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Chicago-Area Issuers Face $17B of Liabilities

CHICAGO - Chicago, Cook County, and five other local governments entered fiscal 2008 with $17.1 billion of unfunded pension liabilities, leaving them poorly positioned to cope with the steep losses of last year due to the market's crash, a local government watchdog group warned yesterday.

The report from the Civic Federation of Chicago on the status of Chicago's four pension funds and those for Cook County, the county's Forest Preserve District, Chicago school teachers, the Chicago Transit Authority, the Chicago Park District, and the Metropolitan Water Reclamation District found their unfunded liabilities more than tripled over the last decade.

Due to strong investment returns, the funds did show some improvement in fiscal 2007 over the previous year when the unfunded liabilities stood at $18.7 billion. But the annual report reviewed only the most recent audited data available, and so the federation's analysis does not reflect the stock market's dramatic downturn and the 20% to 40% loss the funds' likely suffered in 2008.

"Amid the panic the 2008 audited pension reports will undoubtedly generate when they become available, it is important to remember that steep market losses will only have exacerbated an existing trend," said Civic Federation president Laurence Msall.

The long-term growth coupled with the anticipated 2008 losses show the need for an overhaul in how pensions are funded and the need for benefit cuts, the federation said.

The business-funded group is pushing local and state lawmakers to enact benefit reforms that raise retirement age and minimum years of service, to restrict early retirement programs and prohibit enhancements until plans are 90% funded. The group wants any sales of pension bonds tied to pension reforms and would like to see the funds consolidated and required to adopt stricter reporting rules.

The group also wants lawmakers to drop current funding formulas set in state statute that tie employer contributions for most of the funds to a percentage of employee payments over the last two years of work in favor of a formula based on actuarial required contributions.

"The steep decline in the financial markets has certainly had a significant impact, but should not overshadow the fact that employer contributions have not been adequate," said Lise Valentine, the federation's director of research.

The funds in fiscal 2007 had assets of $37.1 billion and long-term liabilities of $54.2 billion, including $52.6 billion for pensions and $1.6 billion for other post-employment benefits. Employees contributed $631.6 million and employers contributed $918 million in 2007. Combined, the contributions fell far short of the actuarial required contribution of $2.3 billion needed to put the funds on a track towards a 90% funded ratio in the coming decades.

The funds operating on a calendar fiscal year posted average 8.1% returns on their investments and those with a fiscal year beginning on July1 showed an average 17.1% rate of return.

Of the 10 funds, only the one managed by the CTA has undertaken reforms. In 2006, skyrocketing growth in the unfunded ratio prompted the Illinois General Assembly to approve legislation that would have required a massive increase in the contributions of both the CTA and its employees.

To address its pension and OPEB burdens, the CTA won union benefit concessions that lawmakers approved as part of a bailout package that allowed the authority to issue $2 billion of pension-related debt to bring its funded ratio to more than 70%.

The wisdom of the transaction has come under question as the CTA was forced to pay a higher interest rate of about 6.8% - higher than its estimate of a 6% rate - in order to sell all its bonds during the market turmoil of last summer. The proceeds were not immediately invested given the market turmoil and so in the near-term the play on arbitrage works against the CTA by reducing its rate of return. The agency needs an annual rate of return of more than 8.5% for the funding plan to work efficiently.

CTA officials believe over the long-term the pension bond deal was still wise given the immediacy of its funding requirements under the 2006 state law.

"We still absolutely support what they did. The market timing was unfortunate but the reforms were really landmark and will save the CTA money over time," Valentine said.

The Chicago firemen's fund had the worst funded ratio of just 42.1% in 2007 followed by the police fund at 50.4% while the strongest fund was the Chicago laborers fund at a 95% funded ratio followed by the Cook County forest preserve fund at an 85.7 % funded ratio. Over the last 10 years, liabilities increased by $22.8 billion while assets increased by just $10.5 billion.

Chicago officials did not return calls to comment on the civic federation's report. Chicago may use a portion of its pending $2.5 billion lease deal to privatize Midway Airport to help better fund its pensions.

Cook County president Todd Stroger's spokesman, James Ramos, said: "Although the Cook County pension fund is one of our strongest and better funded plans, we are working very hard to improve all of our funds, including the benefits fund, despite the circumstances of poor investment performances and problems with the economic situation."

Cook County carries a $2.4 billion unfunded liability on a 77% funded ratio.

Caitlin Devitt contributed to this story.

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