Chicago Mayor Rahm Emanuel

CHICAGO — The 2013 actuarial reports for two Chicago pension funds underscore their troubled conditions prior to an overhaul recently approved by the legislature.

Chicago's municipal employees fund saw further deterioration last year while the city's laborers' fund reversed a five-year trend and improved slightly. Both funds remained headed toward insolvency based on last year's results, which were compiled before Gov. Pat Quinn signed legislation overhauling the two troubled funds.

The 2013 results for the city's other two funds, which cover police and firefighters, were not yet available.

The unfunded liabilities of the municipal employees' fund rose to $8.74 billion from $8.56 billion, driving down the funded ratio slightly to 36.9 % from 37.2%. The fund has deteriorated every year since 2008. The rise in unfunded obligation is due to the "continued shortfall in contributions relative" compared to what would be an actuarially required level.

"If all future assumptions are realized, the funding ratio is projected to deteriorate until all assets are depleted within about 10 to 15 years," the fund's report read. Moving to pay-as-you-go contributions would drive up annual payment by three to four times.

An $849 million payment in 2014 would be needed to achieve an actuarially required contribution level to put the system on a healthy tract. That's $693 million more than the actual payment, based on a formula in state statute that ties city payments to a percentage of employee payments. The new legislation phases in a shift to an ARC in five years.

The accumulated difference between statutory payments to the system and the ARC under Governmental Accounting Standards Board rules has grown to $2.7 billion from zero in 2006, according to the fund's report.

Under a market-based assessment of the fund, the funded ratio is slightly better at 39.13% up from 38%.

The unfunded liabilities of the laborers fund dropped slightly to $1.04 billion from $1.06 billion for a funded ratio 56.65%, up from 55.41%.

The decrease in unfunded liabilities "is mainly attributable to favorable investment return on the actuarial value of assets due to the recognition of investments gains and changes" due to various legislation provisions.

But the report stressed: "Contributions continue to be insufficient to adequately finance the plan, and will result in further decreases in the funding ratio. Under the current funding policy, if all future assumptions are realized, the funding ratio is projected to deteriorate until assets are depleted within about 15 to 20 years. "

A payment of $109 million would be required to meet the ARC. Under a market value assessment, the funded ratio also showed improvement, rising to 61% from 57.7%.

Quinn last week signed legislation that cut some benefits including cost-of-living increases and raised city and employee contributions to stabilize the two funds. The legislation calls for the city to funnel $750 million to the funds over the next five years, increasing contributions by $50 million annually, before shifting to an ARC payment plan.

Mayor Rahm Emanuel is expected to heavily rely on property tax increases to fund higher city contributions although his recent statements have suggested that other revenue sources will be sought out for at least the first year.

The city's cumulative unfunded liabilities in all four funds at the close of 2012 totaled $19.5 billion. The fiscal pressures of those liabilities have driven the city's steep credit dive.

"This pension reform and retirement security plan marks a significant step forward for Chicago," Emanuel said in a statement. The city crafted the plan with the help of most unions impacted, but several remain opposed and have said they are preparing a legal challenge on the benefit cuts.

Moody's rates Chicago's general obligation bonds Baa1 with a negative outlook. Fitch assigns its A-minus rating and a negative outlook, and Standard & Poor's assigns its A-plus rating and negative outlook. Analysts have called the legislation a positive step forward that would restore solvency to the two funds, though any benefits through a notable impact on overall liabilities would be years away.

The city is facing a more severe challenge in the form of a $600 million hike next year in its contributions to fund the police and fire funds. The higher payments are required by a prior state mandate aimed at moving local governments' public safety funds to a 90% funded ratio by 2040.

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