June 13, 2012
UPDATE: On Friday, August 3, 2012, Governor Quinn signed into law the pension reforms for the Metropolitan Water Reclamation District Retirement Fund as Public Act 097-0894.
This blog post provides background information on the funding status of the Metropolitan Water Reclamation District Retirement Fund and a description of significant reforms to the funding of the pension plan that were approved by the Illinois General Assembly on May 31, 2012.
Background
The Metropolitan Water Reclamation District (MWRD) Retirement Fund is a single employer defined benefit pension plan for employees of the MWRD. It was created in 1931 by Illinois State statute to provide retirement, death and disability benefits to employees and their dependents.[1] Plan benefits and contribution amounts can only be amended through state legislation.[2] MWRD is the only sanitary district in Illinois whose employees do not participate in the statewide Illinois Municipal Retirement Fund.
The MWRD pension fund is governed by a seven-member Board of Trustees. As prescribed in state statute, four members are elected by the employees and three members are appointed by the MWRD Board of Commissioners with the approval of the pension fund Board of Trustees. One of the appointed members must be a retiree.
In FY2010 there were 2,024 active members of the pension fund and 2,248 beneficiaries, for a ratio of 0.9 active member for every beneficiary.[3] This ratio has fallen from 0.99 in FY2001 as the number of active members has declined and the number of beneficiaries has risen. This trend puts financial stress on the fund as there are fewer employees contributing to the fund and more annuity payments to make.
Financial Status
The most basic indicator of pension fund status is the ratio of assets to liabilities, or “funded ratio.” When a pension fund has enough assets to cover all of its accrued liabilities, it is considered 100% funded. [4] A funding level under 100% means that a fund does not have sufficient assets on the date of valuation to cover its actuarial accrued liability. The District’s actuarial funded ratio has fallen from 86.4% in FY2001 to 56.5% in FY2010.[5] In general, a ratio below 80% is considered to be an indication that the fund is in poor health.
Over the same ten-year period, the District’s unfunded pension liabilities have grown from $190.4 million to $885.1 million. This is an increase of 364.9%, or $694.7 million, and this is due in part to lower than expected investment returns in the past few years.
Shortfalls in employer contributions have also significantly contributed to the increase in unfunded liabilities and the decrease in funded ratio. State statute requires that the MWRD levy a property tax equivalent to 2.19 times the employee contributions made two years prior. This amount is unrelated to the actuarially calculated annual required contribution (ARC) for funding normal cost plus the amortization of the unfunded liability.[6] The pension fund actuary estimates that in order to contribute an amount sufficient to meet the ARC in FY2011, the MWRD would need to levy property taxes equal to a tax multiple of 4.19 instead of 2.19.[7] The ARC payment would have been $61.9 million in FY2010, nearly $32.0 million more than the District’s actual $29.9 million contribution. [8] Thus, even though the MWRD has not missed making a pension payment, the amounts it contributed were not sufficient to the needs of the fund.
In an effort to strengthen its pension fund, in FY2012 the District increased its contribution to its pension fund beyond the statutory contribution of $28.5 million by transferring nearly $30.0 million in interest income to the Retirement Fund appropriation, as allowed under Public Act 95-0891.[9]
Pension Reforms
Public Act 96-0889
In April 2010 the General Assembly passed and Governor Quinn signed Public Act 96-0889. Public Act 96-0889 created a two-tier benefits system with lower benefits for many Illinois public employees hired on or after January 1, 2011, including members of the MWRD Retirement Fund. The new tier of benefits includes higher retirement ages, a cap on the maximum pensionable salary and lower cost-of-living adjustments. Over time these benefit changes for new hires will slowly reduce liabilities from what they would have been as new employees are hired and fewer members remain in the old benefit tier. The designation “Tier 1 employees” refers to persons hired before the effective date of Public Act 96-0889 and “Tier 2 employees” refers to persons hired on or after January 1, 2011.
HB 4513
In 2011, as part of its FY2012 budgeting process, the MWRD Retirement Board proposed two significant legislative initiatives for pension funding reform, with the support of the MWRD Board of Commissioners. In its budget analysis, the Civic Federation supported the MWRD’s initiative in seeking pension reform. The proposed reforms required amending the MWRD Article of the Illinois Pension Code and therefore, approval from the Illinois General Assembly. State Representative and Personnel and Pensions Committee Chair Elaine Nekritz introduced the reform legislation on January 31, 2012 as House Bill 4513. The House unanimously passed HB 4513 on March 29, 2012. On May 31, 2012, the last day of the Illinois General Assembly’s session for the 2011-2012 legislative year, the Senate approved these initiatives by passing HB 4513 with a vote of 50-2-2.
Reform Part 1: Increase in Employee Pension Contribution
The first part of the funding reform increases employee pension contributions for Tier 1 members by 1% per year beginning on January 1 in 2013, 2014 and 2015. Currently all employees contribute 9% of their salary to the Retirement Fund. Tier 2 employees’ contribution will not increase beyond the current rate of 9% of salary. Current employee contribution rates and rate increases for each year for Tier 1 employees are displayed in the chart below.
Tier 1 employee contribution rates will remain at 12.0% until funding has reached 90%, at which time rates will return to the current rate of 9.0%.
Reform Part 2: Increase in Tax Levy Multiple (Employer Pension Contribution)
The second part of the funding reform increases the property tax levy multiple contributed by the MWRD to an amount calculated by the actuary to be sufficient to bring the total assets of the MWRD Pension Fund up to 90% of the total actuarial liabilities of the Fund over a 40-year period, or by 2050. Beginning with the FY2013 tax levy, and each year thereafter, the MWRD shall levy a tax annually which will be sufficient to meet this required contribution by the Fund, but shall not exceed an amount equal to the total employee contributions two years prior multiplied by 4.19.
The tax levy multiple is currently 2.19. The pension reform will therefore increase the annual tax levy to the lesser of 4.19 times employee contributions two years prior or the annual required contribution calculated by the Fund’s actuary.
It is important to note that this legislation, unlike other pension reforms being considered by State officials, does not change benefits for current employees or current retirees.
For more information on local government pensions, see the Civic Federation’s annual Status of Local Pension Funding report.
[1] MWRD Retirement Fund FY2010 Comprehensive Annual Financial Report, p. 33.
[2] The MWRD pension article is 40 ILCS 5/13, but the fund is also governed by other parts of the pension code, such as 40 ILCS 5/1-160 which defines the changes to benefits for new employees hired on or after January 1, 2011 enacted in Public Act 96-0889. These changes are described later in this blog post.
[3] Beneficiaries include spouses, children and disability recipients.
[4] This does not mean that further contributions are no longer required, but rather that the plan is funded at the appropriate level on the date of valuation.
[5] This ratio is usually expressed in terms of actuarial values, as required by Government Accounting Standards Board (GASB) 25. The Government Accounting Standards Board (GASB) is an independent, non-profit organization that establishes accounting and reporting guidelines for state and local governments in the United States. GASB Statements 25 and 27, issued in November 1994, made a number of changes to reporting requirements for public pension fund assets and liabilities in the pension fund and sponsoring government financial statements. Statement 25 applied to pension fund financial statements and was effective for periods beginning after June 15, 1996.
[6] The annual required contribution (ARC) is the amount of employer contribution adequate to cover normal cost and amortize the unfunded liability of a pension fund over 30 years. It is a reporting, not a funding requirement, but represents a reasonable framework for pension funding. (Normal cost is the portion of the present value of pension plan benefits and administrative expenses allocated to a given valuation year and calculated using one of six standard actuarial cost methods). The State MWRD pension statute requires that the employer levy a property tax not to exceed the multiple amount. Employers levy an amount that, when added to the revenue from Personal Property Replacement Taxes, equals the multiple amount.
[7] MWRD Retirement Fund, FY2010 Comprehensive Annual Financial Report, p. 35.
[8] For more information on the status of the MWRD Retirement Fund, see Civic Federation blog post, Metropolitan Water Reclamation District Pension Fund in Decline, December 21, 2011.
[9] This legislation, enacted in 2008 and supported by the Civic Federation, was a good step toward improving the fiscal health of the MWRD Retirement Fund.