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A Look at the Illinois Municipal Police and Fire Pension Consolidation Process: Pandemic Woes, Legal Challenges, and Increased Returns

NCPERS spoke with Bill Atwood, executive director and CIO of the $7.7 billion Illinois Firefighters' Pension Investment Fund, and Rich White, executive director of the $10 billion Illinois Police Officers' Pension Investment Fund, about the process of consolidating hundreds of municipal funds and what's next for IFPIF and IPOPIF.

 
By: Lizzy Lees, Director of Communications, NCPERS

In March 2020—immediately before the U.S. declared a national emergency and the COVID pandemic brought the world to a halt—Bill Atwood became the Executive Director and CIO of the $7.7 billion Illinois Firefighters' Pension Investment Fund (IFPIF). Shortly after, Rich White was hired as the Interim Executive Director of the $10 billion Illinois Police Officers' Pension Investment Fund (IPOPIF), transitioning to the permanent role one year later.

In January 2024, the Illinois Supreme Court upheld the state legislation directing the consolidation of the Illinois municipal police and fire pension plans based outside the city of Chicago. Operating in what they describe as an almost ‘startup environment' and facing legal challenges and skepticism along the way, the transition of assets is now nearing completion.

NCPERS spoke with Bill and Rich about the process of consolidating hundreds of municipal funds and what's next for IFPIF and IPOPIF.

Q: What led to the 2019 consolidation of Illinois' municipal police and fire pension plans?
Bill Atwood: Illinois is unique in that the 1970 constitution has the pension clause in it which requires public employers to pay pension benefits. Those benefits are to be treated as a contract and they cannot be reduced or impaired. However, the state constitution doesn't require or create a mechanism for the funding of pension plans.
 
Under the pension code, there are 297 local fire funds and 357 local police funds. On the fire side, that effectively meant you had 297 different investment portfolios under 297 different attorneys, etc.
 
So, what came out of the governor's taskforce was a proposal that we consolidate all these pension funds into two plans: the police plan and the fire plan. The goal was to reduce costs through economies of scale, but more importantly, increase the total return. As a pooled fund and a multibillion-dollar plan, you're able to access private markets, private equity, private credit, and just have a higher total return with lower volatility.
 
Q: What was the criteria for inclusion (or exclusion) in the Illinois Police Officers' Pension Investment Fund and Illinois Firefighters' Pension Investment Fund?
Rich White: If you were a downstate or suburban police fund (defined as Article Three in the pension code) or fire fund (Article Four), you were included. Basically, any municipality between 5,000 people and 500,000 people that has a police department or a fire department with a corresponding police or fire pension fund was included in the consolidation.
 
Bill: The pension code defines certain minimums as to when a community has to form a police pension fund and firefighting pension fund. Once those funds are statutorily created, then they have to participate with either IPOPIF or IFPIF.
 
Q: How are these consolidated funds structured from a governance perspective?
Bill: We have nine members, seven of whom are elected. By statute the chairmanship has to rotate every two years between a labor representative and a municipal representative.
 
Rich: And on the police side, we have nine board members as well. The makeup is a little bit different, as eight of our board members are elected. Other than that, the law provides for both of us that our boards have the authority to govern, administer and maintain oversight of each respective fund. They have the ability by law to set administrative rules and policies to run the funds and the authority to direct the investment of assets on behalf of the members and beneficiaries.
 
Q: Logistically, what did the consolidation process look like?
Rich: There was no roadmap or manual. During the consolidation—for both us—we basically had to create everything as startup organizations. I had to go out and get a bank account and a checkbook. We didn't have a payroll system. Everything had to be done basically from scratch. And then the COVID pandemic only made it more challenging. We were trying to do all of these things, but nobody could meet in person.
 
Bill: On the bright side, if you're going to negotiate a lease, there's no better time to do it than in the midst of a global pandemic. I spent the first few months working out of my basement, and then once we secured office space, we were only allowed to have one person there on any given day. It certainly added one more layer of complexity to the process.
 
We also were allowed to conduct our board and committee meetings remotely, and the public could participate virtually. This actually enabled us to hold more meetings which allowed us to move more efficiently in building the fund's infrastructure from ground zero.
 
Rich: Definitely. On the police side, our board met 61 times in four years—and that's just the board, not including the committees. Without technology, we absolutely would not be where we are today. One aspect that was very challenging during the pandemic was hiring service providers and going through the RFP process. Almost everything was on Zoom. I remember we had one in-person meeting in April 2021 so that we could interview the custodians and investment consultants in person. We met in a big ballroom with only nine people so that we could socially distance.
 
In terms of the logistics of the consolidation, the board had to adopt rules and regulations about what the transfer process would look like. We had to hire the investment custodian bank, which was a challenge because we were one client, but we effectively had 357 sub-clients. We had to hire staff and service providers. We had to develop from scratch the rules of engagement.
 
And then we had to educate the local boards and their service providers, which was also a challenge in the COVID environment. It was a lot of one-on-one communication with every local fund to get the assets moved over. Then you had to define what the assets were, and then the board of trustees had to develop their own investment policy statement.  The firefighters were ahead of us in the process, so we learned a lot from them. There were a lot of moving parts and a short period of time to get it done.
 
Bill: It was especially challenging because the local firefighter and police funds don't have a lot of resources, and we were asking them to execute these documents. The other aspect was that a lot of people were not happy about the consolidation initiative. But everybody did their best to get it right. Outside of providing the general information through emails and letters, it really required a lot of one-on-one conversations as Rich said. There was zero margin of error. We had to be transparent and auditable.

Q: There have been some legal challenges along the way, most notably the 2021 lawsuit alleging that creating the consolidated funds violated the Illinois constitution. What impact did the legal challenges have on the consolidation and how were they resolved?
Bill: From the get-go, a lot of local funds didn't want to consolidate. Once the litigation was filed, that gave people who were skeptical about the consolidation a reason to delay transferring their assets. Then the trial judge basically issued a stay that said that if they didn't transfer their assets they wouldn't be penalized, pending the outcome of the litigation. This of course only contributed to the delays, but once the trial judge ruled in our favor, that removed that impediment and most fire funds transferred their assets. There were still a few funds who wouldn't transfer their assets until the case went to the Illinois Supreme Court, though.

Rich: I think there was some skepticism of what the consolidation meant. We started with the headwind of building trust with the local funds, and the litigation put a pause on a lot of it. To illustrate, we had 46 funds transfer assets in the first three months. Then, when the circuit court ruled that the statute was constitutional in June 2022, we had 72 funds transfer their assets in one month alone. There were 16 litigant funds on the police side, and after that June 2022 ruling, one of those funds dropped out of the litigation. As Bill said, the remaining funds were under a stay order from the circuit court and were not required to transfer their assets.

Now, with the Illinois Supreme Court ruling in favor of the consolidation, we'll continue the process of transferring the remaining funds' assets this year.

Q: What challenges are you anticipating now, and what are the opportunities ahead?
Rich: We currently have a short-term asset allocation, and in January of this year we started to hire active managers in the investment space. The approach that our fund has taken is to engage in various asset classes that the smaller funds couldn't access previously to get more return and more value for our risk. That's kind of the idea behind the consolidation—accessing additional asset classes at a scale that will benefit everybody while keeping our management and administrative costs low.

The Illinois Police Officers Pension Investment Fund is laser-focused on investment excellence, which means achieving the best risk-adjusted returns possible through the prudent investment of contributions and investment income. We're looking to build a full-time organization that's going to be able to do the administration that's necessary to run the fund and reduce our footprint of external service providers. That's what we're working towards.  

Bill: We're on a similar trajectory as the police fund. We had an interim asset allocation, and now we're moving to a long-term allocation strategy. We've started moving towards active management and are currently focused on our private markets exposure, because we know that getting that money allocated will take time. We have a board meeting coming up in May where we will consider real assets and private credit. And then in our following board meeting, we will look at the other private markets allocations.

Outside of managing our portfolio, we're also building an organization that will outlive us. We think about what we're doing in the portfolio now, or next quarter, or next year, but how's this all going to operate 10 years from now?

But at the end of the day, the program analysis of the legislation is: Are returns improved and are costs reduced? And so far, so good.

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