Illinois’ consolidation of suburban and downstate police firefighter pension fund assets cleared a second legal hurdle but it could take a decision from the Illinois Supreme Court to clear the path for full participation in the plan.

Kane County Circuit Court Judge Robert Villa last May upheld the law and an appellate court this week affirmed the decision.  A lawyer for the plaintiffs said Friday they plan to ask the Illinois Supreme Court to hear the case.

Nearly all firefighter funds have transferred their assets while 90% of police funds have done so amid the litigation.

Gov. J.B. Pritzker won legislative approval in November 2019 to require the more than 600 local government police and firefighter funds outside of Chicago to transfer their assets to a single consolidated police fund and a single fire fund by July 1, 2022.

Backers say the change cuts costs, raises investment prospects, and should, in turn, reduce some of the unfunded liabilities that weigh on local government balance sheets. Benefits continue to be managed by local boards.

Some funds and their advocacy organizations resisted the change and a group of police funds sued. They argued the law violated the state constitution on multiple fronts, including the air-tight pension clause that protects pensions from being “impaired” or “diminished.”

“The Illinois Police Officer’s Pension Investment Fund is pleased that the Illinois Appellate Court for the Second District has ruled that Public Act 101-0610” is constitutional, the consolidated police fund said in a statement.

To date, 326 of the 357 local government police funds have transferred $9 billion assets to the IPOPIF consolidated fund. Of the 31 funds that still need to complete the asset transfer, 15 are the litigant funds still under the Kane County Circuit Court’s stay order, according to the statement. At the time of the May ruling, only 46 plans with $1 billion in assets had made the transfer.

Nearly $10 billion of police public pension assets are held by suburban and downstate governments. With local governments drowning in pension-related debt, the state legislation that created a single police fund and a single firefighters’ fund set a deadline that has passed, but it does not impose penalties for missing it. Chicago has its own police and firefighter funds and was not part of the legislation.

“There is the possibility that the plaintiffs will appeal to the Illinois Supreme Court,” the statement from IPOPIF said. “As we await the plaintiffs’ decision on doing so, the IPOPIF team will remain a transparent, trusted and financially responsible steward of the pension assets entrusted to our care and we will diligently serve all our stakeholders.”

The Firefighters’ Pension Investment Fund said it hopes the appellate decision ends the case “particularly to avoid unnecessary litigation costs.” FPIF reports that 99% of local firefighter pension funds have successfully completed the transition process. 

“Our research shows that firefighter pension funds are saving over $34 million per year in fee savings alone,” the firefighters’ fund said.

Illinois Attorney General Kwame Raoul’s office, which represented the state, said it was pleased with the decision.

Daniel Konicek of Konicek & Dillon, which is representing the police funds, said Friday he plans to appeal on behalf of his clients to the state’s high court, which has discretion over what cases it hears.

“We disagree from our standpoint that our people have a vested interest in this because their life savings are involved and they feel their right to vote and control” how their hard-earned contributions are invested is a protected benefit, Konicek said.

In Arlington Heights Police Pension Fund et al v. Jay Robert Pritzker et al, the plaintiffs argued that benefits are damaged because the law “strips plaintiffs of their autonomy and their authority” on investment decisions.

The plaintiffs argued the law violates the pension protection clause, the contract clause and the takings clause of the state constitution. The state countered that fund management doesn’t enjoy the same status as “benefits” with constitutional protections.

Villa, in his May ruling, sided with the state in his opinion, saying he could not extend the term benefits beyond the reach of prior Illinois Supreme Court cases to find the challenged legislation unconstitutional against the Pension Clause’s protections.

Villa’s ruling came in the form of a summary judgment on the pension protection and takings clauses. He dismissed all of the named funds for a lack of standing leaving individuals as the plaintiffs and dismissed the count alleging violations of the contract clause for failing to show a cause of action.

The plaintiffs appealed the summary judgment on the takings and pension protection clauses.  

The appellate court said it found “no error” in Villa’s decision on the pension protection clause.

“Where the methods of funding a retirement system are not governed by the pension protection clause, we cannot say that the right to choose who invests the funds of the system is more of a protected benefit. Thus, we conclude that the trial court did not err in granting summary judgment on this basis,” the decision read.

“Plaintiffs present no evidence that the act actually reduced the funding available for the payment of benefits,” the court said on the argument over the impact of the administrative fees.

The lawsuit had also argued that the legislation violates the constitution’s takings clause by taking or damaging plaintiff’s property without just compensation because the transition costs are being covered by loans through the Illinois Finance Authority, which must be repaid by the consolidated funds.

“As the ‘property’ at issue here is not the private property of the plaintiffs, the takings clause is neither relevant nor applicable here. Thus, we find no error in the trial court’s grant of summary judgment on count III,” the appellate court concluded.

Backers tout a reduction in administrative costs and higher-than-expected investment returns — all modest fiscal goals — but rating agencies consider it a positive credit step because municipal budgets are strained by rising payment demands that have forced tax hikes, service cuts, a string of pension obligation bond deals, along with asset sales.

The unfunded liabilities of Illinois’ suburban and downstate public safety pensions rose to $13 billion in the last year of compiled results reported to the state — up from $953 million in 1991 — that underscores the deep strains on local government budgets. The police funds ended 2019 at 54.98% and firefighters were at 54.35%. The health of some individual funds, however, are far weaker with ratios only in the teens.

Police accounted for $7.5 billion of the total and firefighters for $5.5 billion, according to the most recent report issued in late 2021 by the state legislature’s Commission on Government Forecasting and Accountability.

The Illinois Municipal League and the Chicago Civic Federation advocate for more substantial changes. The IML is pressing lawmakers to support legislation that would re-amortize the unfunded liabilities of public safety funds, pushing a 90% targeted date further out from its its current date of 2040. The Civic Federation has proposed a state takeover of local unfunded tabs to ease the burden on local governments.

Presiding Justice Robert McLaren authored the opinion with Justices Susan Hutchinson and Ann Jorgensen concurring.