CHICAGO – Even though Chicago shaved about $7 billion off its net pension liability tab for its largest pension fund after a funding legislative overhaul, the fund remains at risk of insolvency should the economy sour as contributions ramp up to an actuarially based level in 2023.

The net pension liability to the Municipal Employees' fund dropped to $11.7 billion from nearly $18.9 billion, according to the fund’s 2017 actuarial review.

The municipal fund represented more than half of the city’s collective $35.7 billion of net pension liabilities in 2016. The laborers' fund accounted for $2.5 billion, the firefighters' fund $4.1 billion, and the police fund $10.2 billion. The other three funds have not yet published their 2017 reports.

Under funding changes enacted through state legislation last summer, the city is raising its contributions to the municipal fund over a five-year period, with $266 million due this year, $344 million due next year, $421 million due in 2020, and $576 million due in 2022.

Before the overhaul, the fund was on course to exhaust assets in 2025. This year’s contribution still falls $706 million short of meeting actuarial requirements. In 2023, the contribution will be calculated as a level percent of payroll sufficient to raise the fund to a 90% funded ratio by the end of 2058.

“The fixed-dollar contributions through 2022 leave the fund vulnerable to adverse experience,” according to bold-face lettering in the actuarial report from Segal Consulting. “Given the low-funded ratio, the fund is still at risk of potential insolvency if an economic recession or investment market downturn were to occur in the near term.”

Segal also recommends use of a funding method that targets a 100% funded ratio “where payments at least cover interest on the unfunded actuarial liability and a portion of the principal balance.”

The reporting figure of a net pension liability, or NPL, from an unfunded liability – the difference between assets and obligations -- shot up several years ago after new accounting rules took effect for reporting pension liabilities and how the discount rate and other factors are calculated.

The big drop this year in the NPL reflects the incorporation of Mayor Rahm Emanuel’s 2017 funding changes into the actuarial assessment.

Because the contributions still fall short of what’s needed to cover accrued benefits and assumption changes were made, the funded ratio declined slightly to 27.4% from 30.5% on an actuarial basis while the market value declined to 28% from 29.5%. The unfunded liabilities on an actuarial basis rose slightly to $11.8 billion from $10.5 billion.

The fund earned a 14.6% rate of return on its investments last year. The fund serves 31,000 active members, 25,000 retirees and beneficiaries, and 17,000 inactive members.

Assumption changes made last year included a lowering of the assumed rate of return to 7% from 7.5%, the lowering of the inflation assumption rate to 2.5% from 3%, and cost-of-living and pensionable salary caps were lowered for more recent employees that fall under the city’s tier 2 and tier 3 pension plans. All of the changes drove a 1.5% decrease in the funded ratio.

The city is funding the increased payments under legislative changes with a water-sewer charge that will also see it through the first year of the actuarial payment due in 2023, the finance department said.

The city’s legislation last year also overhauled funding for its smaller laborers' fund with higher payments financed by an emergency call surcharge. Police and firefighter funding changes were previously approved with the ramp to an ARC payment funded with a 2015 $550 million property tax that is being phased in over four years.

Prior to the legislative changes, the city’s contributions to all its funds was based on a percentage of employee contributions and that long fell short of an actuarial level, allowing the unfunded tab to balloon.

The weight of the pension burden has been a primary driver of the city’s rating deterioration. The city’s general obligation ratings range from a junk level Ba1 to a high of A.

Moody’s Investors Service at the low end believes the city’s pension funding scheme falls short of what’s needed to stabilize the system for more than a decade. The high of A comes from Kroll Bond Rating Agency, which believes the city can afford to meet growing pension funding demands.

The city is facing a $300 million leap in pension payments due in 2021 on police and fire and $330 million due in 2023 on muni and laborers'. Total payments will rise from $1 billion to an estimated $2.2 billion due in 2023 when all funds hit an ARC.

Chief financial officer Carole Brown has not yet said how the city intends to fully cover the higher payments, but has stressed that a steady reduction in the budget’s structural imbalance would help incorporate the higher tab.

“I challenge every elected city of Chicago official (who are members of MEABF and get this newsletter) to begin discussing the funding sources that will be required in the near future to ensure the solvency of MEABF,” the fund’s president Jeff Johnson wrote in a fund newsletter.

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