CHICAGO — Growing unfunded pension liabilities and poor fund-balance levels are common challenges among many of the nine Chicago-area local governments whose finances are scrutinized by the Chicago Civic Federation.
The federation, an organization that reviews local governments and the state of Illinois’ finances, reported its findings and recommendations in a summary analysis released earlier this month of the 2012 budgets of the local governments it tracks.
They are Chicago, Cook County, DuPage County, Chicago Public Schools, City Colleges of Chicago, the Chicago Transit Authority, the Chicago Park District, the Cook County Forest Preserve District, and the Metropolitan Water Reclamation District of Greater Chicago.
While the group issues a review of each individual government, it discerned “three specific problems that many of the governments face, including declines in the health of their employee pension funds, a lack of adequate fund balances reserved for contingencies, and possible future financial difficulties.”
“Unfunded pension liabilities for local governments have grown significantly over the past 10 years, making dramatic action to significantly increase contributions necessary,” the report reads.
The funded ratios of the seven governments that operate their own funds saw funded ratios decline. The other two, City Colleges and DuPage County, participate in the Illinois State Universities Retirement System and the Illinois Municipal Retirement Fund, respectively.
The federation is pressing local governments to back state legislation that would change how employer and employee contributions are calculated. Currently, most of the nine make payments based on a percentage of past employee contributions and employees pay a percentage of their salary. Neither bears a relationship to the actuarially required contribution needed to fully fund pension obligations.
The federation recommends that contributions be tied to actuarial liabilities and funded ratios similar to a model adopted several years ago by the CTA.
The organization also is urging a reduction in benefits for current employees. “Otherwise, the contributions needed to rescue the fund will become so substantial that governments will have great difficulty funding the pension promises made to their employees. Raising taxes to a level high enough to deal with the problem may not be a viable option,” the report reads.
Pending legislation before the General Assembly that stalled earlier this year over union opposition would protect the vested benefits of current employees while shifting future benefits to a three-tiered system, with employees paying more to maintain their current benefits.
Most lawyers and lawmakers agree that a clause inserted in the state constitution following the 1970 constitutional convention affords public workers stringent legal protection for accrued benefits.
They differ, however, on whether future benefits are afforded similar protections. A report issued earlier this year by Senate Democrats contends any legislative curbs would run afoul of the state’s constitution, while others believe the constitutional language does not protect future benefits of current employees.
The federation also recommends changes in the governance structure of pension funds and calls for studying the merger of various local government funds into larger multi-jurisdictional funds such as the Illinois Municipal Retirement Fund or downstate Teachers Retirement System.
On the subject of corporate or general fund balances, the federation said it encourages local governments to adopt a policy that follows the Government Finance Officers Association’s recommended target of 17% of operating expenses or revenues. Only four of the nine met the GFOA threshold.
The federation also is pressing local governments to present long-term financial plans with proposals to deal with future challenges that affect a government’s ability to maintain fiscal balance.
The governments should set fiscal and programmatic goals and priorities through public input and evaluate financial and service data in order to determine how to achieve the goals and priorities, it said.
Each plan should include a review of the government’s financial policies and a financial condition analysis that presents 10 years of historical trend information, multi-year financial forecasts, a reserve analysis, an evaluation of debt and capital obligations, and a series of action recommendations.
The group’s summary found that six of eight governments that impose a property tax held their levies steady or nearly flat in their adopted 2012 budgets.
CPS and the Water Reclamation District raised their levies the maximum allowed under state caps. The Transit Authority does not levy a property tax. Five of the nine increased their operating budget appropriations and four decreased their operating budgets. All but two, the City Colleges and the Forest Preserve district, cut full-time positions.
The federation endorsed Chicago Mayor Rahm Emanuel’s $6.3 billion 2012 budget, which was up by 2.1%. The budget cut nearly 2,300 positions and the tax levy was nearly held steady. The city’s fund balance was narrow at just 2.7% of operating expenses. Its four pension funds are funded at 32.4%, 39.7 %, 49.8%, and 73.8% for declines of between 3.9% to 7.2%. The federation praised the city for cutting expenses, reducing its use of reserves, and other non-recurring revenues, but raised concerns over pension funding levels and an ongoing structural deficit.
The organization also endorsed Cook County President Toni Preckwinkle’s $3.3 billion budget, which marked a 5.1% decrease over the previous year. The county cut 1,300 positions and nearly held its property tax levy steady. It too saw a narrow ending balance of just 2.3% of operating expenses. Its pension funded ratio declined by 2.5 % to 60.7%. The federation praised the county for reforms and repealing a sales tax increase, but raised concerns similar to the ones it has about Chicago.
The federation supported the schools’ $5.9 billion budget, which increased spending by 1.5% and raised property taxes by the maximum allowed. Its fund balance represented 4.1% of operating expenses and its pensions were funded at 67.1% in fiscal 2010, down 6.5% over fiscal 2009. The federation praised the district for including multi-year budget projections and implementing reforms while raising concerns over its continued use of reserves to balance its budget.
The federation supported the Park District’s $407.5 million budget that marked a 2.5% increase over its 2011 plan. It held its property tax levy flat and cut 33 positions. Its fund balance equaled 20% of operating expenses. Its pensions were funded at 62.3% in fiscal 2010, a 4.9% drop over 2009. It won praise for adopting a fund balance policy, but the federation expressed concerns over the district’s continued use of nonrecurring revenues to balance its budget.
The City Colleges also won support for its $651.5 million budget, which was a 12% increase over 2011. It held its property tax levy steady, increased its total employees, and maintained a fund balance that represented 21.5% of operating expenses. It participates in a state retirement fund. The federation praised its fund balance and fiscal discipline, but recommended it adopt a formal fund balance policy and long-term financing planning.
The federation supported the CTA’s $1.2 billion budget, which was down by 5.1%. It cut 171 positions. The pension funded ratio dropped by 4.7% to 70.1%. It won praise for ending its reliance on capital funds to close operating gaps.
The Forest Preserve District also won support for its $195 million budget, which was down by 1.3%. It held its property tax levy steady, saw an increase in positions, and maintained a fund balance equal to 96.1% of operations.
The federation supported DuPage County’s $434.7 million budget, which was down by 2.3% over 2011. It cut two positions and maintained a fund balance of 44.3% of operating expenses.
The water district won just conditional support for its $1.04 budget, which was up by nearly 1%. It cut 149 positions and maintained a fund balance equal to 9.4% of operating expenses. It increased its levy and its pension funded ratio fell by 4.2% to 56.5%. It won praise for increasing pension funding and reducing personnel costs, but the federation raised concerns over its failure to comply with fund balance policy.