Having been put in an unenviable position, the Pontiac City Council took a step at its Dec. 3 meeting that it was unwilling to take the year prior — the body voted to increase its annual levy beyond the 2.1 percent rate of inflation in order to combat the growing costs of local pensions. Despite some dissent in 2017, the more palatable choice then was to not raise taxes.

    Avoiding the ire of taxpayers did not allow the city to cut into its ballooning pension deficit for public jobs, which have hurt municipalities as much as they’ve hurt the state government. But a recently released study suggests that there’s a way to help curtail the pension crisis without risking an incensed public.

    Part of the trouble, City Administrator Bob Karls has noted, is the tight restrictions on how pension boards, such as the local fire and police pension boards, are allowed to invest.

    Pension boards are allowed to put 40 percent of its allocations in the stock market, which makes hitting the 6 percent rate of return factored into the state’s actuarial calculations difficult. The success of this measure has been mixed, predicated on a pension board’s chosen investment firm’s ability to accurately forecast the stock market. Some pension boards of smaller municipalities might not have the same talent pool of those with market acuity that larger cities might.

    Yet the pension problem remains significant enough locally to require a property tax hike, albeit a small one. The increased levy, which would tack on about $37,000 from the new equalized assessed valuation, amounted to about an extra $7 a homeowner would have to pay — provided they possessed a $100,000 property.

    Beating the pension problem will require more than very modest tax increases. A study commissioned by the Illinois Public Pension Fund Association argues that there’s merit in easing a pension fund investment restriction.

    Doing this would increase average annual pension fund returns statewide by at least $418 million over 20 years, the study’s authors, Anderson Economic Group, LLC, argued. This would go a long way in helping municipalities meet the state’s goal of pensions being 90 percent funded by 2040. At present, for example, the fire and police pensions are both below 70 percent.

    Anderson Economic Group examined what would happen if the state government voted to ease the investment restrictions on local pension funds with less than $10 million in assets — that is, allow them to invest more than the 40 percent of its funds in the stock market or to be able to diversify portfolios more liberally. The study showed that gains for the 228 smallest funds in Illinois would average as much as 5 to 6.8 percent per year if the restrictions were eased.

    Yearly returns for the Pontiac pension boards have typically been much more meager: in their joint January report from last year, the fire pension fund had received a return of 6.5 percent while the police pension fund had an investment return of 6.3 percent. These rates of return were much healthier than their respective 0.8 and 0.7 percent returns the year prior.

    Something that has been suggested to reverse ballooning deficits is for consolidation of police and fire pensions with the statewide Illinois Municipal Retirement Fund, which currently provides pensions for many city and county workers who do not fall under the umbrella of fire and police employees. Since it is structured differently and subject to different investment rules, it is at present about 97 percent funded.

    Anderson Economic Group warns against such consolidation in its study, however. Such a consolidation would require that all assets from each local fund be liquidated and then re-invested in the larger fund, the group stated, noting that this move would generate a one-time cost of up to $155 million in commissions, taxes and other fees, which would increase the pension funds’ unfunded liability by that amount as well.

    Moreover, consolidation poses an even higher risk if the transfer occurs during a period of stock market growth and the local pension funds miss out on the resulting dividends from their existing investments, the study found. IPPFA President James McNamee argued that consolidation would also take control away from local municipalities; however, given that some municipalities are less than 50 percent funded at present, taking control might bring some measure of relief from the pension burden.