on physical decline and longevity after retirement for public safety employees, including any epidemiology and actuarial experience studies, for purposes of determining whether the normal age of retirement for such workers should be increased to, say, age 60;
Moving toward a proportional sharing of the contribution costs between employers and employees, thereby making employees more conscious of the cost of unfunded benefits;
Utilizes a discount rate much closer to high quality corporate bond rates to compute the unfunded liabilities;
Incorporating some form of stress testing, or stochastic modeling, to manage the portfolio and identify risky or underperforming assets or asset categories that should be eliminated in favor of more sustainable income streams;
Evaluating the best pension practices, especially those in world leaders, such as the Canadian or European plans;
Using much shorter amortization schedules (thereby moving toward correcting the current intergenerational equity imbalance); and
Seeking to achieve a funded status of 120% of liabilities within a reasonable period (thereby providing a cushion for inevitable economic downturns).
Essentially, this is the shared risk model pioneered by the Province of New Brunswick, which has been praised by, among others, the American Academy of Actuaries and Alicia Munnell of the Boston College Center for Retirement Research.

There is no reason to follow the “free-fall” Chapter 9 example of Detroit, which spent $170 million on professional fees. Municipalities instead can follow the lead of corporations, which in the 1980’s and 1990’s developed prepackaged bankruptcies to avoid these unwelcome aspects of bankruptcy. Section 1126(b) of the Bankruptcy Code is applicable to Chapter 11’s as well as Chapter 9’s, and provides an expedited process by which a debtor may propose and confirm a Chapter 9 plan. Under this provision, a prospective municipal debtor may solicit consents for a proposed plan from its creditor constituencies and thereafter file a petition under Chapter 9.



The case law now permits municipalities to alter their pension obligations in Chapter 9 proceedings, even if statutes or constitutional provisions prohibit impairment of contracts. Some 24 states currently permit Chapter 9 filings, with some requiring approval by a state official. States which have not granted such approval, like Illinois, could do so with an enabling statute.

America’s public pension plans have nearly $4 trillion in unfunded liabilities, according to Stanford’s Josh Rauh. Severely underfunded pension plans simply cannot tax their way to full funded status. Bankruptcy has provided a “fresh start” since the Kings of Mesopotamia declared debt jubilees, and our Constitution has continued that tradition. States under stress can utilize the process we have outlined to start afresh and preserve the desirable risk-pooling and insurance aspects of defined benefit pensions. Better funded public plans can reach 120% funded status relatively quickly and have some cushion against future market downturns. In addition to achieving financial stability for state and local governments, we believe our proposal preserves meaningful pension benefits for employees and retirees. In the absence of real reform, employees and retirees risk losing all their retirement benefits.

No solution is perfect, but this proposal seems more fair, secure, and sustainable than any other solution we have seen.

* W. Gordon Hamlin, Jr. is a retired lawyer now residing in Tuscumbia, AL. Mr. Hamlin is a 1978 graduate of Harvard Law School, practiced with a large Atlanta law firm for over 32 years, and was a 2016 Fellow in Harvard’s Advanced Leadership Initiative. He is the President of Pro Bono Public Pensions, a non-profit which seeks to create fair, secure, and sustainable public pension solutions. As principal author, comments or inquiries can be directed to him at gordonhamlin@comcast.net.

Mary Pat Campbell, FSA, MAAA, is a life-annuity actuary with a long-standing interest in public pensions working in Hartford, CT and residing in New York.

Andrew M. Silton is a retired lawyer and investment manager in Chapel Hill, NC. During his career, he served for several years as the Chief Investment Advisor to the North Carolina Treasurer, the sole Trustee of that State’s public pensions. He managed over $68 billion in assets in that capacity.

James E. Spiotto is a retired lawyer, now Managing Director of Chapman Strategic Advisors LLC in Chicago. He is the author of Municipalities in Distress? and Primer on Municipal Debt Adjustment, both published by Chapman and Cutler LLP. Municipalities in Distress? is available on Amazon and can be purchased by clicking on the link below:
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Youíre suggesting imposing a definition of solvency that isnít relevant to the problem but which artificially short circuits certain legal questions. I donít disagree that the legal flow chart should be rearranged in some jurisdictions but youíre substituting a fiat from on high for the rule of law.

Insurance companies attempt to prefund all losses because it is very difficult to make up a deficit on past policies by selling new policies. It doesnít work because the profit margins are thin and having lost money on past policies doesnít bode well for increasing profitability or volume on new premium. Regulatory oversight also requires attestation of solvency via bright line tests.

Pensions have more in common with risk financing mechanisms than they do with risk transfer markets. Changes in funding contributions lag triggering events rather than pricing in an external guarantor in order to immunize them in advance. Contribution requirements should be a fraction of total personnel costs which in turn should be a fraction of total costs. Unlike the insurance companies, yes, you can make up a gap if pension funding requirements grow less quickly than the rest of the budget. Attestation of solvency here takes the form of a comparison of projected revenues and projected expenses rather than balance sheet attestation.

Now that said, the fixed 3% COLA is an abomination. There are many municipalities that have clearly drafted benefit terms that were not appropriate for their intended purpose and to varying degrees that windfall to past participants is given undue protection. I would not wipe out this protection everywhere, but mainly in cases where there are benefits substantially more generous than neighboring municipalities offer and the excess benefits do not effect a meaningful HR boon to the municipality. Itís crazy to wipe out benefits for new workers to balance out irrational benefits that were awarded to past workers. It takes a different kind of analysis to sort this out than you are proposing. Youíre proposing an irrational analysis of every benefit arrangement to force a cure on particular bad actors.

Iíll also note that I think if benefits are cut for past participants, they may have a court case for economic damages resulting from relying on the promise of benefits. If the benefits were created in bad faith, you have to consider whether some officials should be personally liable.
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Of the four co-authors, I and Gordon Hamlin wrote a much longer paper where we develop the ideas further. [not yet published, but we may not publish the full 45-page-ish montrosity.]

Hamlin is a lawyer (and I am not), so he developed the legal theory.

FWIW, we are not claiming all pensions need this. I just looked up some this morning that seem to be doing pretty well: Wisconsin, South Dakota, Pennsylvania Municipal, New York State Teachers, and North Carolina Local.

But many others -- most of the Kentucky plans, the many Illinois plans (except IMRF), etc. are in a position where they can't really afford what's been accrued to date, much less future accruals. The only way to fix these specific plans is to cut benefits -- to current retirees and participants, not only future employees.

Yes, in places like Illinois and Kentucky, this would require them amending their state constitutions. It would be nice if they would do that before the money in their funds runs out.
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And I really don't like what Calpers does as a "fix" when a sponsor can no longer afford pension contributions.
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ILLINOIS

http://www.chicagobusiness.com/artic...oreUserAgent=1

Quote:
Illinois' pension crisis: Is there a way out?
Spoiler:
Like a car stuck in the mud, Illinois' pension-funding crisis seems to only keep getting worse, as the wheels keep spinning but only splatter mud everywhere and dig a deeper hole.

Consider that the unfunded liability in the state's combined retirement systems has risen in 11 of the state's past 12 years—despite a roaring stock market, despite a steady increase in contributions that now amount to a stunning $8 billion or so a year, and despite passage several years ago of a plan that markedly reduces benefits for those hired after Jan. 1, 2011. Between 2004 and 2016 (the last year for which audited financials are available) unfunded liability quadrupled, to $123.8 billion, according to the Illinois Commission on Government Forecasting and Accountability, the Legislature's financial watchdog unit.

Quadrupled!

Is it really as bad as it looks? It clearly is bad enough that, as my friends at the Better Government Association suggested last week, dealing with the pension hole that ate Illinois ought to be the top issue in the race for governor this year.

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Of course, it's not. So the folks at the Federal Reserve Bank of Chicago and the Civic Federation of Chicago are gathering together a roomful of experts tomorrow to prescribe on what realistically can be done.

I'll go over some of the alternatives that are on the table in a minute. But let's just say that all of them involve pain: probably lots of pain, depending on whether a way can be devised to get the Illinois Supreme Court to back off its stance of "suck it up, buttercup, and just pay!"

More:

The $130 billion question Rauner and Pritzker won't answer

You won the primary. Now get serious on pension reform

How Illinois got in this mess to begin with

"The goal is to advance the understanding of why pension reform is essential to stabilizing Illinois finances," says Federation President Laurence Msall, referencing the fact that retirement costs now absorb about a fifth of all state operational expenses. "Hopefully the conference will create an idea of the best way forward."

First, some factual background.

Under a long-term plan approved when Jim Edgar was governor—he's among the speakers at tomorrow's conference—spending on pensions was to slowly ramp up, starting in 1995, so that funding would hit the 90 percent level by 2045. According to retirement system reports combined and passed on to me by former state CFO John Filan, unfunded liabilities were expected to rise from just under $20 billion in 1995 to $70 billion in 2034, before then dropping sharply in the next few years:


Reality has been far different than those original circa-1995 forecasts. The actual 2016 unfunded liability of $123.8 billion is two and a half times the predicted $50 billion under the Edgar ramp. And with another 17 years to go before the ramp is scheduled to peak, the spread between prediction and reality is only going to grow—a lot.


Why the bad projections? There are lots of reasons, but Filan puts a number on two of the largest: Assuming a return on investments of an overly peppy 8.5 percent a year—the retirement systems since generally have ratcheted that expectation down to 7 percent—has driven up unfunded liability $35 billion, according to Filan. And another $35 billion came when lawmakers failed to follow the ramp and instead spent money that should have gone toward pensions for other, more popular items. One instance of that came during Filan's tenure, when the state issued $10 billion in pension-obligation bonds but used those proceeds to replace normal pension contributions, which were spent on other items.

Anyhow, that's the backdrop. What's the solution?

The folks at the right-leaning Illinois Policy Institute keep talking about shifting workers from a defined-benefit pension to a defined-contribution 401(k)-style program. That might cut costs somewhat in the future. But it does nothing about paying off that $123.8 billion in legacy debt, and indeed might worsen matters by shifting cash flow away from the retirement systems.

Some insiders still believe there's a way to effectively get the high court to reconsider and reduce benefits. Like Eric Madier, former chief counsel to Illinois Senate President John Cullerton, who will talk tomorrow about his idea to make workers choose between including raises in their pension base and receiving their full 3 percent-per-year guaranteed bump in pension benefits. Msall says a negotiated deal along that line was reached in Arizona, with other progress made in Detroit and Atlanta. Officials from all three regions will present at the conference.

If a compromise like that works, great. If not, then you have to come up with more money. But how?

One thing that the folks at the Center for Budget and Tax Accountability, a left-leaning Chicago research group, are talking about is a new pension-obligation issue. Under their plan, which has been run by Democratic gubernatorial hopeful J.B. Pritzker, the state would borrow another $10 billion but use that funding to supplement current contributions, effectively moving to a level-funding mechanism in which the old Edgar-style ramp would be dumped for bigger, earlier contributions. The theory is that $10 billion would pay investment dividends over time by letting the magic of compounded interest work in taxpayers' favor, with earnings far exceeding the cost of the borrowing and allowing the state to catch up faster than it would have even with the costs of the bond issue.

But Filan is skeptical of such a plan, while acknowledging the irony that he, as the godfather of the Blagojevich-era pension-obligation bond conceit, is dubious of taking such a similar step now. The critical difference nowadays, he argues, is that Illinois' credit today is much worse than it was in the early 2000s, and the stock market now is in his view near the end of a bull run rather than at the beginning of one. That in his view makes it much more unlikely such fiscal magic would work this time.

Others are looking at other state assets that could be capitalized, with proceeds immediately shifted to pension funds. Like a long-term lease on the Tollway, for instance—an idea that got notice a few years ago—or selling and then leasing back state office buildings

Then there's always the possibility of raising taxes—again. But that risks setting off a downward spiral if the proceeds go to pay off old pension debt rather than to fund new investments in schools, infrastructure and the like.

We'll see what the pros come up with tomorrow at the big conference. One always can hope.

Www.civicfed by Ann Dwyer on Scribd


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ILLINOIS

http://www.chicagotribune.com/suburb...y.html#new_tab

Quote:
Slowik: Crisis hits Harvey, but money pressures squeeze many towns
Spoiler:
ve covered local governments for a long time and I was shocked last week when the city of Harvey laid off 40 police officers and firefighters.

That’s a steep human toll. Forty people with steady jobs — many providing for families — suddenly lost their livelihoods. I felt bad for the workers, and also for how the move would impact residents of the community.

ADVERTISING

I read accounts that led me to believe Harvey officials bear some responsibility for the town’s money woes. I also checked out reports that other towns could be facing problems nearly as severe as Harvey’s.

I reviewed data about how well municipal pensions are funded in towns throughout the state. I tried to determine whether residents of Orland Park, Tinley Park and other towns should worry about their town’s finances.

I spoke with representatives of management and labor Tuesday in an effort to better understand municipal pensions. I asked about the challenges of providing services while holding the line on costs.

The problem cannot be solved with higher taxes alone, I concluded. Municipal leaders bear their share of responsibility, but I think state legislators must do more to address the issue of pension costs.

Harvey is perhaps the first town to feel the full impact of a state law designed to hold municipalities accountable when they fail to make required contributions to police and fire pensions over a sustained period of time.

Harvey’s police pension fund sued over nonpayment of funds and a Cook County judge ordered the state comptroller to intercept $1.5 million in tax revenue that was headed for the city’s coffers. That’s when Harvey announced the layoffs.

An appellate court then overturned the judge’s ruling and ordered the comptroller to send the money to the city instead of the pension fund.

Harvey was among the worst towns in the state at funding its police and fire pension funds, according to an analysis of 2016 data released Monday by Wirepoints, which calls itself a news source for stories about state government and finances.

Other south suburbs with significant shortfalls in their pension contributions include Riverdale, Sauk Village, Lynwood, Midlothian and Hazel Crest, Wirepoints found.

Some local pension systems are well-funded. Crestwood, Worth, Mokena and New Lenox ranked among the best-funded pensions in 2016, Wirepoints found.

The New Lenox Fire Protection District, however, closed one of its four fire stations this month after voters again rejected a tax-increase referendum. The village is offering to loan the district money to reopen the station through the remainder of the year.

“We’re trying to look at the bigger picture and keep costs down for everyone,” Fire Chief Adam Riegel told me Tuesday. The district, for example, is pursuing a deal with the neighboring Frankfort Fire Protection District to share reserve equipment.

“It’s a small step,” Riegel said. “We’re trying to be frugal.”

Taxpayer dollars fund buildings and equipment, but the greatest expense is people. Salaries, benefits and pensions typically account for most costs. In Oak Lawn, officials have tried for years to hold the line on costs, Village Manager Larry Deetjen told me Tuesday.

“What has occurred in Harvey is only the tip of the iceberg,” Deetjen said. “We’ve been loudly and publicly sounding the alarm since at least 2013.”

The village has been in a protracted dispute with the union that represents firefighters. The two sides fought over minimum staffing levels. The village has successfully negotiated with unions that represent other city workers, Deetjen said.

“Labor has worked with management,” he said. “When we have differences we resolve them locally at the bargaining table.”

I asked Deetjen how towns could avoid the type of pension-funding crisis facing Harvey.

“The state legislature passes benefits without regard to costs,” he said. The governor and legislative leaders need to sit down with labor leaders and negotiate reasonable caps to expenses, he said.

“In Oak Lawn, the residents are now paying for two fire departments — one that works, and one that is retired,” Deetjen said. The city’s fire pension fund has more than 100 beneficiaries, he said.

“They’re living longer and retiring at an earlier age. It’s not sustainable,” he said.

I also spoke Tuesday with Pat Devaney, president of Associated Fire Fighters of Illinois. Labor unions representing public workers have made significant concessions, he said, including creation of the “Tier 2” class of retirements that took effect in 2011.

“In those negotiations, we insisted if they lowered the benefits for future employees that we fix the problem of employers not making contributions over many years,” Devaney said.

That’s what created the legal mechanism — used in Harvey for the first time — where the comptroller is authorized to intercept funds, he said. The Illinois Municipal Retirement Fund — the state’s best-funded pension system — has had that authority since at least the 1960s, he said.

“They created a culture of compliance,” Devaney said.

I told Devaney I agreed with him, that I didn’t think the problem in Harvey was the legal mechanism that allowed the state to divert money to the police pension fund. State Sen. Napoleon Harris, D-Harvey, has proposed taking another look at the 2010 law.

“This law has proven too drastic and harmful to poor communities struggling to make ends meet,” Harris said in a letter dated Friday.

At a news conference in Harvey on Monday, state Rep. Jeanne Ives, R-Wheaton, said legislators should allow communities like Harvey to declare bankruptcy.

“Bankruptcy is not a four-letter word,” Ives said, according to a transcript posted on her website. “It is a path to reorganize obligation and revitalize flailing enterprises, private and public.”

I asked Deetjen and Devaney what they thought of Ives’ bankruptcy notion, and both said they disagreed with it.

I thought Devaney suggested a good solution when he said lawmakers should revisit the “Edgar Ramp.” Former Gov. Jim Edgar engineered the 1994 legislation that lowered required pension contributions for 15 years. Since 2010, however, everyone is feeling the pain of making up the difference.

I don’t think retirees and unions should have to concede every benefit they’ve gained through good-faith negotiations. I do agree with Deetjen’s suggestion that negotiations between union and legislative leaders are needed to address an unsustainable situation.

“The system is broken, and the day of reckoning is coming,” he said. “You can’t tax folks’ property more. You can’t tax your way out of this. Productive households — they’re moving away.”
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