CHICAGO – The health of Chicago's municipal employees' and laborers' pension funds further eroded over the last year with another $3 billion of unfunded liabilities being dumped on to the city's pension tab, according to new 2015 actuarial reports.
And under new accounting rules, the net pension liability for the two funds that must be reported on the city's balance sheet skyrocketed by about $13 billion.
The funds' worsening conditions and bleak prospects – both are headed toward insolvency in the next decade -- underscore the urgency of an overhaul for the funds, after the Illinois Supreme Court's in March voided city-backed state legislation designed to salvage the funds.
The voided reform plan would have slowly gotten the funds to a 90% ratio in 2055 through higher city and employee contributions and benefit cuts, but the court ruled that the latter ran afoul of the state constitution. The two funds accounted for about half of the city's 2014 unfunded tab of $20 billion. The police and firefighter funds' 2015 financial reports have not yet been posted.
"As a result of the benefit and funding changes in Public Act 98-0641 being revoked, the fund is in imminent danger of insolvency. Without increased funding, the [municipal employees] Fund is projected to become insolvent within the next 10 years (during 2025)," according to the municipal employees' fund's 2015
The municipal fund, which has about 70,000 members, saw its unfunded liabilities rise by $2.5 billion.
They grew to $9.8 billion in 2015 from $7.3 billion in 2014 after falling from $8.7 billion in 2013. The funded ratio fell to 32.9% from 40.9%, according to the report prepared by Segal Consulting.
The 2014 figures had incorporated the changes prescribed by the reform legislation tossed this year by justices. The funded ratio for 2014 was 35.2% before applying the rejected reforms which brought it up to 40.9%.
The actuarial figures reflect a smoothing of assets over five years. Using the market value of assets, the funded ratio last year showed a sharper decline to 32.4% from 42% with unfunded liabilities rising to $9.9 billion from $7.1 billion.
The municipal fund earned a 2.3% rate of return compared to its 7.5% assumed rate.
The net pension liability figure skyrocketed to $18.6 billion from $7.1 billion due to the application of the new calculation and reporting requirements from the Governmental Accounting Standards Board Statements 67 and 68 which, among other changes require, the use of a blended discount rate in calculations and a shorter amortization schedule. The changes separate pension liability accounting and reporting from funding which is reflected in the unfunded liability figures. The changes also require that the net pension liability figure be recognized on the fund and employer's balance sheets.
The new statements also shed the use of an actuarially required contribution for plans like Chicago's which have statutory payment formulas. It shifts to what's being called an actuarially determined contribution that has a similar goal of setting payments at a level to keep funds healthy.
Under the ADC, the city should contribute $961.8 million this year to the funds, but the statutory payment set for this year is $161.5 million, including $8.3 million for other post-employment benefits. That leaves the pension contribution about $800 million short of the ADC.
"Each year there is a contribution deficiency leads to an increased deficiency in all future years," the report warns.
The laborers' actuarial unfunded liability on a smoothed basis rose by about $500 million.
It grew to $1.2 billion in 2015 from $754 million in 2014 with its funded ratio falling to 53% from 64.3%, according to the 2015
The increase is mainly attributable to the reform legislation repeal as well as "unfavorable investment return on the actuarial value of assets due to the recognition of investments losses in 2011, 2014 and 2015, and contributions less than normal cost plus interest on the unfunded actuarial accrued liability," the report read.
On a market basis, the unfunded tab rose to $1.2 billion from $723.6 million with the funded ratio deteriorating to 50.15% from 65.7%.
The fund, which serves about 8,000 members, is on course to deplete assets in 2027. "An important and concerning fact to note is that the fund is in a significant negative cash flow position," the report warned. "Given this negative cash flow situation and the funding policy, the ability to achieve higher returns over the long term is in jeopardy because assets may need to be liquidated in order to pay annual benefits."
An ADC for 2016 would be set at $117 million while the city will pay only $12 million based on the statutory formula. That's $105 million short. The investment portfolio lost 1.5% while the fund assumes a rate of return of 7.5%. The plan was forced to liquidate $130 million in assets in 2014 and 2015 to meet its obligations.
The plan's net pension liability was set at $2.5 billion, up from $775 million, according to the fund's
Mayor Rahm Emanuel said this week his administration remains in negotiations with unions to come up with an alternative reform plan that will be announced in the coming weeks. The plan is expected to include new revenue coming from some tax or fee increases and would need to offer fund members some benefit for agreeing to a cut if the plan is to pass legal muster.
Chief Financial Officer Carole Brown acknowledged the status of the city's ratings and size of the yield penalties on future borrowings will depend on how that plan is viewed.
The city is also awaiting action by Gov. Bruce Rauner on a re-amortization of its public safety pension contribution schedule that would trim payments owed this year by $220 million.
The city's $20 billion unfunded pension tab has dragged its ratings down, leaving it with one junk rating and at risk of another if it can't stabilize its pension strains. The city's GOs are rated Ba1 by Moody's Investors Service and BBB-plus by Kroll Bond Rating Agency and S&P Global Ratings. Fitch Ratings has the city at the lowest investment grade level of BBB-minus.