(Illinois News Network
) — As municipalities across the state determine how to spend taxpayers’ money for the next year, they’re looking at what to expect for pension fund investment returns. Bad predictions can mean big costs to taxpayers and, when estimated returns on city pension fund investments are too generous, taxpayers have to pay up.
The city of Springfield’s estimated returns were off enough to require an additional $600,000 the city didn’t budget for. That’s expected to impact other areas of the city’s already tight budget.
Sterling recently voted to increase its property taxes and is increasing pension fund contributions by more than $105,000.
Highland could see a property tax increase to help cover its pensions.
Doug Offerman with Fitch Ratings Agency said pension obligations have been rising everywhere the past decade and fund managers and budgeteers need to set the right course in a way that the years of good and bad investment returns balance out.
“Pension systems have not always been good at setting that course,” Offerman said.
The state has mandated that pension funds get to 90 percent funded by 2040. Springfield Alderman Joe McMenamin said Springfield’s pensions were 90 percent funded 20 years ago, but now it’s less than half funded. He’s been pushing for less aggressive investment return predictions to better budget the taxpayers’ money.
S&P’s Managing Director Gabe Petek said sometimes the numbers crunchers’ estimated investment returns for various pension funds aren’t accurate.
“This implies that going forward the contribution schedule will escalate upward, year after year,” Petek said.
Offerman said returns on pension assets have been lower than expectations in recent years.
“And pensions are gradually correcting that, but that’s going to result on more pressure on pension contributions and on budgets over time,” Offerman said.
Lowering the assumed rate of returns means more tax dollars will be needed to fund pensions. One estimate, for example, is for every .25 percent reduction in the city of Springfield’s assumed rate of return equals an additional $2.5 million from taxpayers.
Springfield’s budget director already expects its share of property taxes to be eaten up entirely by its pension obligations.
Eric Harper, associate director of ratings agency S&P, said overly aggressive assumptions that don’t pan out mean the money it takes to make up that difference crowds out other important spending, such as for infrastructure or public safety.
“You can get to a situation where a fairly sizable amount of the budget is fixed and that can create some flexibility issues in providing services,” Harper said.
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