CHICAGO — The fiscal condition of the pension systems of Chicago, its sister governments, Cook County, and the Illinois municipal pension fund deteriorated in 2012 as their collective unfunded obligation rose to more than $42 billion from $37 billion.
The numbers are from the General Assembly's non-partisan Commission on Government Forecasting and Accountability's annual overview of the financial status of local government funds.
Two of Chicago's four funds remained headed toward insolvency, according to the report. The Chicago Laborers' Annuity and Benefit Fund is on track to exhaust its assets in 2027 and the Municipal Employees' Annuity and Benefit Fund in 2025.
The unfunded obligations grew for all but one of the systems reviewed and the funded ratios weakened for all but two even though investment returns - which are smoothed over a period of a few years - were mostly strong in 2012.
The local stresses reflect a national problem. A report last week from Moody's Investors Service on local government pensions suggested that strong 2013 investment returns could help reduce liabilities overall but costs will remain elevated. "Contribution requirements for pensions will remain high and trending upward in most cases," said Moody's analyst Tom Aaron.
Still, pension underfunding is particularly acute in Illinois, which helped drive state lawmakers to overhaul retirement systems for state employees last year.
Those changes do not touch the local systems covered by the commission's report although the park district won passage of its own set of reforms
Benefits and employee and employer contributions are set by state statute. Lawmakers have pledged to tackle local government reforms this year.
Chicago, the park district, the school system, the county forest preserve district, and the water reclamation district have all seen their general obligation ratings fall over the last year due primarily to their pension challenges. Those strains are further heightened by their overlapping reliance on the same property tax base.
The city's funds also include the Fireman's Annuity and Benefit Fund and the Policemen's Annuity and Benefit Fund. The four city funds account for more than $19 billion of the unfunded tab.
The Chicago Laborers' unfunded liabilities rose to $1.06 billion from $769 million and its funded ratio dipped to 55.4% from 64.9%. The 2012 figures reflected changes adopted in actuarial assumptions. The fund is on course to drop to a 6.2% funded ratio in 2026 and then exhaust assets in 2027 unless changes are made. It saw a return rate of 13.8% up from negative territory in 2011 and assumes a return rate of 7.50%. The fund pays an average annual annuity of nearly $43,000.
The Municipal Employees fund carried $8.56 billion unfunded obligations in 2012, up from $6.9 billion a year earlier as its funded ratio deteriorated to 37.2% from 44.6%. The fund earned 12.9% on its investments up from less than 1 % in 2011 and it assumes a rate of return of 7.50%. It pays an annual annuity of $33,000. A change in the assumed rate contributed to the increase in unfunded obligations.
Its funding is on pace to steadily decline toward exhausting all funds in 2025 without any change in benefits and payments.
Two of the four city funds were subject to state legislative changes approved a few years ago aimed at stabilizing public safety funds. They will drive the city's required pension contributions up by $600 million in 2015 to put its police and fire funds at a 90% funded ratio in 2040. The near-term strain of that payment spike in addition to the challenge of the sheer size of its pension liabilities drove two rating agencies to drop the city's credit rating by three notches last year.
The fireman's fund's unfunded obligation rose to $3.07 billion from $2.8 billion with the funded ratio falling to 24.4% from 28.3%. The figures include retiree healthcare liabilities. The fund assumes a rate of return of 8% and returned 16.2% in 2012, up from negative 2% a year earlier. It pays an average annuity of $65,000.
The city police fund's unfunded liabilities rose to $6.9 billion from $6.1 billion and its funded ratio dipped to 31.3% from 36.2%. The figures include retiree healthcare. The fund earned a rate of return of 12.4% in 2012 up from just under 1% a year earlier. It assumes a 7.75% rate of return. It pays an annual annuity of $57,000.
A recent Morningstar report on the per capita aggregate pension liabilities of the nation's 25 most populous cities and Puerto Rico put Chicago at the top. The report found Chicago carried the highest aggregate unfunded pension burden at more than $18,000 per capita, five times greater than the median of cities examined. The report covered direct pension liabilities and overlapping jurisdictions.
"The magnitude of the per capita liability facing Chicago residents is expected to remain immense going forward, barring additional pension reforms on the local level," said the report authored by Rachel Barclay.
Mayor Rahm Emanuel wants lawmakers to delay the full impact of the shift to actuarial based contributions for its public safety funds as it awaits action on a local pension overhaul.
Chicago Public School Teachers' unfunded liabilities rose to $8 billion from $6.8 billion and its funded ratio deteriorated to 53.9% from 59.7%. The fund saw an investment return of less than 1% compared to 24.8 % in 2011 and assumes a rate of return of 8%. It pays an average annual annuity of $46,000.
The district faced a $400 million spike in its payments in the current budget after the expiration of a three-year partial pension holiday. The district has been attempting to broker a deal on reforms with its union to no avail so far.
Senate Democratic President John Cullerton is proposing changes that would alter how cost of living adjustments are calculated and provide guarantees on pension payments. He believes the proposal could withstand a constitutional challenge because it is more limited than the state changes and offers more benefits in exchange for the cuts. Unions are challenging the state overhaul.
The Chicago Park District's unfunded liabilities rose to $426 million from $355 million and its funded ratio fell to 50.9% from 58%. It saw a return rate of 1.4% down from 21% a year earlier and assumes an 8 % rate of return. It pays an average annual annuity of $25,000.
The park district's numbers don't reflect pension reforms for the district signed into law last year to stabilize the fund. They call for increased employee and district payments and changes in benefits including the COLA.
The systems that saw poorer investment returns in fiscal 2012 operate on fiscal years that run from July 1 through June 30 while the ones with stronger returns in 2012 mostly operate on calendar years.
The transit authority fund's unfunded obligations rose to $1.165 billion from $1.146 billion although its funded ratio saw a slight improvement rising to 59.4% from 59.2%.
The Cook County Employees' Retirement Fund's unfunded obligation grew to nearly $6.8 billion from $5.83 billion while its funded ratio dropped to 53.6% from 57.5%. The figures include retiree healthcare liabilities.
Cook officials are hoping for state action on reforms but they are also in negotiations with unions in an attempt to reach an agreement.
The Cook County Forest Preserve Employees' Retirement Fund's unfunded obligations grew to $132 million from $111 million and its funded ratio fell to 56.7% from 61.6%. The figures include retiree healthcare liabilities.
The Metropolitan Water Reclamation District Retirement Fund's unfunded obligations rose to nearly $1.1 billion from $1 billion and its unfunded ratio dropped to 50.4% from 52.2%.
The Illinois Municipal Retirement Fund, which covers employees hired by local units of governments outside Cook County and school districts with the exception of Chicago, remained the healthiest of all the funds reviewed.
Its unfunded obligations fell to $5.11 billion from $5.25 billion with its funded ratio rising to 84.3% from 83%. Its investments returned 13.5% up from negative territory in 2011. It assumes a 7.5% return rate and it pays an average annual annuity of $15,700. The benefits include a non-compounded annual cost-of-living adjustment unlike many of the other funds that pay the annual benefit at a more expensive compounded rate.
The Chicago Civic Federation issues a similar report annually although it does not cover the state municipal fund.
"Without comprehensive reforms, this staggering level of pension obligations will soon mean dramatic tax increases, significant service cuts or both for Chicago residents," the group's president, Laurence Msall, said in its review published last year before state level reforms were approved.
