CHICAGO - The unfunded pension liabilities of Chicago-area governments rose by nearly $2 billion to $18.7 billion in fiscal 2006 and by than $14.6 billion over the last decade - increases that if left unchecked could eventually lead to "full-blown fiscal crisis" for some governments, a local government watchdog group warned yesterday.
The annual review by the Civic Federation of Chicago covers 10 funds managed by local governments that include most Chicago and Cook County government employees. The $2 billion increase mirrored the growth rate reported last year by the federation in its review of fiscal 2005 figures, signaling that the trend shows no signs of abating.
In addition to the rising size of the unfunded liabilities, the funded ratio of each fund also fell in fiscal 2006, resulting in an average funded ratio of 65.1%, compared to 67.2% for fiscal 2005. The funded ratios showed wide disparities, however, with one above 90% and others below 50%.
"With every passing year Chicago-area governments' pension deficits become more unmanageable," the federation's president Laurence Msall said. "Half of the pension funds we examined have funding shortfalls that are several times larger than what the government spends on payroll for its employees. Immediate steps must be taken to reduce future liabilities and increase funding levels before pension pressures cause full-blown fiscal crises, like they did with the Chicago Transit Authority."
The evaluation covers the city of Chicago'sfour pension funds - which alone accounted for over half of the fiscal 2006 deficit - the Chicago Park District, the Chicago Public Schools, Cook County, Cook County Forest Preserve District,the Metropolitan Water Reclamation District,and theChicago Transit Authority.
The funds reported assets with an actuarial value of $34.9 billion and accured liabilities of $53.6 billion, resulting in an unfunded liability of $18.7 billion. The average rate of return was 9.2% or 11.8% depending on the fiscal year end dates of the funds.
The CTA reported the lowest funded ratio of just 25.2%. The city's fire fund ended the year at a 40.4% funded ratio and the police fund at 49.3%. The city's municipal fund was at 67.2%, the water district's fund at 70.1%, Cook County fund at 75.3%, the park district fund at 76.8%, the teachers' fund at 78%, the cook forest preserve fund at 85.4% and the city laborers' fund at 92%.
The total liabilities include $3.4 billion of healthcare liabilities reported by eight of the funds that fall under other post-employment benefits. Most of the funds have included their healthcare liability on a accrued basis in their overall liability but are now separating it out to comply with new Government Accounting Standard Board rules. The level of subsidies vary greatly and are limited in some of the funds. The CTA has the largest liability of $1.8 billion.
The report blamed the current status of the unfunded liabilities on a mix of factors including poor, multi-year investment returns in the past, benefit enhancements, early retirement program, changes in the actuarial assumption methods and state restrictions on increasing employee and government contributions for most of the funds.
The organization recommended that local and state leaders push for pension funding reforms that include the prohibition on benefit improvements unless a fund is at a 90% funded level, reducing benefits for new employees, and change how employer contributions are calculated so increases are mandated when the level falls below 90%.
The CTA is one fund that will soon receive an overhaul. Skyrocketing growth in the unfunded ratio prompted the Illinois General Assembly to approve in 2006 legislation that would have required a massive increase in both the CTA and its employees contributions to $150 million from $51.7 million in 2009 in order to bring the funded ratio up to a 90% ratio by 2058.
The CTA's pension fund had been on track to exhaust its portion of funds that cover retiree healthcare benefits this year and faced insolvency in 2013 absent reforms approved by the General Assembly last month. The reform package, included in a transit bailout package that provides more than $500 million annually in new revenue for Chicago-area transit systems, increases contribution levels and restricts some benefits. The plan also permits the issuance of up to $2 billion in bonds in order to bring the funded ratio of the CTA fund to a 72% level. The legislation also allows for the use of $528.8 million of the bond proceeds to establish a trust to begin funding healthcare benefits on an actuarial basis.
Chicago Mayor Richard Daley last month formed a commission to come up with recommendations to improve the city's pension funds. Chicago has said it would use a piece of any funds received from a proposed privatization of Midway Airport to help better fund its pension funds if accompanied with structural pension reforms. q
