December 4, 2013
In 2011, as part of its FY2012 budgeting process, the Metropolitan Water Reclamation District (MWRD) Retirement Board proposed legislative initiatives for pension funding reform, with the support of the MWRD Board of Commissioners. In its FY2012 budget analysis, the Civic Federation supported the MWRD’s initiative to seek pension funding reforms. The legislation increases the contributions to the pension fund for Tier 1 employees hired before January 1, 2011 and the employer contribution made by the District starting January 1, 2013. The employer contribution was adjusted so that the MWRD is required to fund its pensions at a level consistent with their actuarial needs, so long as those needs do not exceed 4.19 times employee contributions two years prior.
Although tying employer contributions to a multiplier may be adequate in any one year and may provide budgetary stability for a government, the risk of underfunding the pension fund remains. In FY2014 the District has found that the 4.19 multiple limitation will result in a contribution insufficient for the actuarial needs of the funding plan intended to increase funding to 90% by 2050. Therefore, the District has proposed to make an additional employer contribution beyond the multiple. Unlike other area local governments that are not allowed to contribute more or less than the multiple to their pension funds, the MWRD is allowed to transfer interest earned on any of its moneys to its pension fund, per Public Act 95-0891 enacted in August 2008.
P.A. 97-0894 Provides Two Significant Pension Funding Reforms
The first funding reform in P.A. 97-0894 provides for staggered increases in Tier 1 employee contributions starting January 1, 2013. Increased contribution levels will eventually reach a total of 12% in 2015 and apply to the portion of the employee contribution related to the retirement annuity itself, to the annual increase (sometimes called the cost-of-living increase, or “COLA”) and the surviving spouse annuity. Employee contributions will return to their pre-2013 levels of 9% in the first pay period after the Retirement Fund reaches a 90% funded ratio. Tier 2 members, who have lesser benefit levels, will not provide increased contributions.
The second funding reform increases the District’s contribution to the pension fund. The District’s contribution prior to fiscal year 2013 was set in state statute as a multiple of the total employee contribution made two years previously. The statute required that the MWRD levy a property tax not to exceed 2.19 times what employees contributed two years prior. This multiple was not automatically adjusted to meet the funding needs of the pension plans. According to the Retirement Fund’s most recent annual financial report, insufficient employer contributions over the past ten years are responsible for $298.7 million of the nearly $1.1 billion unfunded liability.
Under the revised MWRD pension statute, the District will be required to increase its tax levy multiple to an amount calculated by the actuary to be sufficient to bring the total assets of the MWRD Retirement Fund up to 90% of the total actuarial liabilities of the Fund in 2050. Beginning with the 2013 tax levy (payable in 2014), and each year thereafter, the MWRD shall levy a tax annually which will be sufficient to meet the annual required contribution by the Fund, but shall not exceed an amount equal to the total employee contributions two years prior multiplied by 4.19. That is, the MWRD will be required to fund its pensions at a level consistent with their actuarial needs, so long as those needs do not exceed 4.19 times employee contributions two years prior. The amount the District must contribute to the fund will not decrease once the fund reaches 90% funded.
Pension Funding for FY2014
The MWRD projects that for FY2014 the 4.19 multiple will be insufficient for the actuarial needs of the fund. Therefore, it will make an additional contribution beyond the multiple of what was contributed by employees two years prior in order to meet the actuarial needs of the fund. According to the District’s proposed FY2014 budget, the total FY2014 employer contribution to the fund will be $75.0 million.
Although the MWRD is prudently proposing to contribute to its Retirement Fund according to an actuarially determined funding level in FY2014, the Federation strongly encourages the District to consider permanently tying its annual contribution to its pension fund to an annually determined actuarial funding level, rather than to a multiplier.
Because an annually determined actuarial funding level would more accurately reflect the amount needed to sufficiently fund the pension, the Federation strongly believes annual pension contributions should be tied to this amount rather to an arbitrary multiplier which could be adequate now but fall short of requirements in the future. By limiting its contributions to a multiplier, the MWRD may risk underfunding the pension fund in the future. Although the multiplier may provide some budgetary stability for the government, additional employer contributions such as the one proposed for FY2014 may require additional resources via reserves, borrowing, expenditure cuts, tax or fee increases or some combination of these.
 The proposed reforms required amending the MWRD Article of the Illinois Pension Code and therefore, approval from the Illinois General Assembly. With support from State Representative Elaine Nekritz, the House unanimously passed House Bill 4513 on March 29, 2012. On May 31, 2012, the Senate approved these initiatives and on August 3, 2012, Governor Quinn signed into law the pension reforms as Public Act 097-0894. Click here for the Civic Federation’s previous blog which describes the reforms in more detail.