CHICAGO – The fiscal condition of the pension systems in Chicago, Cook County, and five other local governments deteriorated by $4.6 billion in 2011, bringing their collective unfunded obligations to $32 billion, according to a local government watchdog organization’s newly released annual review.

The grim analysis offered Tuesday by the Civic Federation of Chicago, which tracks the finances of Chicago area local governments and the state, warns of the heavy strain those obligations pose to local government balance sheets if pensions aren’t reformed.

The report underscores the need for state action, which many local government officials are banking on for a solution because their pension funding structures are set in state statute. The General Assembly, however, is nearing the final week of its spring session with two dueling reform packages before it, and they only tackle the state’s government’s dismal system and its $95 billion of unfunded liabilities.

Gov. Pat Quinn and legislative leaders have said local reforms would follow and likely track the state measures.

“Without comprehensive reforms, this staggering level of pension obligations will soon mean dramatic tax increases, significant service cuts or both for Chicago residents,” said the group’s president, Laurence Msall. “Illinois and local lawmakers owe it to taxpayers and public employees to agree on reforms that will significantly reduce pension costs for our state and local governments and ensure that the funds remain solvent for current and future public employees.“

The federation recommends reductions in automatic cost of living increases, raising the retirement age, and increased worker contributions to shore up the local government systems. The report also noted that the non-pension unfunded liabilities for other post-employment benefits – OPEBs – for six of the seven governments totaled $5.9 billion.

The report found a 16.7% increase in the unfunded pension liabilities of 10 Chicago area pension funds from 2010 to 2011, the year for which the most recent audited data is available. The total figure of $32 billion equals $16,914 per Chicago resident when all pension funds supported by Chicago taxes, including the state pension funds, are counted.

The report covers Chicago’s four funds for police, firefighters, laborers, and municipal workers as well as the Cook County fund and Cook County Forest Preserve District. It also covers the Chicago Park District, the Chicago Transit Authority, the Chicago Teachers’ Fund, and the Metropolitan Water Reclamation District of Greater Chicago.

The city’s laborers’ fund is projected to exhaust assets in 2031 and the municipal fund in 2030. Cook’s fund will run short in 2034 and the forest preserve district in 2031.

All 10 funds fall below a 65% funded ratio, with the Chicago firefighters in the poorest state at 28.3% and the Laborers’ fund on the other end of the spectrum at a 64.9% funded ratio. All have seen a weakening in their funded ratios over the last decade and collectively have an average 50.8% funded ratio, down from 80.3% in 2002.

The federation report primarily blames the worsening situation on investment losses and the inadequacy of the current funding structure. Employer contributions are based on a statutory formula that falls woefully short of the actuarially required contribution needed to keep the funds on a healthy course.

The analysis calculated that total employer payments in 2011 of $832 million fell $1.6 billion shy of the $2.5 billion needed to cover current costs and reduce the unfunded liability over a 30-year schedule. The average rate of return on pension plan assets in 2011 was 0.5%, down sharply from 13.7% in 2010 for those that observe a calendar year. The average rate of return for funds using a July 1 to June 30 fiscal year was 23.9% in fiscal 2011, up from 12.7% in 2010.

The report also warns of other looming challenges including the rising number of beneficiaries and shrinking number of employees to contribute. In FY2011 the ten funds had 1.16 active employees for every beneficiary, down from 1.65 actives per beneficiary in 2002. Six of the ten funds – the police, laborers’, MWRD, Forest Preserve, CTA and Park District --had more beneficiaries than active employees in 2011.

Chicago’s unfunded liabilities for its four funds total $16.7 billion. Chicago’s firefighters’ fund carries $2.8 billion of unfunded liabilities for a funded ratio of 28.3%, the police fund $6.2 billion for a funded ratio of 35.6%, the municipal fund $6.9 billion for a funded ratio of 44.6%, and the laborers’ fund $769 million of unfunded liabilities for a funded ratio of 64.9%.

If the state doesn’t act, Chicago would acutely feel the price of inaction in 2015 when it faces a more than $550 million increase in its police and fire contributions under previously approved state legislation.

Chicago was among the 29 governments Moody’s Investors Service put on review for a possible downgrade in April due to its new methodology for analyzing public pension liabilities. The possible downgrades reflect the rating agency’s view that “pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations,” Moody’s said.

“Mayor [Rahm] Emanuel has taken critical steps to right Chicago’s financial ship, but it is Springfield that must act and pass pension reform,” a city statement said. “Without needed reform, the city cannot move forward and critical services will have to be slashed. This problem is decades in the making and must be addressed.”

Emanuel laid out a framework for city reforms – which require state approval – in a proposed agreement with leaders of the Chicago Police Sergeants Association, but its members recently rejected the plan.

The deal raised the retirement age, raised pension contributions, cut COLAs, and allowed retirees to continue to receive subsidized health care but required future retirees to contribute 2% of their annuity to defray city costs. The city has a budget of about $6.5 billion so Emanuel has warned that the looming pension payment increase would drive a massive property-tax hike and/or deep cuts.

Cook County has $5.8 billion of unfunded obligations for a funded ratio of 57.5% and the forest preserve district has $111 million for a funded ratio of 61.6%. The federation urged in the report local governments to develop individualized pension reform frameworks tailored to their employee bases and funding levels. It cited the efforts led by Cook County Commissioner Bridget Gainer’s on the county’s OpenPensions.org website.

Cook Board President Toni Preckwinkle said in a statement: “The county continues to work with all stakeholders on comprehensive pension reform with the goal of achieving fully funded pensions in 30 years.”

MWRD has $1 billion for a funded ratio of 52.2%. The figures don’t take into account the impact pension reforms that were approved last year by state lawmakers for the district. The CTA has unfunded obligations of $1.1 billion for a funded ratio of 59.2%. The park district has $355 million for a funded ratio of 58% and the Chicago teachers fund has $6.8 billion for a funded ratio of 59.9%.

The schools face a $404 million jump in their payment for the teachers fund in the next fiscal year to $600 million – contributing to an overall looming $1 billion deficit. The hike is due to the expiration of a three-year pension holiday. The district faces further credit deterioration because of the scheduled payment and its deficit.

At the state level, the Senate recently approved a reform package its supporters argue could better withstand a constitutional challenge than a House plan because it asks employees and retirees to accept various cuts in exchange for preserving state retiree health care subsidies. The plan has the backing of key state unions but a group of retired teachers have called the plan unconstitutional and threatened to sue.

A different package passed by the House imposes direct cuts to the COLA, raises the retirement age, and phases in a 2 % hike in employee contributions. It would make a significantly bigger dent in future pension payments and eliminate more of the unfunded liability but Senate leaders believe it’s unconstitutional because it diminishes promised benefits.

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