FISCAL ANALYSIS OF. POLICE, FIRE and IMRF PENSION SYSTEMS

FISCAL ANALYSIS OF THE DOWNSTATE POLICE, FIRE and IMRF PENSION SYSTEMS ILLINOIS MUNICIPAL LEAGUE PO Box 5180 Springfield, IL 62705-5180 Phone: 217-525-1220 Fax: 217-525-7438 www.iml.org February, 2007 Illinois Municipal League

The Illinois Municipal League would like to thank the members of the IML Managers Committee for their cooperation with the study. Special thanks is also extended to the Illinois City/County Management Association and Tim Sexton with the Village of Lombard.

TABLE OF CONTENTS FISCAL ANALYSIS OF THE DOWNSTATE POLICE, FIRE and IMRF PENSION SYSTEMS PAGE Executive Summary i Introduction 1 Illinois State-Funded Pension System Crisis Only Part of the Story 7 The Aggregate Fiscal Status Of The Downstate Police And Fire Funds 13 A Targeted Analysis Using 59 Individual Pension Funds 23 Public Safety Benefits Where Does Illinois Rank Among 55 Plans? 43 Conclusion 51 End Notes 53

EXECUTIVE SUMMARY The financial cost and fiscal health of public pension systems has recently become an issue of significant concern both nationally and within Illinois. Several studies have been prepared by organizations both within and without state government to analyze the myriad problems and challenges. There has been a notable absence, however, of studies analyzing the fiscal condition of the three defined benefit pension funds that service municipal employees outside of Chicago those being the downstate police, fire and IMRF pension systems. This study is an attempt to fill that void. Following this Executive Summary, the study is divided into six chapters. The Introduction provides readers with an overview of the benefits available within each of the three systems, how each of the pension systems is funded and what non-pension benefits are available. There is also a brief discussion about the applicability of the Property Tax Extension Limitation Law (PTELL). The second chapter provides an overview of the funding crisis afflicting public defined benefit pension plans in Illinois. This includes the five state-funded plans as well as twelve locally-funded plans. Strategies considered and adopted by the State of Illinois to address the fiscal solvency problems attendant upon the state-funded pension plans are presented. Finally, a comparison of the per capita unfunded liability levels for each system are discussed and reveal that the downstate police and downstate fire pension systems are presently carrying an amount of unfunded liability per active employee that exceeds three of the five state-funded systems in particular the financially problematic State Employees Retirement System (SERS) and Teacher s Retirement System (TRS). Chapter three looks at the downstate police and downstate fire pension systems in the aggregate as if the hundreds of individual police and fire funds were consolidated into two funds respectively. The chapter discusses the significant increases in accrued and unfunded liability and the notable decline in the funded ratio for both the police and fire systems over a seventeen-year study period (1987-2004). The analysis also notes that the growth in liabilities for each system have outpaced the growth of assets. The employer contribution trends are also examined for both systems. Readers will find in chapter four an analysis of 34 police and 25 fire pension funds. These funds are analyzed collectively, but eight of the funds (four police and four fire) are analyzed individually to provide a clear picture of their fiscal solvency. The collective analysis examines asset levels, accrued and unfunded liability growth and the significant decline in the funded ratios of these police and fire funds, particularly over the last five years of the study period. Meanwhile, the tax levy as a percentage of payroll suggested by the Illinois Department of Financial and Professional Regulation (IDFPR) one way of measuring the tax liability necessary to fund the benefits evidences significant growth during this same period. The individual analysis provides a reminder that each of these funds is in a unique financial situation and must be so considered by policymakers. The chapter also contains a brief discussion of the funded ratio and tax levy as a percentage of payroll for IMRF accounts. I

The fifth chapter examines the pension benefit levels received by Illinois downstate police and fire fighters within the context of 55 different police and fire pension plans throughout the nation. Based upon the methodology used, Illinois police and fire fighters compare favorably with their peers and receive the seventh most generous 30-year pension payout among 50 comparable formulas. In addition, Illinois police and fire fighters rank near the top when their 30-year pension is compared among their peers within the mid-west and border states. Illinois police and fire fighters are also unique among their peers in that they benefit from a pension formula that calculates the final pension earned based upon the final day s salary. The chapter concludes with a comparison of 30-year pension benefits among Illinois public defined benefit pension plans. II

INTRODUCTION OVERVIEW OF POLICE, FIRE AND IMRF BENEFITS AND FUNDING The Municipal Retirement Systems Despite the continued focus on the five state-funded pension plans (discussed in the next section of the study), state policymakers have paid little attention to the three downstate municipal employee retirement systems. The purpose of this study is to fill this void by conducting an analysis of the downstate police and fire systems, and to a lesser extent, the Illinois Municipal Retirement Fund (IMRF) defined benefit fund. Included in the study will be a brief history of each plan inclusive of major benefit levels, an analysis of each plan s fiscal health in the aggregate and, for some, the particular, and finally an examination of how the downstate police and fire funds compare with systemically comparable plans in other states. The Downstate Police and Fire Pension Plans The Article 3 (police) and Article 4 (fire) defined benefit plans, commonly known as the downstate police and fire pension plans, were established decades ago to provide pension, disability and survivor benefits to eligible municipal public safety employees in municipalities with fewer than 500,000 citizens (exclusive of the City of Chicago). The statutes require all municipalities with a police and/or fire department to establish one or both of the funds after a census reveals that the municipality has reached the 5,000 population threshold. Municipalities are permitted to adopt either article through a front-door referendum if there are fewer than 5,000 citizens and the corporate authorities support the funds adoption. Presently there are approximately 343 downstate police funds and 278 downstate fire funds. i The difference between the number of municipal police and fire funds is attributable to the consolidation of fire service into fire protection districts in certain areas of the state. BENEFITS Although each plan evolved somewhat differently, both the downstate police and fire plans have arrived at a state of general benefit parity. The downstate police and fire benefit levels are established by the Illinois General Assembly. A comparison of the major plan features can be viewed in Table 1: TABLE 1 Features Downstate Police Downstate Fire Full Retirement Age 50 with 20 Years Service Age 50 with 20 Years Service Final Rate of Earnings (FRE) for Pension Calculation Salary for Final Day of Service Salary at Final Day of Service Pension Formula 2.5% x FRE x Years of Service 2.5% x FRE x Years of Service Maximum Pension 75% of FRE at 30 years 75% of FRE at 30 years Annual Increases 3% Compounded 3% Compounded Duty Disability 65% of FRE 65% of FRE Non-Duty Disability 50% of FRE 50% of FRE Duty Death Survivor Benefit 100% of FRE 100% of FRE Non-Duty Death Survivor Benefit 20+ Years Service = 100% of Pension Earned 10-19 Years Service = 50% Salary 20+ Years Service = 100% of Pension Earned Less than 20 Years = 54% of Salary Death When Retired Survivor Benefit Full Pension Earned Greater of 54% FRE or Pension Earned 1

FUNDING Employer contributions for the downstate police and fire pension plans come primarily from a tax on real property but can also come from other local revenue sources. Both the downstate police (40 ILCS 5/3-125) and downstate fire (40 ILCS 5/4-118) statutes contain the following language with regard to financing pension obligations: The city council or the board of trustees of the municipality shall annually levy a tax upon all the taxable property of the municipality at the rate on the dollar which will produce an amount which, when added to the deductions from the salaries or wages of police officers, and revenues available from other sources, will equal a sum sufficient to meet the annual requirements of the (police/fire) pension funds. Employer contributions fluctuate based upon changing benefit levels, demographics and investment returns. Employee contributions are much more straightforward. Participants in a downstate police or fire fund contribute a statutorily fixed percentage of their pay. Fire fighters contribute 9.455% of pay while police officers are required to contribute 9.91% of pay. These contributions can only be altered by the Illinois General Assembly. The employee contribution rates in both systems are significantly less than the employer contribution rates. NON-PENSION BENEFITS Downstate police and fire plan participants are also entitled to additional statutory benefits that are not paid out of either pension plan yet are funded by the municipality or state: Public Employee Disability Act (5 ILCS 345/0.01) Police officers and fire fighters who sustain a duty-disability are entitled to 100% of salary for one full year. One hundred percent of this benefit is paid by the municipality. If the disability exceeds one year, the 65% duty-disability benefit established in the pension systems is applicable. 2 Public Safety Employee Benefits Act [820 ILCS 320/10(a)] Municipal public safety employees who have sustained a catastrophic injury or are killed in the line of duty are entitled to health insurance that is 100% funded by the municipality for themselves, their spouse and children until majority age is reached or later if the child is a dependent, part-time or full-time student. Upon the death of the public safety employee receiving the health insurance coverage, the surviving spouse continues to receive the health insurance benefit until remarriage. Catastrophic injury means the employee can no longer serve as a firefighter or police officer, but can still seek other gainful employment. Health Care Continuance Privilege Downstate police officers (215 ILCS 5/367g) and fire fighters (215 ILCS 5/367j) are eligible upon retirement to continued membership within the municipal health care plan. Municipalities have the option of covering all, a percentage or none of the premium benefit. Regardless, membership in the plan amounts to some degree of employer-subsidized health insurance. Use of this plan by retirees increases the average cost of a municipality s covered personnel and consequently raises the municipal cost to provide health insurance for active employees.

Federal and State Lump Sum Death Benefit The surviving spouse of a downstate police officer or downstate fire fighter killed in the line of duty is entitled to receive a lump-sum payment effective October 1, 2006 of $295,194 from the federal government based upon the federal Public Safety Officers Benefits Program. In addition, the surviving spouse is entitled to receive a lump-sum from the State of Illinois (820 ILCS 315) of $293,888.83 for a death in 2007. Each year this lump-sum benefit increases with inflation for newly eligible survivors. This combined death benefit is $589,082.83. This is in addition to the 100% of salary annual duty-death benefit provided under the downstate police and fire plans. The Illinois Municipal Retirement Fund (IMRF) The IMRF defined benefit pension fund was established decades ago to provide pension, disability and survivor benefits to eligible general municipal employees in municipalities with fewer than 500,000 citizens. The statutes require that all municipalities establish the fund after a census reveals that the municipality has reached the 5,000 population threshold. Municipalities are permitted to adopt IMRF through a front-door referendum if there are fewer than 5,000 citizens and the corporate authorities support the funds adoption. Unlike the hundreds of individual police and fire funds, IMRF is a consolidated statewide fund. IMRF presently has a funding ratio of 95.6%. BENEFITS IMRF benefit levels are established by the Illinois General Assembly. The major benefit features for IMRF can be viewed in Table 2: TABLE 2 Features Full Retirement Final Rate of Earnings (FRE) for Pension Calculation Pension Formula Maximum Pension Annual Increases Duty Disability Non-Duty Disability Duty Death Survivor Benefit Non-Duty Death Survivor Benefit IMRF Age 60 with 8 Years Service or Age 55 with 35 Years Service Average of 48 Consecutive Months Within Last 120 Months First 15 Years (1.67% x FRE x Years of Service) 16+ Years (2% x FRE x Years of Service) 75% of FRE at 40 Years 3% Non-Compounded Plus Supplemental Check Each Year 50% of FRE 50% of FRE (8 Years Or Less)1 Year s Earnings + Member Account Balance (More Than 8 Years) Same Benefit With Option for Spouse to Instead Elect 50% of FRE Less than One Year: Employee Contribution 1-8 Years: 1 Year s Earnings + Member Account Balance More than 8 Years: $3,000 Plus Surviving Spouse Pension or Lump Sum = 1 Year s Earnings + Member Account Balance Death When Retired Survivor Benefit 50% of FRE + $3,000 3

FUNDING As with the downstate police and fire systems, the principal method of financing the Article 7 employer contribution is through the levy of a property tax but other local revenue sources can also be used. Article 7 (40 ILCS 5/7-171) contains the following language with regard to financing pension obligations: (a) Each municipality other than a school district shall appropriate an amount sufficient to provide for the current municipality contributions required by Section 7-172 of this Article, for the fiscal year for which the appropriation is made and all amounts due for municipal contributions for previous years. Those municipalities which have been assessed an annual amount to amortize its unfunded obligation, as provided in subparagraph 5 of paragraph (a) of Section 7-172 of this Article, shall include in the appropriation an amount sufficient to pay the amount assessed. The appropriation shall be based upon an estimate of assets available for municipality contributions and liabilities therefor for the fiscal year for which appropriations are to be made, including funds available from levies for this purpose in prior years. A distinction must be made between the IMRF employer contribution versus that for the downstate police and fire funds. Unlike the police and fire funds that allow municipalities the option to seek their own actuarial services, Article 7 requires that each municipality contribute an annual actuarial amount calculated by IMRF based upon statutory guidelines. The amount of this required employer contribution may fluctuate from year to year, but the employer contribution is actuarially determined and set by IMRF nonetheless. The employee contribution rate is fixed by statute at 4.5% of salary and is therefore significantly less than the employer contribution rate. NON-PENSION BENEFITS IMRF participants are also entitled to additional statutory benefits not attributable to the pension plan but still partially funded by the municipality: Social Security Participation Unlike the vast majority of participants within the downstate police and fire funds, IMRF employees pay into the Social Security system and are therefore entitled to receive those benefits upon obtaining the Social Security eligibility age. Health Care Continuation Privilege IMRF participants (215 ILCS 5/367i) are eligible upon retirement to continued membership within the municipal health care plan. Municipalities have the option of covering all, a percentage or none of the premium benefit. Regardless, membership in the plan amounts to some degree of employer-subsidized health insurance. Use of this plan by retirees increases the average age of the municipality s covered personnel and consequently raises the municipal cost to provide health insurance for active employees. 4

Local Funding And PTELL The employer contributions for the downstate police, fire and IMRF pension systems are funded solely from taxpayers residing within each municipality. Although the benefit levels are established by the Illinois General Assembly, the State of Illinois does not contribute any money toward the solvency of these pension plans. The original statutory provision authorizing municipal governments to levy a tax on property to fund the employer portion of the pension obligations was hindered by the 1991 enactment by the General Assembly of the Property Tax Extension Limitation Law (PTELL), commonly known as tax caps. The 1991 Property Tax Extension Limitation Law (35 ILCS 200/18-185) imposed caps on the amount that could be levied using property taxes. Property tax levies can only be increased annually to the lesser of 5% or the Consumer Price Index unless voters approve a higher amount through referendum. The initial law was applicable to non-home rule governments (fewer than 25,000 citizens unless home rule adopted by referendum) located in DuPage, Kane, Lake, McHenry and Will counties. In 1995, PTELL was extended to all non-home rule taxing districts in Cook County. The law was further amended in 1996 to allow other county boards throughout the state to subject their non-home rule taxing districts to PTELL if approved by countywide referendum. The practical affect of tax caps upon municipal government has been to limit the ability of capped municipalities to generate the property tax revenue necessary to adequately meet employer pension obligations. Some non-home rule municipalities are presented with a choice between using general revenue funds and possibly having to cut services as a result or electing to not contribute the full annual employer funding amount recommended by the Illinois Department of Financial and Professional Regulation (IDFPR). It is important to note that non-home rule municipalities have less statutory authority for non-property tax revenue. PTELL FACTS 39 out of 102 Illinois counties are under tax caps. There are approximately 343 downstate police pension funds statewide. Of these 343 funds, approximately 124 are located within tax-capped jurisdictions. There are approximately 278 downstate fire pension funds statewide. Of these 278 funds, approximately 49 are located within tax-capped jurisdictions. --Statistics calculated using information provided by the Illinois Department of Revenue and the Illinois Department of Financial and Professional Regulation -- 5

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ILLINOIS STATE-FUNDED PENSION SYSTEM CRISIS ONLY PART OF THE STORY A Widely Recognized Problem Growing In Severity The pension funding crisis besetting the five Illinois state-funded pension systems has emerged as one of the seminal issues facing policymakers and taxpayers. These funds include the State Employee Retirement System (SERS), Teachers Retirement System (TRS), State University Retirement System (SURS), General Assembly Retirement System (GRS) and the Judges Retirement System (JRS). While the public has yet to become fully engaged in the issue, there is no shortage of sources that have recognized the crisis and issued recommendations to avert the coming fiscal debacle. Illinois pension nightmare headlined the November 3, 2006 edition of the Chicago Tribune. The byline stated, Funds for teachers, state workers face a $45.8 billion shortfall. The Illinois Business Roundtable released a 2005 study entitled, Illinois Pension Funding The Consequence of Funding Deferred that reported the following: By June 2003, after two decades of systemic under-funding of Illinois public pension systems, the unfunded liability of Illinois retirement systems stood at $43.1 billion, the highest in the nation. Our pension system funding ratios were the second worst in the country, standing at 49%. In a 2003 article entitled, Pension Obligations Squeeze State Budget, the Taxpayers Federation of Illinois reported that: Illinois pension programs still face daunting problems from years of inaction. Annual pension obligations during the next five years start around $2 billion and ratchet ever higher. Public pension benefits are defined in the Illinois Constitution as a contractual right that cannot be diminished. Where will this guaranteed money come from? The Civic Federation published a study in October of 2006 entitled, The State Of Illinois Retirement Systems: Funding History and Reform Proposals within which the following conclusion was reached: The pension funding crisis is not going away. In fact, from a budgetary standpoint it will get much worse in the future. If the State complies with current law and continues makes (sic) the full certified contributions for the next ten years, the annual required payment in FY2016 will have increased by 223.2%. That is a $3.06 billion increase from $1.37 billion to $4.43 billion. When the debt service payments on the pension obligation bonds are factored in, the amount of increase is $3.14 billion, or from $1.86 billion to $5.01 billion. This represents a 168.2% increase. 7

A study published by The Heartland Institute in May of 2005 entitled, Illinois Public Pension Crisis concluded with the following assessment: No one denies that Illinois faces a public pension funding crisis. It has been averted in the past only by pushing the burden of a solution onto future generations of taxpayers by borrowing billions of dollars and pushing the day of reckoning a few years or decades into the future. Each year it gets more difficult, and more costly in terms of interest paid on debt, to avoid the inevitable. The Civic Committee of the Commercial Club of Chicago issued a study in December of 2006 entitled, Facing Facts: A Report of The Civic Committee s Task Force on Illinois State Finance that stated the following: In addition, of the total $108 billion pension liability of the State s five pension funds, today about $46 billion is unfunded. The State s 58% pension funding ratio is among the lowest in the nation. Perhaps the most significant testament to the severity of the problem was evidenced when Governor Rod Blagojevich officially put state leaders on notice during his 2005 annual budget address that significant pension reform was necessary: Unless we reform the way we fund our pensions we will never eliminate the structural deficit that takes money away from education, from health care, from law enforcement, from parks, and from everything else we care about. How Illinois Got Here According to a study prepared by Deloitte Research ii, there are ten contributing factors to the current fiscal crisis afflicting defined benefit pension plans throughout the nation: Lack of Pre-funding Requirements Benefit Expansions Growth of Supplemental Benefits Smaller Employer Contribution Share Lucrative Early Retirement Packages Higher Risks of Defined Benefit Programs Structural Weakness Masked by 1990s Stock Market Boom Deferring Pension Contributions to Balance Budgets Little Incentive or Urgency to Fix Problem Difficulty of Modifying Retirement Plans 8

STATE-FUNDED SYSTEMS Many of these factors have been operative among the five state-funded systems in Illinois. The amount of unfunded liability carried by these plans as of 2004 can be seen in Table 3: TABLE 3 Pension Fund Unfunded Liability (Rounded) Per Capita Unfunded Liability For Actives In Dollars (Unfunded Liability Divided By Active Employees) Teachers Retirement System $19,400,000,000 $122,969 State Employees Retirement System $8,500,000,000 $119,687 State University Retirement System $6,500,000,000 $88,945 Judges Retirement System $622,000,000 $685,996 General Assembly Retirement System $124,000,000 $687,208 The cumulative unfunded liability is just over 35 billion dollars. Confronted with the need to begin making serious decisions for reform, the Blagojevich Administration successfully pursued the following legislative measures, most of which were recommended by a study that the State of Illinois commissioned Deloitte Consulting to undertake with the intention of addressing the Illinois pension funding crisis: The issuance of $10 billion in Pension Obligation Bonds with $7.3 billion dedicated to the state pension systems. This measure immediately reduced the pension system s unfunded liability from $43 billion to approximately $36 billion and increased the funding ratio from 49% to 57%. Elimination of a benefit calculation method known as the money purchase formula for university employees hired after June of 2005. Reducing the interest rates earned on employee contributions to the State University Retirement System. Requiring that local school districts, not the state, fund costs attributed to end-of-career pay spikes that inflate final pension payouts. Limiting those employees eligible for the SERS alternative formula that provides enhanced retirement benefits for employees deemed subject to additional job-related risks. Placing the responsibility on employers for pension costs caused by granting public employees extra sick leave. Increasing employee contribution rates within the Teachers Retirement System. Imposing a 5-year expiration on all new benefits enactments unless renewed by the legislature. Requiring that every future benefit increase must have a dedicated revenue source. Creating a state advisory commission to propose additional retirement plan improvements. iii These reforms have mitigated some of the short-term pension costs while offering the prospect of addressing the long-term financial issues within Illinois five state-funded pension funds. Unfortunately for other public employers and Illinois taxpayers, efforts to resolve the problems within the five state-funded systems only addresses part of the problem. 9

What About The Other Public Pension Plans? There is much more to the pension funding crisis than what is being experienced within the five state-funded systems. There are twelve other public pension systems that report to the Illinois Department of Financial and Professional Regulation besides the five state-funded systems. These other systems are largely funded by local governments, and ultimately, local taxpayers. The benefit structure and improvement decisions are made by the General Assembly. Much like the state systems, these twelve systems all face significant unfunded liabilities. LOCALLY-FUNDED SYSTEMS Table 4 contains a breakdown of each system along with its total unfunded liability and per capita unfunded liability based upon active employees as of 2004. TABLE 4 Pension Fund Unfunded Liability (Rounded) Per Capita Unfunded Liability for Actives in Dollars (Unfunded Liability Divided by Active Employees) Chicago Police $3,900,000,000 $284,536 Cook County $2,800,000,000 $106,388 Chicago Municipal 0 0 IMRF $1,100,000,000 $6,578 Downstate Police $2,200,000,000 $179,958 Chicago Teachers $1,700,000,000 $45,861 Chicago Fire $1,600,000,000 $332,222 Downstate Fire $1,400,000,000 $176,845 MWRD $400,000,000 $203,114 Cook County Forest Preserve $59,000,000 $159,676 Chicago Park District 0 0 Chicago Laborers $24,600,000 $7,864 The per capita unfunded liability (unfunded liability divided by active employees) for these systems as well as the five state-funded systems is also represented in Chart 1. Examining the amount of unfunded liability using a per capita reference allows for funds of different sizes to be compared in a meaningful way. It is interesting to note that, for all the alarm expressed over the poor funding levels of the SERS and TRS plans in particular, the unfunded liability of the aggregate downstate police and fire funds is in much worse shape on a per capita basis. 10

CHART 1 (2004) PER CAPITA UNFUNDED LIABILITY AMONG ACTIVE EMPLOYEES (2004) $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Chicago Park District Chicago Municipal IMRF Chicago Laborers Chicago Teachers SURS Cook County Employees SERS TRS Cook County Forest Preserve Downstate Fire Downstate Police MWRD Chicago Police Chicago Fire Judges General Assembly COMPARISON OF DEBT TO REVENUE SOURCES The cumulative unfunded liability for the twelve systems is just over 15 billion dollars. The total unfunded liability of the five state-funded systems along with the aforementioned twelve systems carries a cumulative cost of approximately 50 billion dollars. In other words, these public pension systems have 50 billion dollars in outstanding obligations for which no money has been set aside. If this unfunded liability were spread over the entire population of Illinois on a per capita basis it would come to approximately $3,932 per person (using 2004 census data). To put this amount in perspective, consider it within the context of the cumulative Illinois property tax burden. In FY 2004, Illinois localities collected $17.8 billion dollars in property tax revenue. iv On a per capita basis, this works out to $1,404 per person, or $2,528 per person less than what it would take to pay off the unfunded pension liability for all seventeen public pension systems combined. Examined another way, the State of Illinois collected a total of $10.6 billion in income tax revenue in FY 2004. v On a per capita basis, this works out to $834 per person, or $3,098 per person less than what it would take to pay off the unfunded liability for all seventeen public pension systems combined. 11

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THE AGGREGATE FISCAL STATUS OF THE DOWNSTATE POLICE AND FIRE FUNDS The following chapter will provide statistical data obtained from the Illinois Department of Financial and Professional Regulation showing the aggregate seventeen-year trends (1987-2004) for the downstate police and fire funds respectively. The chapter will examine the issue of ideal funding levels, the growth in both accrued and unfunded liability, the decline in the funded ratios and the relationship between assets and liabilities. Funding Levels How Much Is Enough? Opinions vary regarding what level of funding is appropriate for defined benefit pension plans. According to a June 1994 survey of State and Local Government Employee Retirement Systems prepared by the Public Pension Coordinating Council (PPPC), the value of assets as a percentage of the Pension Benefit Obligation averaged 90.2% for the retirement systems surveyed in 1993. vi Possibly because of this survey, the Illinois General Assembly passed P.A. 88-593 in 1995, establishing the goal of achieving a 90% funded ratio for the five state-funded pension systems by the year 2045. It is therefore reasonable to conclude that the State of Illinois deems the achievement of a 90% funded ratio as good public policy. This sentiment appears to be confirmed by the Director of the Governor s Office of Management and Budget, who stated the following in a 2003 letter sent to the legislative co-chairs of the Commission on Government Forecasting and Accountability: The 90% funding target for a state pension plan represents a reasonable and appropriate funding target. vii On the question of the appropriateness of the funding level, a study published by the Civic Federation stated the following: Many experts concur that there is no real need to achieve 100% funding. They argue that governments, unlike private corporations, are not at risk of dissolving and, therefore, can meet their obligations in perpetuity. However, public pensions should be funded sufficiently to prevent the growth of unfunded liability. viii Downstate Police Plan Aggregate Overview The information provided in Table 5 provides a general overview of the aggregate financial condition of the downstate police pension funds between the years 1987-2004. This data provides a snapshot of the fiscal health of the funds as if the 316 reporting funds (out of 343 total funds) were consolidated together. Financial data for FY 1998 was unavailable. 13

TABLE 5 (Dollar Amounts Rounded) Fiscal Year Accrued Liability Net Assets Unfunded Liability Funded Ratio (as %) 1987 $1,500,000,000 $1,100,000,000 $400,000,000 72.70% 1988 $1,600,000,000 $1,200,000,000 $460,000,000 71.90% 1989 $1,800,000,000 $1,300,000,000 $490,000,000 72.40% 1990 $2,000,000,000 $1,400,000,000 $520,000,000 73.30% 1991 $2,200,000,000 $1,700,000,000 $560,000,000 75.10% 1992 $2,500,000,000 $1,800,000,000 $650,000,000 73.60% 1993 $2,700,000,000 $2,000,000,000 $690,000,000 74.20% 1994 $2,900,000,000 $2,100,000,000 $750,000,000 74.10% 1995 $3,200,000,000 $2,300,000,000 $860,000,000 72.90% 1996 $3,400,000,000 $2,500,000,000 $890,000,000 74.50% 1997 $3,700,000,000 $2,800,000,000 $900,000,000 74.60% 1998 No Data No Data No Data No Data 1999 $4,200,000,000 $3,200,000,000 $1,000,000,000 76.40% 2000 $4,700,000,000 $3,500,000,000 $1,200,000,000 74.10% 2001 $5,200,000,000 $3,600,000,000 $1,600,000,000 68.71% 2002 $5,500,000,000 $3,500,000,000 $2,000,000,000 63.20% 2003 $6,100,000,000 $3,700,000,000 $2,400,000,000 60.67% 2004 $6,000,000,000 $3,700,000,000 $2,300,000,000 62.40% ACCRUED LIABILITY Between 1987 and 2004, the total accrued liability of the downstate police funds quadrupled from $1.5 billion to $6 billion an increase of 300% over seventeen years. The accrued liability represents those liabilities, both current and prospective, that are actually covered by actuarial assets. Accrued liabilities are based on the cost of benefits under the plan at the time of the estimate as well as actuarial assumptions concerning expected future salary increases, investment returns, mortality rates, disabilities, turnover and other factors. The accrued liabilities are the result of an actuary s educated estimate of what the fund is likely to experience. UNFUNDED LIABILITY Unfunded liabilities represent that portion of the accrued liabilities not covered by a system s assets. They ultimately represent the total deficit of a fund for which no money has been set aside. The total aggregate unfunded liability of the downstate police funds grew almost six-fold from $400 million in 1987 to $2.3 billion in 2004 an increase of 500%. This increase is represented in Chart 2. Also note that the unfunded liability more than doubled between 2000 and 2004. 14

CHART 2 2.50 DOWNSTATE POLICE UNFUNDED LIABILITY UNFUNDED LIABILITY (1987-2004) 1987-2004 2.00 Billions 1.50 1.00 0.50 0.00 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 FUNDED RATIO During this period of growing unfunded liability, the funded ratio of the aggregate downstate police funds declined 10.3% from 72.7% funded in 1987 to 62.4% funded in 2004 as evidenced by Chart 3. The most precipitous reduction occurred during the six-year period between 1999-2004. During this period, the funded ratio dropped by 14%. Expressed as a percentage of a system s liabilities, the funded ratio is calculated by dividing net assets by the accrued actuarial liabilities. CHART 3 FUNDED RATIO (1987-2004) DOWNSTATE POLICE FUNDED RATIO 80% 75% 70% 65% 60% 55% 50% 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 As mentioned previously, several factors can contribute to the total accrued liability as well as a decline in defined benefit plan funded ratios and a subsequent increase in unfunded liability. The most significant factors, however, are contribution rates, investment returns and benefit levels. 15

Chart 4 examines the IDFPR suggested downstate police aggregate employer contribution rates as a percentage of payroll between 1987 and 2004. The rates remained fairly steady during the eleven years for which data was actually available, beginning in 1987 at 18.88%, hitting a low of 15.62% in 2000 and bouncing back up to 18.98% in 2004. The average employer contribution rate expressed as a percentage of payroll during this time was 17.5%. During this period the contribution rates for police officers increased by.91% of salary, raising their contribution from 9% to 9.91% of salary. CHART 4 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% 1987 CONTRIBUTIONS AS PERCENTAGE OF PAYROLL (1987-2004) DOWNSTATE POLICE TOTAL SUGGESTED EMPLOYER CONTRIBUTIONS AS PERCENTAGE OF PAYROLL (1987-2004) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 After several years of high investment returns in the late 1990 s, there was a significant decline between 2000 and 2002. ix However, investment returns were more than adequate between the years 1987 and 2004. The average rate of return during this period for fixed income investments was 7.40%. Equities returned an average of 12.88%. Blended fixed income/equities averaged 7.91%. This latter estimate assumes the maximum amount allowed by statute was invested in equities 10% from 1987 to 1997; 35% in 1998; and 45% for 1999 and forward. The funds should have therefore experienced a net investment gain over this seventeen-year period, positively impacting the funded level. Roughly coinciding with the market decline was the implementation of two laws providing benefit increases into the downstate police plans (P.A. 91-0466 and P.A. 91-0939) that carried a combined average estimated cost of 2.22% of payroll for each fund, of which the employer funded an estimated 1.31%. 16

P.A. 91-0466 (EFFECTIVE 2000) Increased Minimum Pension for Survivors from $600 to $1,000 over three years. P.A. 91-0939 (EFFECTIVE 2001) Flat 2.5% Per Year Formula Allowing Maximum Pension of 75% Salary To Be Reached at 30 Years Instead of 35 Years Permit Receipt of Three Years of Creditable Service While on Disability Base Initial Automatic Annual Increase on Months Instead of Years Duty or Occupational Disease Disability Greater of 65% Salary or Pension Added Stroke as an Occupational Disability Annuity of 100% Salary for Duty Death ASSETS AND LIABILITIES It is important to analyze whether or not the downstate police pension funds assets are sufficient to compensate for the total liabilities of the system. Again, this section of the study is concerned with the aggregate numbers. In 2004, the 316 reporting funds had an aggregate amount of approximately $6 billion in accrued liability. Total assets carried an actuarial value of approximately $3.7 billion. A year-by-year comparison of the relationship between aggregate assets and liabilities for the downstate police funds can be found in Chart 5. As indicated by the chart, the relatively steady growth in assets was eclipsed by a growth in accrued liabilities toward the end of the analysis period. CHART 5 6 5 LIABILITIES (1987-2004) DOWNSTATE POLICE ASSETS VS. ACCRUED LIABILITIES (1987-2004) Billions 4 3 2 1 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 Assets Liabilities Over the seventeen-year period, assets increased by 236% while accrued liabilities increased by 300% (Chart 6). This 64% variance is significant in contrast to the relationship between aggregate assets and liabilities within the downstate fire fighter system, which will be discussed in the following section. 17

CHART 6 DOWNSTATE POLICE PERCENTAGE GROWTH IN ACTUARIAL ASSETS AND LIABILITIES ACTUARIAL ASSETS AND LIABILITIES (1987-2004) (1987-2004) 300% 250% 200% Growth In Assets Growth In Liabilities Downstate Fire Plan Aggregate Overview The information provided in Table 6 provides a general overview of the aggregate financial condition of the downstate fire pension funds between the years 1987-2004. This data provides a snapshot of the fiscal health of the funds as if the 246 reporting funds (out of 278 total funds) were consolidated. Financial data for FY 1998 was unavailable. TABLE 6 (Dollar Amounts Rounded) Fiscal Year Accrued Liability Net Assets Unfunded Liability Funded Ratio (as %) 1987 $1,200,000,000 $854,000,000 $310,000,000 73.33 1988 $1.300,000,000 $936,000,000 $332,000,000 73.81 1989 $1,400,000,000 $1,000,000,000 $358,000,000 74.27 1990 $1,500,000,000 $1,100,000,000 $371,000,000 75.46 1991 $1,700,000,000 $1,300,000,000 $400,000,000 76.4 1992 $1,900,000,000 $1,400,000,000 $450,000,000 76.3 1993 $2,000,000,000 $1,500,000,000 $464,000,000 76.77 1994 $2,200,000,000 $1,700,000,000 $500,000,000 76.9 1995 $2,400,000,000 $1,800,000,000 $618,000,000 74.65 1996 $2,600,000,000 $2,000,000,000 $611,000,000 76.58 1997 $2,700,000,000 $2,100,000,000 $602,000,000 77.98 1998 No Data No Data No Data No Data 1999 $3,200,000,000 $2,500,000,000 $721,000,000 78.57 2000 $3,400,000,000 $2,600,000,000 $820,000,000 76.58 2001 $3,700,000,000 $2,600,000,000 $1,070,000,000 70.85 2002 $4,000,000,000 $2,600,000,000 $1,350,000,000 65.82 2003 $4,200,000,000 $2,700,000,000 $1,520,000,000 64.14 2004 $4,100,000,000 $2,700,000,000 $1,400,000,000 65.9 18

ACCRUED LIABILITY Between 1987 and 2004, the total accrued liability of the downstate fire funds more than tripled from $1.2 billion to $4.1 billion an increase of 242% over seventeen years. The accrued liability represents those liabilities, both current and prospective, that are actually covered by actuarial assets. Accrued liabilities are based on the cost of benefits under the plan at the time of the estimate as well as actuarial assumptions concerning expected future salary increases, investment returns, mortality rates, disabilities, turnover and other factors. The accrued liabilities are the result of an actuary s educated estimate of what the fund is likely to experience. UNFUNDED LIABILITY Unfunded liabilities represent that portion of the accrued liabilities not covered by a system s assets. They ultimately represent the total deficit of a fund for which no money has been set aside. The total aggregate unfunded liability of the downstate fire funds grew at a rate of four-and-a-half times from $310 million in 1987 to $1.4 billion in 2004 an increase of 352%. This increase is represented in Chart 7. CHART 7 2 DOWNSTATE FIRE UNFUNDED LIABILITY DOWNSTATE FIRE UNFUNDED LIABILITY (1987-2004) (1987-2004) Billions 1.5 1 0.5 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 FUNDED RATIO During this period of growing unfunded liability, the funded ratio of the aggregate downstate fire funds declined by 7.43% from 73.33% funded in 1987 to 65.90% funded in 2004 (Chart 8). The most precipitous funding reduction occurred during the six-year period between 1999 and 2004. During this period, the funded ratio dropped by 12.67%. Expressed as a percentage of a system s liabilities, the funded ratio is calculated by dividing net assets by the accrued actuarial liabilities. 19

CHART 8 (1987-2004) DOWNSTATE FIRE FUNDED RATIO (1987-2004) 80% 75% 70% 65% 60% 55% 50% 1987 1989 1991 1993 1995 1997 1999 2001 2003 As mentioned previously, several factors can contribute to the total accrued liability as well as a decline in defined benefit plan funded ratios and a subsequent increase in unfunded liability. The most significant factors, however, are contribution rates, investment returns and benefit levels. Chart 9 examines the downstate fire aggregate employer contribution rates as a percentage of payroll between 1987 and 2004. The rates remained fairly steady during the eleven years for which data was actually available, beginning in 1987 at 19.78%, hitting a low of 17.70% in 1994 and bouncing back up to 22.04% in 2004. The average employer contribution rate expressed as a percentage of payroll during this time was 19.9%. During this period the contribution rates for fire fighters increased by 1.205% of salary, raising their contribution from 8.25% to 9.455% of salary. CHART 9 CONTRIBUTIONS AS PERCENTAGE OF PAYROLL DOWNSTATE FIRE AGGREGATE EMPLOYER CONTRIBUTIONS AS PERCENTAGE OF PAYROLL 24% 23% 22% 21% 20% 19% 18% 17% 16% 15% 2003 2001 1999 1997 1995 1993 1991 1989 1987 20

After several years of high investment returns in the late 1990 s, there was a significant decline between 2000 and 2002. However, investment returns were more than adequate between the years 1987 and 2004. The average rate of return during this period for fixed income investments was 7.40%. Equities returned an average of 12.88%. Blended fixed income/equities averaged 7.91%. This latter estimate assumes the maximum amount allowed by statute was invested in equities 10% from 1987 to 1997; 35% in 1998; and 45% for 1999 and forward. The funds should have therefore experienced a net investment gain over this seventeen-year period, positively impacting the funded level. Roughly coinciding with the market decline was the implementation of two laws providing benefit increases into the downstate fire plans (P.A. 91-0466 and P.A. 93-0689) that carried a combined average estimated cost of 7.14% of payroll for each fund, of which an estimated 5.94% was funded by the employer. P.A. 91-0466 (EFFECTIVE 2000) Flat 2.5% Per Year Formula Allowing Maximum Pension of 75% Salary To Be Reached at 30 Years Instead of 35 Years Permit Receipt of Three Years of Creditable Service While on Disability Base Initial Automatic Annual Increase on Months Instead of Years Duty or Occupational Disease Disability Greater of 65% Salary or Pension Added Stroke as an Occupational Disability Annuity of 100% Salary for Duty Death Increased Minimum Pension for Survivors from $600 to $1,000 Over Three Years. P.A 93-0689 (EFFECTIVE 2005) Surviving Spouse Annuity of 100% of Pension Earned by Decedent, Retroactive to January 1, 2004 Increased Minimum Pension for Survivors from $1,030 in 2004 to $1,159.27 by 2008 Retroactively and Prospectively Increased Children s Annuity by 3% Annually Through 2008 Reciprocity Between Downstate Fire Funds and the Ability to Transfer IMRF Service to a Downstate Fire Fund ASSETS AND LIABILITIES It is important to analyze whether or not the downstate fire pension funds assets are sufficient to compensate for the total liabilities of the system. Again, this section of the study is concerned with the aggregate numbers. In 2004, the 246 reporting funds had an aggregate amount of approximately $4.1 billion in accrued liability. Total assets carried an actuarial value of approximately $2.7 billion. A year-by-year comparison of the relationship between aggregate assets and liabilities for the downstate fire funds can be found in Chart 10. As indicated by the chart, the relatively steady growth in assets was outpaced by a growth in accrued liabilities toward the end of the analysis period. 21

CHART 10 DOWNSTATE FIRE VS. LIABILITIES (1987-2004) 5 4 Billions 3 2 1 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 Assets Liabilities Over the seventeen-year period, assets increased by 216% while accrued liabilities increased by 242% (Chart 11). While not as severe as the asset-to-liability variance of the aggregate downstate police funds (64%), the presence of a 26% asset gap among the aggregate downstate fire funds is nonetheless notable. CHART 11 DOWNSTATE FIRE PERCENTAGE GROWTH IN ACTUARIAL ASSETS AND LIABILITIES (1987-2004) (1987-2004) DOWNSTATE FIRE PERCENTAGE GROWTH IN ACTUARIAL ASSETS AND LIABILITIES 250% 240% 230% 220% 210% 200% Downstate Fire Growth In Assets Growth In Liabilities 22

A TARGETED ANALYSIS USING 59 INDIVIDUAL PENSION FUNDS The previous section examined aggregate data for both the downstate police and fire pension funds. In other words, the data represented the fiscal realities as if all reporting funds were consolidated together. This section seeks to provide a more focused analysis of the experience of 59 individual funds 25 downstate fire funds and 34 downstate police funds. This data was obtained from the Illinois Department of Financial and Professional Regulation (IDFPR) reports filed by individual cities as required annually. The section will be divided into two parts. The first will look at the 59 funds in aggregate. In doing so, the same 17-year period between 1987-2004 will be used. The analysis will go further, however, in that it will also include tax levy data for purposes of demonstrating the relationship between the funds and what taxpayers are being asked to contribute for solvency purposes. The second part will focus on several individual funds, allowing an even more lucid picture of the fiscal conditions. The 59 funds included in the analysis are as follows: Police and Fire Barrington Bellwood Bolingbrook Carbondale Chicago Ridge Edwardsville Elk Grove Village Forest Park Hoffman Estates Homewood Lombard Midlothian Mt. Prospect Naperville Oak Brook Oak Forest Peoria Rock Island Rockford Roselle Schaumburg Skokie Springfield Wilmette Winnetka Police Only Lake in the Hills Lisle McHenry New Lenox North Lake Riverside Westmont Wood Dale Woodstock 23

Funded Ratio The funded ratio of the 25 downstate fire funds dropped by 12.6% from 82.84% funded in 1987 to 70.24% funded in 2004. The funded ratio of the 34 downstate police funds dropped by 13.51% from 79.29% in 1987 to 65.78% in 2004. Just as a point of reference, the funding ratio for IMRF actually increased by 54% during this period, from 61.10% in 1987 to 94.30% in 2004. Expressed as a percentage of a system s liabilities, the funded ratio is calculated by dividing net assets by the accrued actuarial liabilities. The funding ratios between 1987 and 2004 for all three systems can be viewed in Chart 12. CHART 12 Funded Ratio FUNDED RATIO 120.00% 110.00% 100.00% 90.00% 80.00% Fire Police IMRF 70.00% 60.00% 50.00% 40.00% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 As discussed previously, several factors can contribute to the total accrued liability as well as a decline in defined benefit plan funded ratios and a subsequent growth in unfunded liability. The most significant factors, however, are contribution rates, investment returns and benefit levels. The declining funded ratio raises the question about future trends. One way to analyze this issue would be to plot out what would be required for the funded ratio to reach the 100% level required by the end of the 40-year amortization period that began in 1993. Chart 13 graphs out the growth necessary to achieve full-funding by 2033: 24

CHART 13 2033 AMORTIZATION TARGET 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% Police Fire IM RF 2032 2030 2028 2026 2024 2022 2020 2018 2016 2014 2012 2010 2008 2006 2004 The downstate police funds included in the sample would need to make up 35% in their funded ratio by 2033. The included downstate fire funds would need to make up 40% in their funded ratio by 2033. The included IMRF accounts need only make up about 5% in their funded ratio by 2033. Poor investment returns or benefit changes that increase the cost of the pensions systems would make the achievement of a 100% funded level by 2033 less likely. If it is assumed that the 100% funded target will be steadily achieved by the end of the scheduled amortization period, then it can also be assumed that the funded ratio of almost 80% experienced by the included downstate fire funds as recently as 2001 would be not be achieved again until around 2013. For the included downstate police funds, the almost 80% funded ratio experienced as recently as 2000 would not be achieved again until around 2016. Perhaps the only scenario in which an 80% funded ratio would be achieved significantly sooner in either fund is in the unlikely scenario where investment returns dramatically exceed assumed projections. If a 90% funded goal is desired, the downstate fire funds would need until 2023 under this scenario. The downstate police funds would need until 2025. It bears repeating that a 90% funded ratio has been placed into state statute as the target for the state-funded pension systems. Tax Levy As A Percentage of Payroll As mentioned in the Introduction, the Illinois Compiled Statutes specifically identifies the property tax as the primary revenue source for funding the downstate police and fire pension systems. Property tax levies consist of several different components levied by many local governments. The aggregate property tax bill received by a property owner reflects the amount of money requested (and permitted) to be levied by the county on behalf of the taxing districts located within the county and allowed by statute to levy a property tax for the purpose of fulfilling public purposes. Employer contribution amounts required to fund the downstate police and fire pension funds will be reflected on each property tax bill and will typically result in a tax increase on property owners as the funds become more expensive. Municipalities that do not impose a property tax must raise the necessary revenue from their citizens through other sources of taxation. 25

One way to measure the amount of money contributed by taxpayers toward funding pensions for police and fire fighters is to use the property tax levy expressed as a percentage of each respective police and fire department s payroll. This methodology provides a useful comparative tool regarding the relationship between the amount taxpayers are asked to pay for police and fire pensions and the total cost of salaries to staff a department. Each analysis of the employer contribution as a percentage of payroll serves to demonstrate a trend. In other words, a steady increase in the amount being levied by a municipality for pension purposes means that taxpayers are seeing an increase in that portion of their property tax bills devoted to police and/or fire pensions. Conversely, a decrease in the amount being levied for pension purposes can indicate a reduction for taxpayers, at least with regard to that particular portion of the property tax bill. It is important to keep in mind, however, that the tax levy as a percentage of payroll increases annually as wages rise. The tax levy as a percentage of payroll for this section of the study is based upon the levy amount recommended by the Public Pension Division of the Illinois Department of Financial and Professional Regulation. Between 1987 and 2004, the suggested tax levy as a percentage of payroll to fund the 34 downstate police pension funds, 25 downstate fire pension funds and all IMRF accounts (with social security) fluctuated as follows in Table 7: TABLE 7 Year Police Fire IMRF with SS 1987 20.80% 28.35% 13.49% 1988 22.92% 28.68% 18.37% 1989 23.40% 29.85% 17.99% 1990 22.96% 29.62% 17.80% 1991 22.08% 29.03% 18.09% 1992 18.98% 25.20% 16.78% 1993 18.37% 23.67% 16.97% 1994 18.63% 23.86% 16.39% 1995 18.82% 24.02% 16.18% 1996 18.92% 23.80% 15.81% 1997 19.03% 25.02% 15.84 1998 No Data No Data No Data 1999 19% 24.51% 14.36% 2000 20.75% 24.24% 12.84% 2001 22.93% 28.09% 12.07% 2002 25.90% 31.30% 12.42% 2003 27.26% 32.44% 14.02% 2004 28% 33.67 15.45% 26

POLICE Chart 14 graphs out the tax levy as a percentage of payroll for the 34 downstate police funds. CHART 14 Police Tax Levy as a % of Payroll POLICE - TAX LEVY AS A % OF PAYROLL 35.00% 30.00% Amortization period for unfunded liability reset to 40 years 2000 Police Pension Bill Est. Cost 2.22% of Payroll 25.00% Police IMRF & SS 20.00% 15.00% 10.00% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 The trend line indicates that the tax levy as a percentage of payroll for the downstate police funds declined between 1989 and 1993 and remained fairly steady through 1999. During these years, the funds benefited from re-amortization in 1993 (adding approximately 13.5 years to fund the shortfall), better market returns in the late 1990s and the lack of any significant pension benefit increases. Between 1999 and 2004, however, the tax levy as a percentage of payroll grew 9% following lower investment returns (below an actuarially assumed amount of 7%) between 2000 and 2002 and a significant increase in benefits granted by the Illinois General Assembly in 2000 for police officers. 27

Chart 15 provides a comparison between suggested employer and actual employee contribution rates for the police funds from 1987-2004. Employee contribution rates remained mostly static and under 10% of payroll during the seventeen-year period while employer rates experienced some fluctuation before rising considerably between 1999 and 2004. The chart demonstrates that employers and taxpayers carry the most significant financial burden to maintain the fiscal solvency of the funds. CHART 15 DOWNSTATE POLICE EMPLOYER AND EMPLOYEE CONTRIBUTIONS DOWNSTATE POLICE EMPLOYER AND EMPLOYEE CONTRIBUTIONS AS % AS OF % OF PAYROLL 30% 25% 20% 15% Employer Contribution Police Contribution 10% 5% 0% 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 FIRE Chart 16 graphs out the tax levy as a percentage of payroll for the 25 downstate fire funds. CHART 16 TAX LEVY AS A % OF PAYROLL Tax Levy as a % of Payroll 35.00% 30.00% 1993 Fire Pension Bill - Est. Cost 1.535% of Payroll 1999 Fire Pension Bill - Est. Cost 1.51% of Payroll 25.00% 20.00% Amortization period for unfunded liability reset to 40 years 2004 Fire Pension Bill - Est Cost 5.63% of Payroll Fire IMRF & SS 15.00% 10.00% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 28

The trend line indicates that the tax levy as a percentage of payroll for the fire funds declined between 1989 and 1993 and remained fairly steady through 2000. During these years, the funds benefited from re-amortization in 1993 (adding approximately 13.5 years to fund the shortfall) and better investment returns in the late 1990s. 1993 saw the passage of a pension benefit increase that did not appear to have an immediate impact on the tax levy as a percentage of payroll. It is interesting to note that the tax levy as a percentage of payroll for these 25 downstate fire funds runs several percentage points above the tax levy as a percentage of payroll for the 34 downstate police funds over the seventeen year study period. This can be seen in Chart 17. CHART 17 TAX LEVY AS A% OF PAYROLL Tax Levy as a % of Payroll 40.00% 35.00% 30.00% 25.00% 20.00% Fire Police IMRF/SS 15.00% 10.00% 5.00% 0.00% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 The difference indicates that there is a greater cost to employers to fund the fire pension benefits. Between 2000 and 2004 the tax levy as a percentage of payroll for the downstate fire funds rose 9.43% a 38% increase following lower investment returns (below an actuarially assumed amount of 7%) between 2000 and 2002 along with two significant increase in benefits granted by the Illinois General Assembly in 1999 and 2004. x 29

Chart 18 provides a comparison between suggested employer and actual employee contribution rates for the fire funds from 1987-2004. Employee contribution rates remained mostly static and under 10% of payroll during the seventeen-year period while employer rates experienced some fluctuation before rising considerably between 2000 and 2004. The chart demonstrates that employers and taxpayers carry the most significant financial burden to maintain the fiscal solvency of the funds. CHART 18 40% DOWNSTATE FIRE CONTRIBUTION RATES DOWNSTATE FIRE CONTRIBUTION RATES AS % OF PAYROLL AS % OF PAYROLL 35% 30% 25% 20% 15% 10% Fire Fighter Contributions Employer Contribution 5% 0% 2003 2001 1999 1997 1995 1993 1991 1989 1987 IMRF Chart 12 shows that the funded ratio for IMRF went from a surplus of 107.20% in 2000 to 94.30% in 2004. This constitutes a decline of almost 14% during this time period. It should be noted, however, that IMRF stood at 61.10% funded in 1987 and has therefore seen an increase in its overall funded ratio of 54% over seventeen years while the downstate police and fire funds were experiencing a decline in their aggregate funded ratios during the same period. Charts 14, 16 and 17 also graph out the tax levy as a percentage of payroll for all IMRF accounts along with what the employers levy for Social Security. The trend line indicates that the tax levy as a percentage of payroll actually declined between 1988 and 2001. The increase of 28% between 2001 and 2004 can largely be attributed to the market decline that occurred between 2000 and 2002, as there were no pension benefit increases coinciding with that period of time. The tax levy as a percentage of payroll runs well behind both that associated with the downstate police and downstate fire funds. IMRF benefits are less generous than those offered by the downstate police and fire plans and have not been increased significantly in recent years. 30

Chart 19 provides a comparison between employer and employee contribution rates for all IMRF accounts from 1987-2004. Employee contribution rates remained completely static at 4.5% of payroll during the seventeen-year period while employer rates experienced some fluctuation before rising considerably between 2000 and 2004. The chart demonstrates that employers and taxpayers carry the most significant financial burden to maintain the fiscal solvency of the funds. CHART 19 IMRF CONTRIBUTION RATES AS % OF PAYROLL IMRF CONTRIBUTION RATES AS % OF PAYROLL 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Employer Contribution Employee Contribution Data For Each Of The 59 Funds The following section provides the important 2004 data (with a few exceptions when the latest data available was 2003) for each of the 34 police and 25 fire funds under analysis. Table 8 looks at the police funds while Table 9 shows the fire funds. Most municipalities levy a property tax, but some do not. For this reason, the IDFPR suggested tax levy percentage increases have been expressed within the following tables as general cost increases as a percentage of payroll. 31

TABLE 8 POLICE (Dollar Amounts Rounded) Municipality Net Present Assets Total Accrued Liabilities Unfunded Liability Funded Ratio 2004 IDFPR Suggested Tax Levy Cost Increase As Cost Increase % % Of Payroll 1987-2004 Barrington 13,700,000 19,400,000 5,800,000 70.40% 600,000 25.93% 466% Bellwood 19,100,000 29,500,000 10,400,000 64.80% 800,000 36.90% 276% Bolingbrook 27,700,000 44,700,000 17,000,000 61.80% 1,800,000 25.53% 412% Carbondale 14,700,000 24,900,000 10,200,000 59.10% 800,000 31.51% 268% Chicago Ridge 10,000,000 18,500,000 8,400,000 54.30% 700,000 34.57% 380% Edwardsville 8,400,000 12,000,000 3,600,000 69.90% 400,000 23.57% 269% Elk Grove Village 38,700,000 53,900,000 15,200,000 71.80% 1,500,000 24.17% 338% Forest Park 16,100,000 22,100,000 6,000,000 73% 600,000 26.37% 154% Hoffman Estates 36,300,000 56,000,000 19,700,000 64.80% 1,800,000 27.05% 315% Homewood (2003) 16,200,000 22,900,000 6,700,000 70.60% 600,000 27.19% 407% Lake in the Hills 8,000,000 9,900,000 1,900,000 81.10% 400,000 19.36% 842% Lisle 11,800,000 16,200,000 4,300,000 73.30% 500,000 22.01% 326% Lombard 29,500,000 47,000,000 17,500,000 62.70% 1,500,000 30.49% 318% McHenry 12,000,000 19,000,000 7,000,000 63.10% 700,000 26.74% 363% Midlothian 10,100,000 11,800,000 1,700,000 85.50% 260,000 21.11% 114% Mount Prospect 35,200,000 56,200,000 20,900,000 62.70% 1,700,000 30.78% 339% Naperville 48,800,000 71,600,000 22,800,000 68.20% 2,700,000 22.82% 687% New Lenox 5,400,000 7,800,000 2,400,000 69.70% 400,000 21.39% 374% North Lake 11,000,000 15,000,000 4,000,000 73.10% 500,000 24.72% 428% Oak Brook 23,800,000 29,500,000 5,800,000 80.50% 600,000 24.03% 195% Oak Forest 15,000,000 23,400,000 8,400,000 64.10% 700,000 29.82% 233% Peoria 120,500,000 170,400,000 49,900,000 70.70% 4,200,000 31.51% 85% Riverside 8,000,000 14,200,000 6,200,000 56.60% 500,000 33.48% 127% Rock Island 22,500,000 49,500,000 27,000,000 45.40% 1,800,000 41.15% 113% Rockford 142,100,000 187,700,000 45,600,000 75.70% 4,500,000 25.98% 124% Roselle 11,600,000 20,000,000 8,400,000 57.80% 700,000 30.86% 252% Schaumburg 53,200,000 84,500,000 31,300,000 63% 2,700,000 30.41% 271% Skokie 64,100,000 83,500,000 19,400,000 76.70% 1,800,000 26.73% 90% Springfield 75,400,000 135,000,000 59,600,000 55.80% 4,800,000 32.87% 182% Westmont 15,800,000 28,700,000 12,900,000 55.10% 1,000,000 33.31% 207% Wilmette 23,800,000 33,700,000 9,900,000 70.50% 900,000 27.71% 197% Winnetka 16,500,000 20,900,000 4,400,000 78.80% 500,000 25.48% 86% Wood Dale 12,000,000 17,200,000 5,200,000 69.80% 500,000 24.39% 463% Woodstock (2003) 7,400,000 13,000,000 5,600,000 57.10% 500,000 28.68% 128% 32

TABLE 9 FIRE (Dollar Amounts Rounded) Municipality Net Present Assets Total Accrued Liabilities Analysis of Select Individual Funds Unfunded Liability Funded Ratio 2004 IDFPR Suggested Tax Levy Cost Increase As % Of Payroll Barrington 2,900,000 3,900,000 1,000,000 74.10% 500,000 25.53% Cost Increase % Increase 1987-2004 162% (1997-2004) Bellwood 15,900,000 19,500,000 3,600,000 81.50% 500,000 30.43% 199% Bolingbrook 24,900,000 37,300,000 12,400,000 66.80% 1,700,000 30.57% 397% Carbondale 10,400,000 16,300,000 5,900,000 63.70% 500,000 41.79% 141% Chicago Ridge 3,600,000 6,600,000 3,000,000 54.30% 400,000 31.61% 859% Edwardsville 8,500,000 8,900,000 400,000 95.30% 200,000 23.78% 71% Elk Grove Village 45,300,000 59,500,000 14,200,000 76.20% 1,800,000 32.17% 218% Forest Park 12,400,000 16,900,000 4,500,000 73.40% 500,000 35.31% 110% Hoffman Estates 40,700,000 51,200,000 10,400,000 79.60% 1,800,000 28.05% 354% Homewood (2003) 5,300,000 6,700,000 1,300,000 80.03% 300,000 25.96% 360% Lombard 22,400,000 30,000,000 7,600,000 74.70% 1,300,000 28.44% 434% Midlothian 6,000,000 7,400,000 1,500,000 80.20% 300,000 28.94% 227% Mount Prospect 36,300,000 53,200,000 16,900,000 68.20% 1,800,000 35.75% 313% Naperville 48,300,000 65,400,000 17,000,000 73.90% 3,400,000 27.72% 896% Oak Brook 19,300,000 26,200,000 6,900,000 73.80% 800,000 35.04% 231% Oak Forest 8,400,000 10,800,000 2,500,000 77.20% 400,000 27.87% 290% Peoria 94,400,000 139,800,000 45,400,000 67.50% 4,400,000 38.23% 89% Rockford 128,000,000 182,800,000 54,800,000 70% 5,600,000 36.23% 108% Rock Island 21,800,000 41,400,000 19,600,000 52.60% 1,500,000 49.27% 76% Roselle 1,900,000 2,100,000 200,000 90.10% 200,000 23.21% 629% (1992-2004) Schaumburg 53,900,000 84,500,000 30,500,000 63.90% 3,400,000 35.19% 240% Skokie 58,700,000 82,400,000 23,700,000 71.30% 2,600,000 35.16% 132% Springfield 69,700,000 134,700,000 65,000,000 51.80% 5,300,000 45.97% 173% Wilmette 24,700,000 36,200,000 11,500,000 68.30% 1,100,000 36.41% 148% Winnetka 14,400,000 20,100,000 5,700,000 71.60% 570,000 36.15% 61% The same methodology used to examine the 34 police and 25 fire funds in the aggregate to determine the relationship between the funds and what taxpayers are being asked to contribute can be used in looking at individual funds. Once again, each analysis of the suggested tax levy as a percentage of payroll serves to demonstrate a trend that ultimately reveals the impact on taxpayers of the costs to fund police and/or fire pensions. The following examples were selected to demonstrate the variance with regard to the financial health of individual municipal police and fire pension funds and how taxpayers are likely being affected. 33

The first four funds analyzed two each for police and fire are comparatively stable. This simply means that, when examined among the pool of 59 funds, they appear fiscally steady at the moment. This is not to suggest that these funds are not becoming more expensive, only that they do not appear to have trend indicators that are alarming or fluctuating wildly at present. LAKE IN THE HILLS POLICE PENSION FUND Chart 20 graphs out the tax levy as a percentage of payroll along with the funded ratio for the Lake in the Hills police pension fund. The trend line indicates that the tax levy as a percentage of payroll remained remarkably steady between 1987 and 2004. After starting out at approximately 19.19% in 1987 it actually dropped to a low of 16.01% in 1994, the year following the re-amortization legislation that added an additional 13.5 years to fund the pensions. From 1994 to 2004, the tax levy as a percentage of payroll trended upward and was at 19.36% in 2004 an almost insignificant increase from 1987. Keep in mind that even a level trend means that taxpayers are facing an increase in property taxes because the trend remains a percentage ratio of the overall payroll, which increases annually. CHART 20 140.0% LAKE IN THE HILLS POLICE PENSION FUND Lake in the Hills Police Pension Fund 130.0% 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% % Funded Levy% PR 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1987 1988 1989 1990 1991 1992 1994 1995 1996 1997 1999 2000 2001 2002 2003 2003 2004 2005 The trend line also indicates that the funded ratio remained steady between 1987 and 2004. After reaching an apex of 87% funded in 1999, the funded level dropped to 75% in 2002 following the police pension increase of 2000 and the 2000-2002 market decline. By 2004, the funded ratio stood at 81.1% 1.7% higher than where it stood in 1987. 34

While not charted, the total unfunded liability for the Lake in the Hills police pension fund grew almost ten times from $188,544 in 1987 to $1,869,067 in 2004 an increase of almost 900%. Despite the problems and cause for concern evident with this rapidly growing unfunded liability that will have to be made up for in the future, the Lake in the Hills police pension fund appears comparatively stable at the moment when analyzed among the other 58 funds. The indicators, however, reveal a fund that has in recent years become more expensive in real dollars. MIDLOTHIAN POLICE PENSION FUND Chart 21 graphs out the tax levy as a percentage of payroll along with the funded ratio for the Midlothian police pension fund. The trend line indicates that the tax levy as a percentage of payroll experienced significant fluctuation between 1987 and 2004. After starting out at 20.57% in 1987 it actually dropped to a low of 5.15% in 2000. From 2000 to 2004, the tax levy as a percentage of payroll trended upward and was at 21.11% in 2004 an increase of about half a percent over 1987. Keep in mind that the trend remains a percentage ratio of the overall payroll, which increases annually. CHART 21 MIDLOTHIAN Midlothian POLICE Police Pension PENSION FundFUND 140.0% 130.0% 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% % Funded Levy% PR 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1999 2000 2002 2003 2004 2005 The trend line also indicates that the funded ratio varied widely between 1987 and 2004. After reaching an apex of 116.5% funded in 1999, the funded level dropped to 85.5% in 2004 following the police pension increase of 2000 and the 2000-2002 market decline. This is certainly an acceptable funded percentage, but demonstrates a rapid reduction of 31% over five years that should provide some cause for concern. 35

While not charted, the total unfunded liability for the Midlothian police pension fund grew approximately three-and-a-half times from $479,097 in 1987 to $1,712,665 in 2004 an increase of over 250%. Like the Lake in the Hills police pension fund, the Midlothian police pension fund also appears comparatively stable at the moment when analyzed among the other 58 funds. The percentage growth in unfunded liability for the Midlothian fund is actually running significantly behind the increase in unfunded liability experienced by the Lake in the Hills police fund. WINNETKA FIRE PENSION FUND Chart 22 graphs out the tax levy as a percentage of payroll along with the funded ratio for the Winnetka fire pension fund. The trend line indicates that the tax levy as a percentage of payroll saw some fluctuation between 1987 and 2004. After starting out at approximately 48.65% in 1987 it actually dropped to a low of 26.70% in 1997. From 1998 to 2004, the tax levy as a percentage of payroll trended upward and was at 36.15% in 2004 an actual reduction of 35% from 1987. Keep in mind that even a reduction can mean that taxpayers are facing an increase in property taxes because the trend remains a percentage ratio of the overall payroll, which increases annually. CHART 22 140.0% WINNETKA FIREFIGHTERS PENSION FUND Winnetka Firefighters Pension Fund 130.0% 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% % Funded Levy% PR 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1987 1988 1989 1990 1991 1992 1993 1994 1997 1999 2000 2001 2002 2003 2004 2005 The trend line also indicates that the funded ratio fluctuated between 1987 and 2004. After reaching an apex of 81.2% funded in 1997, the funded level dropped to 70.1% in 2003, coinciding with the fire pension increase of 1999 and the 2000-2002 market decline. By 2004, the funded ratio stood at 71.6% 21% higher than where it stood in 1987. 36

While not charted, the total unfunded liability for the Winnetka fire pension fund approximately doubled from $2,772,071 in 1987 to $5,713,014 in 2004 an increase of over 100%. The Winnetka fire pension fund appears comparatively stable at the moment when analyzed among the other 60 funds. PEORIA FIRE PENSION FUND Chart 23 graphs out the tax levy as a percentage of payroll along with the funded ratio for the Peoria fire pension fund. The trend line indicates that the tax levy as a percentage of payroll saw a slight degree of fluctuation between 1987 and 2004. After starting out at approximately 42.13% in 1987 it actually dropped to a low of 30.10% in 1993. From 1999 to 2004, the tax levy as a percentage of payroll trended upward and was at 38.23% in 2004 an actual reduction of 10% since 1987. Keep in mind that even a reduction can mean that taxpayers are facing an increase in property taxes because the trend remains a percentage ratio of the overall payroll, which increases annually. CHART 23 140.0% PEORIA FIREFIGHTERS PENSION FUND Peoria Firefighters Pension Fund 130.0% 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% % Funded Levy% PR 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 2000 2002 2003 2004 2005 The trend line also indicates that the funded ratio fluctuated between 1987 and 2004. After reaching an apex of 72.9% funded in 1989, the funded level dropped to 62.4% in 2002, coinciding with the fire pension increase of 1999 and the 2000-2002 market decline. By 2004, the funded ratio stood at 67.5% 3% lower than where it stood in 1987. While not charted, the total unfunded liability for the Peoria fire pension fund almost tripled from $15,538,928 in 1987 to $45,396,527 in 2004 an increase of almost 200%. The Peoria fire pension fund appears comparatively stable at the moment when analyzed among the other 58 funds. 37

The final four funds analyzed two each for police and fire exhibit signs of fiscal duress. This means that they are evidencing one or more of the following traits significantly declining funded ratios, significantly increasing suggested property tax levies as a percentage of payroll or a significant growth in unfunded liability compared to more stable funds. CHICAGO RIDGE POLICE PENSION FUND Chart 24 graphs out the tax levy as a percentage of payroll along with the funded ratio for the Chicago Ridge police pension fund. CHART 24 140.0% CHICAGO RIDGE Chicago POLICE Ridge Police PENSION Pension Fund FUND 130.0% 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% % Funded Levy% PR 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1987 1988 1989 1990 1991 1992 1993 1994 1996 1997 1999 2000 2001 2002 2003 2004 The trend line indicates that the tax levy as a percentage of payroll has been growing significantly since 1993. After starting out at 23.55% in 1987 it actually dropped to a low of 19.30% in 1992. From 1993 to 2004, the tax levy as a percentage of payroll trended upward and was at 34.57% in 2004 an increase of 47% over 1987. After holding relatively stable during those years between 1996 and 1999 for which data was available, the tax levy as a percentage of payroll increased by 28% between 2000 and 2004, coinciding with the 2000 downstate police pension increase and the 2000-2002 market decline. Keep in mind that the trend remains a percentage ratio of the overall payroll, which increases annually. The trend line also indicates that the funded ratio decreased significantly between 1987 and 2004. After reaching an apex of 84.7% funded in 1993, the funded level dropped to 54.3% in 2004 a decline of 56% over eleven years. The funded ratio dropped 14.2% between 2000 and 2004 alone, coinciding with the police pension increase of 2000 and the 2000-2002 market decline. Unlike some of the funds analyzed previously, the funded ratio for the Chicago Ridge police fund is at present exceedingly low. 38

While not charted, the total unfunded liability for the Chicago Ridge police pension fund increased more than twelve times from $679,375 in 1987 to $8,440,713 in 2004 an increase of over 1100%. This is a significant increase in unfunded liability that will have to be made up at some point in the future. BELLWOOD POLICE PENSION FUND Chart 25 graphs out the tax levy as a percentage of payroll along with the funded ratio for the Bellwood police pension fund. The trend line indicates that the tax levy as a percentage of payroll has been growing precipitously since reaching a low in 1999. After starting out at 19.68% in 1987 it actually dropped to 13.02% in 1999. Between 2000 and 2004, the tax levy as a percentage of payroll climbed upward sharply and was at 36.90% in 2004 an increase of 88% over 1987. The tax levy as a percentage of payroll increased by 183% between 1999 and 2004, coinciding with the 2000 downstate police pension increase and the 2000-2002 market decline. Keep in mind that the trend remains a percentage ratio of the overall payroll, which increases annually. The trend line also indicates that the funded ratio decreased significantly between 1987 and 2004. After reaching an apex of 102.5% funded in 1999, the funded level dropped to 64.8% in 2004 a decline of 58% over five years. This decrease coincided with the police pension increase of 2000 and the 2000-2002 market decline. The rapidness of the funding decline appears to be quite significant. While not charted, the total aggregate unfunded liability for the Bellwood police pension fund grew almost twelve times from $896,471 in 1987 to $10,400,879 in 2004 an increase of almost 1100%. This is a significant increase in unfunded liability that will have to be made up at some point in the future. CHART 25 BELLWOODBellwood POLICE Police PENSION Pension Fund FUND 140.0% 130.0% 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% % Funded Levy% PR 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2005 39

SPRINGFIELD FIRE PENSION FUND Chart 26 graphs out the tax levy as a percentage of payroll along with the funded ratio for the Springfield fire pension fund. The trend line indicates that the tax levy as a percentage of payroll has been growing precipitously following 1997. After starting out at 37.14% in 1987 it actually dropped to 28.00% in 1993. Between 1999 and 2004, the tax levy as a percentage of payroll climbed upward sharply and was at 45.97% in 2004 an increase of 24% over 1987. The tax levy as a percentage of payroll increased by 56% between 1997 and 2004, a period both immediately preceding and coinciding with the 1999 downstate fire pension increase and the 2000-2002 market decline. Keep in mind that the trend remains a percentage ratio of the overall payroll, which increases annually. The trend line also indicates that the funded ratio decreased significantly between 1987 and 2004. After reaching an apex of 75.3% funded in 1994, the funded level dropped to 51.8% in 2004 a decline of 45% over ten years. This decrease occurred during a period both immediately preceding and coinciding with the fire pension increase of 1999 and the 2000-2002 market decline. The rapidness of the funding decline appears to be quite significant. This chart is most remarkable because of the convergence of the funded ratio and tax levy as a percentage of payroll at about the 50% line. This convergence constitutes both a low-level of funding and a high-suggested property tax levy. While not charted, the total aggregate unfunded liability for the Springfield fire pension fund grew almost six times from $11,430,202 in 1987 to $64,960,378 in 2004 an increase of almost 500%. This demonstrates significant growth in unfunded liability that will have to be addressed before it increases further. CHART 26 SPRINGFIELD FIREFIGHTERS Springfield Firefighters PENSION Pension FundFUND 140.0% 130.0% 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% % Funded Levy% PR 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 2000 2001 2002 2003 2004 2005 40

ROCK ISLAND FIRE PENSION FUND Chart 27 graphs out the tax levy as a percentage of payroll along with the funded ratio for the Rock Island fire pension fund. This particular fund appeared to be experiencing fiscal problems in 1987 that have since become even more daunting. The trend line indicates that the tax levy as a percentage of payroll has been growing precipitously following 1993. After starting out at 47.05% in 1987 it actually dropped to 33.43% in 1993. Between 1994 and 2004, the tax levy as a percentage of payroll climbed upward and was at 49.27% in 2004 an increase of almost 5% over 1987. The tax levy as a percentage of payroll increased by 15.83% between 1993 and 2004. The tax levy as a percentage of payroll increased by 9.62% between 1999 and 2004 alone a period both immediately preceding and coinciding with the 1999 downstate fire pension increase and the 2000-2002 market decline. Keep in mind that the trend remains a percentage ratio of the overall payroll, which increases annually. The trend line also indicates that the funded ratio fluctuated significantly between 1987 and 2004. After reaching an apex of 70.2% funded in 1992, the funded level dropped to 51.5% in 1996 before increasing to 64.1% in 2000 and then dropping to 52.6% in 2004 a decline of 33% over the twelve years since the high in 1992. The four years between 2000 and 2004 saw a decline in the funded ratio of 22%. This decrease occurred during a period coinciding with the fire pension increase of 1999 and the 2000-2002 market decline. As was the case with the Springfield fire pension fund, this chart is most remarkable because of the near convergence between the funded ratio and tax levy as a percentage of payroll at about the 50% line. This convergence constitutes both a low-level of funding and a high-suggested property tax levy. CHART 27 ROCK ISLAND FIREFIGHERS PENSION FUND Rock Island Firefighters Pension Fund 140.0% 130.0% 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% % Funded Levy% PR 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1987 1988 1989 1990 1991 1992 1993 1994 1996 1997 1999 2000 2001 2002 2003 2004 2005 While not charted, the total aggregate unfunded liability for the Rock Island fire pension fund increased over 3 times from $6,174,345 in 1987 to $19,599,097 in 2004 an increase of over 200%. 41

42

PUBLIC SAFETY BENEFITS WHERE DOES ILLINOIS RANK AMONG 55 PLANS? The following section seeks to compare the Illinois downstate police and fire pension benefits with benefits offered for public safety employees in other statewide municipal plans. The following section ranks each plan by the generosity of a 30-year pension payment and segregates the various plans into useful categories: Retirement Plans As Determined By Pension Calculation Method Traditional DB Calculation (Illinois Comparables) 1. Louisiana 2. California 3. Minnesota 4. Iowa 5. New Mexico 6. Alaska 7. Illinois 8. Wisconsin Fire 9. Rhode Island 20 Year 10. New Hampshire 11. Nevada 12. Montana 13. Missouri 14 Michigan 15. Kentucky 16. Kansas 17. Hawaii 18. Wyoming Police 19. Alabama 20. New Jersey 21. Ohio 22. Utah 23. Colorado 24. Arizona 25. Arkansas 26. Wyoming Fire 27. Delaware 28. Massachusetts 29. South Carolina 30. Oklahoma 31. Mississippi 32. West Virginia 33. Wisconsin Police 34. South Dakota 35. Rhode Island 25 Year 36. North Dakota 37. Maine 38. Florida 39. Idaho 40. Washington 41. North Carolina Police 42. Oregon 43. Indiana 44. Virginia 45. Vermont 46. New York 47. Tennessee 48. Maryland Alternative Calculations 49. Georgia Police* 50. Georgia Fire* 51. North Carolina Fire (Volunteer)** 52. Texas** Separate And Individual Plans 53. Connecticut** 54. Nebraska** 55. Pennsylvania** *Included Among Comparable Plans Regarding 30-Year Pension Estimates And Post-Survivor Retirement Benefits **Excluded From Bar Graph 43

Methodology The section of the study is the result of looking at 55 different statewide public safety pension plans (including Illinois). 50 of those plans are structured in a manner comparable to the downstate police and fire plans in Illinois in that they employ a formula for the determination of final pension. These 50 plans were used in comparing the 30-year public safety pension benefits with those in Illinois. Five states were excluded from the formula comparison because their plans were either for volunteer firefighters (North Carolina), utilized defined contribution elements (Texas) or allowed each municipality to design and offer their own autonomous plans (Connecticut, Nebraska and Pennsylvania). Information was obtained from pension plan handbooks and direct contact with pension fund administrators when necessary. In comparing pension formulas there were instances where multiple plan options were available. Either the most generous options or the most common options were incorporated into the comparison. The particular benefits compared are benefits that exist in common within the Illinois downstate police and firefighter plans. A salary table was created assuming a starting salary of $25,000 at age 22 and a final salary of $60,681 at age 52. Salaries were adjusted upward each year by 3%. Holding the age and salary assumptions constant allowed for the differences in the formulas to become manifest. Prior to undertaking this comparison study, existing studies that compared public safety plans among systems comparable to the downstate police and fire plans were sought unsuccessfully. This segment of the study represents a starting point in that it is an initial study of various state benefit systems and is therefore subject to modification in the event that contrary information or additional benefit changes arise. Updates or modifications will be provided as needed in the event that new information would enhance the value of the comparison. In addition to the pension formulas, the study compares the salary factor used by the 48 comparable plans that use a traditional defined benefit formula consisting of years of service x creditable service x salary (the two Georgia plans that round out the top 50 plans assign a set dollar value to each year of employment and are therefore excluded from the salary factor analysis). The study also compares post-retirement survivor benefits among 50 comparable plans. The study concludes by comparing the retirement formulas of the major government defined benefit plans in Illinois based upon a monthly payout at 30 years of service. 44

Key Findings It is estimated that Illinois offers the 7th most generous 30-year pension payout when compared among 50 different statewide municipal public safety defined benefit plans (Chart 28). CHART 28 PUBLIC SAFETY 30-YEAR MONTHLY SERVICE RETIREMENT PENSION COMPARISON PLANS OF STATEWIDE DEFINED BENEFIT PLANS $5,000 $4,000 $3,000 $2,000 $1,000 GA - Police GA - Fire TN NY VT VA IN OR NC - Police WA FL ME ND RI - 25 SD WV WI - Police MD MS SC MA DE WY - Fire ID AR AZ CO UT OH NJ AL WY - Police HI KS KY MI MO MT NV NH RI - 20 WI - Fire OK ILLINOIS AK NM IA MN CA LA $0 45

It is estimated that Illinois municipal police and firefighter pensioners receive approximately $533 more per month at 30 years of service than an average of the pensions received over the same period by public safety personnel over 50 different statewide municipal public safety defined benefit plans (Chart 29). CHART 29 COMPARISON OF AVERAGED 30-YEAR COMPARISON OF AVERAGED 30-YEAR MONTHLY MONTHLY PENSION AMONG 50 50 PLANS PLANS $4,000 $3,000 $2,000 Illinois Average DB 30-Year Pension Illinois offers the 3rd most generous 30-year pension payout when compared among the 16 different mid-western statewide municipal public safety defined benefit plans (Chart 30). CHART 30 STATES 30-YEAR POLICE AND FIRE MONTHLY PENSION COMPARISON AMONG 16 MIDWESTERN STATES $4,000 $3,500 $3,000 $2,500 $2,000 TN IN SD ND WI - Police AR OH WI - Fire MI KS KY MO OK IL IA MN 46

Illinois municipal police and firefighter pensioners receive approximately $352 more per month at 30 years of service than an average of the pensions received over the same period by public safety personnel over 16 different mid-western statewide municipal public safety defined benefit plans (Chart 31). CHART 31 STATES WITH COMPARABLE BENEFIT DEFINED PLANS BENEFIT PLANS $4,000 $3,500 $3,000 $2,500 $2,000 Illinois Other Midwestern States Illinois offers the 2nd most generous 30-year pension payout when compared with 7 other border state statewide municipal public safety defined benefit plans. (Chart 32) CHART 32 30-YEAR MONTHLY PENSION ILLINOIS COMPARISON BORDER STATES FOR POLICE AND FIRE AMONG ILLINOIS BORDER STATES $4,000.00 $3,500.00 $3,000.00 $2,500.00 IA IL MO KY MI WI - Fire WI - Police IN 47

Illinois municipal police and firefighter pensioners receive approximately $276 more per month at 30 years of service than an average of the pensions received over the same period by public safety personnel in the 7 different border states statewide municipal public safety defined benefit plans (Chart 33). CHART 33 AVERAGE 30-YEAR 30-YEAR MONTHLY PENSION COMPARED COMPARED ACROSS ACROSS 16 MIDWESTERN 16 MIDWESTERN STATES STATES WITH COMPARABLE DEFINED WITH COMPARABLE DEFINED BENEFIT PLANS BENEFIT PLANS $4,000 $3,500 $3,000 $2,500 $2,000 Illinois Other Midwestern States The Illinois municipal police and fire pension formula is the only formula among 48 comparable plans that calculates a retirement pension by using an employee s final day s salary. 47 plans require an average final salary smoothing mechanism that, if applied in Illinois, would reduce the pension. The Illinois municipal police and fire plan is one of only three plans that allow the surviving spouse to continue receiving the full pension benefit upon the death of the retiree without requiring the retiree to take a reduction in pension benefits. 48

The Illinois municipal police and fire pension plans are tied for the 4th highest 30-year retirement payout among 21 major Illinois public pension plans. Only the Judges, General Assembly and SERS alternative (w/o social security) formulas are more generous. The SERS plans provide different benefit levels depending on whether or not an employee is eligible for Social Security. For purposes of the comparison in Chart 34, SERS has 4 plans. Two regular formula plans (one with Social Security and one without) and two alternative formula plans (one with Social Security and one without). CHART 34 30-YEAR MONTHLY PENSION COMPARISON AMONG AMONG ILLINOIS ILLINOIS DEFINED DEFINED BENEFIT BENEFIT PENSION PENSION PLANS PLANS $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 SERS w SS IMRF Chicago Park Dist. SERS w/o SS Chicago Laborers TRS Cook Forest Preserve Cook County Emp. Chicago Municipal Chicago Teachers SURS General MWRD SLEP Chicago Fire Chicago Police Downstate Police Downstate Fire SERS Alt/SS SERS Alt/No S.S. General Assembly Judges 49