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Urgency of Fixing Pensions Put on Display in Chicago

CHICAGO — Just as Chicago’s chief financial officer and local government officials wrapped up a discussion on reining in pension costs at a luncheon hosted by the City Club Monday, Wisconsin Gov. Scott Walker was offering his advice on pension reforms a few blocks away.

Both forums highlighted the growing sense of urgency for action here and they were held on the same day that the Governmental Accounting Standards Board approved new standards for reporting public pension liabilities — rules that could prompt pressures for more reforms.

During the General Assembly’s spring session, Illinois failed to enact pension changes for current employees and did not include proposed reforms sought by Chicago or Cook County for their plans.

“If we do nothing these funds are headed toward insolvency,” Chicago CFO Lois Scott warned at the luncheon. Scott said the city has received “assurances” from legislative leaders that lawmakers will address the city’s concerns in their fall veto session. The headline risks have forced the city and state to pay higher interest rate penalties when borrowing.

The scale of the pension crisis has been underscored by recent ratings actions and various local and national watchdog reports warning of the crippling effect on governments’ ability to fund basic services and stave off credit deterioration.

The latest came Monday from the Civic Federation of Chicago, which warned that the unfunded liabilities of 10 Chicago-area pension funds rose in 2010, bringing the aggregate total of unfunded liabilities to $27.4 billion, up from $4.6 billion in fiscal 2001 and $22.9 billion in 2009. The funds carried combined unfunded liabilities of $31.9 billion when non-pension retiree health care obligations were added.

“The deteriorating state of Chicago-area pension funds threatens the retirement security of public employees and the financial viability of local governments,” said the federation’s president Laurence Msall. “Illinois lawmakers owe it to citizens, employees and retirees to finish what they started and fix our broken pension systems.”

On average, the 10 funds had an actuarial funding level of 56.2% in 2010, a drop from 88% in 2001 and 61.3% in 2009. All 10 funds fall below a 75% funded ratio and range from a low of 32.4% to a high of 73.8%. Four of the 10 funds are headed toward insolvency in the coming decades. Fiscal 2010 results are the most recent available.

Unfunded liabilities per capita in Chicago increased from $1,189 in fiscal 2000 to $8,993 in 2010. The four retirement funds for city of Chicago alone carried $14.8 billion of unfunded liabilities, representing $5,473 per capita.

The federation’s report covers the four city funds — police, firefighters, municipal employees and laborers — and six others, including Cook County, the Cook County Forest Preserve, the Metropolitan Water Reclamation District, the Chicago Transit Authority, the Chicago Park District and the Chicago Public Schools teachers.

The federation blames the poor funded ratios on a combination of factors, including inadequate employer contributions that fall far short of the actuarially required contribution, or ARC, level and recent investment losses. Benefit enhancements approved in past years and payment holidays also hurt.

Local governments like Chicago have defended their contribution levels, which are set under a state-imposed formula tied to employee payments. Reform advocates have countered that Illinois laws don’t preclude local governments or the state from increasing their payments to the ARC level.

The federation found that in 2010, the statutorily based employer contributions for the 10 funds fell about $1.2 billion short of the $2.1 billion ARC level needed to cover both current costs and reduce a portion of unfunded liabilities over a 30-year timeframe.

The unfunded ratios continued to reflect dramatic 2008 declines in investment earnings as all of the funds smooth their investment results over a three- to five-year period. Most of the funds assume an 8% annual rate of return, and returns did recover strength in 2010. The average rate of return on investment for funds examined that operate on a calendar budget cycle was 13.7%, while those with a fiscal year that begins July 1 saw an average return 12.7%.

The federation notes that the current overview of the funds’ status don’t yet reflect the positive impact of a reduction in some benefits adopted by the General Assembly in 2010 for employees hired after Jan. 1, 2011, at many of the local governments examined.

Those changes won’t ensure a rescue for four funds headed toward insolvency. Chicago’s laborers’ fund is still projected to exhaust necessary assets to cover its obligations in 2035, while the city’s municipal fund will fall short in 2030, the Park District in 2025 and Cook County in 2038. The municipal account is 49.8% funded and the laborers’ is 73.8% funded.

The city’s police and firefighters’ funds had been on course to fall short in 2025 and 2021, respectively, but state legislation adopted in 2010 that included higher city contributions puts those funds on a path to a 90% funding level in 2040. The firefighters fund is currently 32.4% funded and the police account is 39.7% funded.

The water district, which did win pension reforms during the most recent legislative session, is funded at a 56.5% ratio. Cook is at 60.7%; the forest preserve is at 65.2%; the CTA, which underwent a pension and other post-employment benefit restructuring in 2009, is funded at 70.1%; the teachers system at 67.1%, and the Park District at 62.3%.

Chicago Mayor Rahm Emanuel this spring unveiled proposals to raise the retirement age, suspend automatic cost-of-living increases and raise employee contribution rates shortly after Moody’s Investors Service moved its outlook on the city’s Aa3 general obligation rating to negative largely over pension funding issues.

The Illinois General Assembly did not take up the city’s proposals and the state reforms were derailed by a political dispute over shifting payments for suburban and downstate teachers off the state’s back and on to local districts.

In addition to reforms, Chicago is seeking some form of relief from the 2010 legislation affecting its police and firefighters funds. The city faces a $700 million hike in 2015 to meet obligations under that legislation.

While Scott said the General Assembly’s leaders have pledged to take up city proposals this fall, there’s no guarantee of passage. “There are continuing discussions about pension reform at every level of government,” said Steve Brown, spokesman for House Speaker Michael Madigan, D-Chicago.

State reforms stalled over the teacher cost-shift provision. Republicans blocked the teacher cost-shift and Democrats refused to support the package without it. Scott said the city supports the cost-shift given that the Chicago Public Schools is the only district forced to cover its own pension contributions. “That’s really not fair for our taxpayers,” she told the luncheon crowd.

Illinois is under pressure to act in order to stave off a possible Standard & Poor’s downgrade of its A-plus rating. The state’ unfunded pension liabilities have risen to $82.9 billion for a funded ratio of just 43%. Gov. Pat Quinn has met with legislative leaders twice since the General Assembly adjourned late last month without reaching a consensus on reforms. They are expected to meet again in about a month.

Labor leaders have attacked both Quinn and Emanuel’s proposals as unconstitutional. The state has had to tread cautiously on reforms as its constitution affords strong protections against diminishing promised retirement benefits. Some lawyers believe that the rules protect only accrued benefits.

Wisconsin’s Walker said Monday in Chicago that he would leave it to local officials to decide what’s best in Illinois, but he pointed out benefit differences between both states, such as Wisconsin’s lack of an automatic COLA increase.

Walker addressed the influential Commercial Club of Chicago, a business group that has put money behind an advertising campaign pressing lawmakers to tackle the pension crisis. Walker inherited one of the top retirement systems in the nation with full-funded status when he took office last year.

He pushed through additional pension reforms that helped reduce the state’s burden by raising health care premiums and retirement contributions of state employees.

“Governor Walker, a Republican, has taken the same fiscally responsible approach in Wisconsin that Treasurer [Gina] Raimondo, a Democrat, has taken in Rhode Island,” said club president Tyrone Fahner. “Clearly this isn’t about politics — it’s about math. We have to make difficult decisions and those decisions will determine Illinois’ future.”

Cook County Commissioner Bridget Gainer, chairwoman of the board’s pension oversight committee, appeared on the panel with Scott and a representative from the water district.

The county, too, will push for a series of reforms, including COLA changes in the veto session to avoid raising taxes and maintain bond ratings.




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