McHenry County towns try to tackle climbing fire, police pension payments

H. Rick Bamman - hbamman@shawmedia.com
Some area police pensions are underfunded according a report recently released by the Commission on Government Forecasting and Accountability.
H. Rick Bamman - hbamman@shawmedia.com Some area police pensions are underfunded according a report recently released by the Commission on Government Forecasting and Accountability.

A sizable chunk – nearly 14 percent – of Fox River Grove's general fund budget is set to go to police pensions this year.

But the Village Board has decided to pay about $1.2 million in addition to the $341,000 the village-hired actuary says is needed in order to meet its pension obligations, Village Administrator Derek Soderholm said.

The goal is to get the pension fund over the $2.5 million, the threshold for investing in more lucrative and riskier funds, so that the village's annual pension payments don't climb as quickly.

Fox River Grove isn't the only village looking for new ways to get their pension costs under control.

Voters in Spring Grove will decide April 7 whether to raise their property taxes by a collective $338,000 to cover pension costs. The village took the issue to the voters after pension payments were estimated to climb 204 percent from 2011 to 2016.

The two villages are among the eight McHenry County municipalities that have seen the funding ratio – the percentage of pension liability the village could pay for that day – decline from 2008 to 2013, according to the Commission on Government Accountability and Forecasting's 2015 update on the state's police and fire pensions. (Seventeen McHenry County municipalities have police pensions.)

A state law passed in 2010 requires local governments to have 90 percent of their pension obligations funded by 2040.

The real issue, Crystal Lake Finance Director George Koczwara said, is whether the city can meet 100 percent of its obligations.

"A common analogy to pension funding levels are mortgages," he said. "Just like most people do not pay off a mortgage in a single year ... pension funding is a multi-decade process as well."

The city of Crystal Lake was 57 percent funded in 2013, according to Department of Insurance calculations. (Municipalities have their own internal funding ratios calculated by independent actuaries.)

But as far Koczwara knows, the city always has funded pensions at the level recommended by the actuary.

That's also true for the village of Lake in the Hills as far as Finance Director Rich Hentschel is aware, he said.

Lake in the Hills' police pension is 79 percent funded, the highest in the county, according to the Commission on Government Accountability and Forecasting report.

Each group of employees and retirees is different, and these differences – demographics, funding history, number of disabilities and deaths – can dramatically change the funding ratio, Hentschel said.

Many municipalities also levy separately for pensions, a separate line item showing up in property tax bills. When Fox River Grove created its line item, it had to pull the money from the general fund levy, cutting into the money it had to spend on the other services it provides, Soderholm said.

Investment returns, interest rates and benefit increases can also significantly impact funding levels, according to an American Academy of Actuaries July 2012 report.

"Higher funded ratios are to be expected following periods of strong economic growth and investment returns such as at the end of the 1990s," the report said. "Lower funded ratios are to be expected after recessions or years of poor investment returns such as the economic downturn that began in 2008."

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