Defund The Police, Cut Pension Liabilities? The One Weird Trick That Just Might Work For Chicago

Minneapolis wants to dismantle its police department. On Sunday, as CNN reported,

“Nine members of the Minneapolis City Council on Sunday announced they intend to defund and dismantle the city’s police department following the police killing of George Floyd.”

What exactly that means, and how that might play out, as CNN clarifies, and the Minneapolis Star Tribune fleshes out, is far from clear, as “defund” advocates want to prioritize social services but the city’s charter actually requires that it fund a police force.

Separately, Chicago Mayor Lori Lightfoot announced a 90-day reform initiative. Turns out, the city was already supposed to have reformed its police department as a result of a consent decree in the aftermath of the Laquan McDonald shooting in 2014 — but city officials learned that implementing reform in the face of resistance and bureaucracy is actually harder than it looks. In particular, as Ed Bachrach and Austin Berg note in a Chicago Tribune commentary, that consent decree, and the disciplining of police officers in general, were made subordinate to police union collective bargaining agreements.

But it turns out there is a useful model for successful “defund the police” reform: the city of Camden, New Jersey, in which their police department was so irredeemable dysfunctional, not in terms of police brutality/racism but in their competence in basic police work, that it was indeed shuttered — not to leave its residents at the mercy of criminals, but with the county taking over policing duties.

Is this the right model for cities where prior attempts at reform have failed? I can hardly answer that question – not with any particular expertise.

But I nonetheless asked myself, “what would happen to pensions if the city of Chicago followed that same model?” Of course, that would be contingent on Cook County being able to step in as a more competent successor entity, but hypothetically let’s imagine that this is true, for the sake of argument.

Now, there are some unique characteristics to pensions in Chicago and Illinois.

In the first place, Illinois binds all of its pensions to the requirement that they be “neither impaired nor diminished” and the state Supreme Court has ruled that this requirement is very broad, encompassing future as well as past accruals, retiree medical benefits, and any form of benefit related to retirement.

In addition, most pension plans in Illinois have reciprocal agreements: individuals who move between the Chicago Teachers’s Pension Fund and the Teachers’ Retirement System, for example, can use their total years of service to qualify for benefits and have their highest average pay from either system used to calculate benefits from both systems. The same is true for Chicago and Illinois municipal workers, state employees, university employees, Cook County workers, and miscellaneous Illinois public employees.

But neither the police and fire plans for the city of Chicago, nor those plans for other Illinois municipalities, are included in these reciprocity agreements.

What’s that mean?

If the Cook County Sheriff’s Office took over policing in the city of Chicago, then, logically enough, no police officers would be employed by the Chicago Police Department, because it wouldn’t exist any longer.

That doesn’t mean that cops and retired cops would lose their pensions — the city of Chicago would still be liable. But for currently employed cops, they would only be liable for a “frozen” benefit — that is, based on their salary at the time of the take-over, without the benefit of the pay increases they would have gotten up to retirement, and without any service-based benefit improvements (such as early retirement benefits) that they would have earned in the future. In the private sector, this would be called a “curtailment,” because, logically enough, benefits were curtailed.

How much would that cut liabilities?

Here are the basic numbers, at year-end 2019 (I don’t wish to hazard a guess as to the post-covid-crash values):

Assets (market value, not smoothed): $3,162 million

Liability: $14,270 million.

Funded status: 22%.

The liability splits out into $5,725 million for active employees, and $8,931 for inactive participants (retirees, survivors of deceased employees, and vested terminations).

So what happens if the liability for the active police drops by, say, one-third due to these curtailment effects?

The new funded status would be — are you ready for it? — 25%.

Why such a small impact? That’s because the inactives’ liability makes up such a large fraction of the total — 65%.

But at the same time, in terms of actual dollars saved, it would work out to $1.9 billion. Turns out, that’s more than the entire CPD spends in a year, which amounts to $1.78 billion — but, of course, this would be a one-time reduction rather than an annual savings.

To be clear, this is a result that’s somewhat unique to Chicago. Most states’ police pensions are a part of a larger pension system, so that none of the above is relevant to them — for example, in Minneapolis, police officers participate in the PERA Police and Fire Plan alongside all other Minnesota pubic safety workers.

And, considering the bigger picture, actuary Mary Pat Campbell crunches the numbers and concludes that the chorus calling for the cutting of police department spending and reallocating the savings to social services misses the fact that, as a percentage of total state and local spending, police spending amounts to only 4% of the total. Her data source also reports that public welfare spending (e.g., Medicaid) amounts to 22%; elementary and secondary education, 21%; and higher education and health/hospitals, 10% each.

So nothing’s simple, and the impact of reform on police pensions — or, to the contrary, the impact of police pensions on the effectiveness of intentions to reform — is only a small tangent in a bigger story, but, as an actuary, it’s an interesting wrinkle nonetheless.

As always, you’re invited to comment at JaneTheActuary.com!