Best Practices in Public Pension Board Governance

May 05, 2010

There are over 3200 public pension board trustees governing 657 separate public pension funds in the State of Illinois according to data from the Illinois Department of Insurance.[1] These trustees have fiduciary responsibility for $135.7 billion dollars in assets, and paid out $10.5 billion in benefits to 386,975 beneficiaries in 2008.[2]  These pension funds can have as few as five or as many as thirteen trustees.

Of the 657 pension funds, 644 are police or firefighter funds (352 police, 292 firefighter) for individual municipalities including the City of Chicago. Most municipal employees who are not police or firefighters participate in the multi-employer Illinois Municipal Retirement Fund, which is governed by a single board of trustees.[3]

The pension boards are responsible for managing the assets of the funds, ensuring the efficient administration of benefits, and approving applicants for disability or other benefits. They have fiduciary responsibility for millions of dollars in assets including annual contributions from employees and taxpayers. What mix of perspectives, skills, and training do trustees need in order to effectively oversee these funds?

In March 2010 the Government Finance Officers Association adopted a new best practice recommendation on Governance of Public Employee Post-Retirement Systems. The GFOA recommends that:

“Board Composition should reflect the varied interests of those responsible for funding the plan and should include plan participants and retirees, citizens of the governmental unit, and officers of the plan sponsor, as well as independent directors. This assures balanced deliberations and decision making.”

GFOA also recommends that new trustees receive orientation training and that a continuing education program be established.

The Civic Federation reached similar conclusions in its 2006 report on public pension boards of trustees in Illinois. The report found that employees and retirees held a clear majority on most pension boards in the State and few boards guaranteed taxpayer representation. Despite the significant fiduciary responsibilities of the trustees, training was not required for most funds. The report reviewed public pension board composition in other states and found that many other jurisdictions required their pension governing boards to reflect a balance between employees, management, and citizens. Many others also required financial training or expertise for at least some of their trustees.

Public Act 96-0006, passed in April 2009, made some improvements recommended by the Civic Federation. The Act now requires eight hours of training each year for pension board trustees on topics including ethics, fiduciary duty, and investment issues (40 ILCS 5/1-113.18). P.A. 96-0006 also changed the composition of the board for the State Employees Retirement System and the Teachers Retirement System such that employees and retirees no longer constitute a majority of the board. However, employees and retirees are still in the majority for most pension funds in the state. Some very unbalanced boards remain, such as the 12-member board of the Chicago Teachers’ pension fund where two trustees are members of the Board of Education and ten trustees are teachers, principals, or annuitants.

The Civic Federation believes that balance in pension board composition is of critical importance if Illinois is to confront and more equitably debate the escalating costs of public pensions.

Rather than attempting to fill over 3200 public pension board seats across the State with knowledgeable, trained trustees, funds should be consolidated. While the State’s 644 police and fire pension funds may enjoy local control over investing and disability decisions, the Civic Federation believes that overall investment performance and administrative efficiency generated by economies of scale would greatly improve if funds were consolidated into a multi-employer fund like the Illinois Municipal Retirement Fund. We also recommend exploring consolidations such as moving the Park District, MWRD, Cook County, and Cook County Forest Preserve Funds into IMRF, merging all four City of Chicago funds into a single fund, and combining the Chicago Teachers fund with the State Teachers’ Retirement System.[4]

 
 


[1] The Department of Insurance monitors 657 funds but there are also others such as the Chicago Transit Authority pension fund not included in these figures.
[2] Illinois Department of Insurance Public Pension Division, 2009 Public Pension Report [[https://insurance.illinois.gov/Applications/Pension/PublicDocuments/Biennial/pension_biennial_report_2009.pdf], pp. 8, 54, 57.
[3] The exception is the City of Chicago, which does not participate in the Illinois Municipal Retirement Fund but instead has two separate pension funds for its non-public safety employees: the Municipal Fund [http://www.meabf.org] and the Laborers’ Fund [http://labfchicago.org].
[4] See this recommendation in the Civic Federation’s Status of Local Pension Funding FY2008 [/civic-federation/publications/fy2008statuslocalpensions] report.