CHICAGO – Chicago’s proposal to fix its troubled municipal employees’ pension fund offers a better solution that shields residents from steeper tax hikes than a restructuring backed by the pension fund’s managers, say Chicago’s finance chiefs.
The city’s plan relies on a recently approved utility tax based on water usage.
“It will be adding billions to the municipal pension fund without sacrificing service and without forcing unsustainable pension contribution growth in just one year,” Chicago’s chief financial officer, Carole Brown, told lawmakers at a state House committee hearing in Chicago Monday about the alternative fix offered up by the fund.
A new state law is needed to change how city contributions are calculated for the retirement fund, which is on track to insolvency if nothing changes.
Chicago’s restructuring proposal relies on increased city contributions being phased in over a five-year period, until an actuarially based contribution is reached in 2022.
The fund’s preferred alternative moves more quickly to an actuarially determined contribution with the first year’s payment at 60% of the full ADC which is then reached after four years.
City budget director Alexandra Holt called the alternative plan’s ramp “aggressive” and Brown warned that the city would struggle to afford the steeper increases. The city’s plan phases in the water/sewer tax hikes on a schedule tied to the proposed five-year ramp. At the end of the ramp, homeowners will see their water/sewer rates rise by 30%.
“Our opposition” to the proposed legislation from the fund “is that we believe that the four-year ramp is too severe for the increase in taxes and too severe for our residents and taxpayers,” Brown said. “We wanted to be able to design a payment plan that put the fund on a path to solvency without diminishing services and without bearing too big a burden on our taxpayers.”
While fund managers said the infusion of new revenue is welcome, they sounded alarms about the condition of the fund and whether its dwindling assets can withstand the longer ramp. They also questioned the city’s investment assumptions.
The five-year ramp “puts us in extreme danger,” said the fund’s executive director, Jim Mohler. “I hope I’m wrong.”
The city’s proposed ramp relies on a 7.5% investment return rate. Mohler warned that the actuarially based payment at the end of the ramp may not look the same as what the city has projected.
The system has just $4.4 billion in assets and contributions have long fallen short of actuarial levels under a contribution schedule set forth in state law that puts payments at a percentage of employee contributions. The fund last year was forced to deplete $550 million in assets to meet annuity requirements.
“The longer the wait for doing this [reaching an ADC]….the larger the underfunding that will occur,” Mohler told lawmakers.
The focus of the “subject matter” hearing held by the House Personnel and Pensions Committee Monday was on the fund’s proposal outlined in Amendment 1 to House Bill 705.
While the city council last week approved the new tax, legislation that would restructure the payment formula has yet to be introduced to the General Assembly. Brown said the bill would be submitted in the coming weeks with approval sought during the legislature’s annual veto session set for November.
Both plans would put the city on course to reach a 90% funded ratio in 40 years.
The Chicago Federation of Labor landed on the city’s side Monday because Mayor Rahm Emanuel’s plan was the result of negotiations with labor unions that signed off on higher contributions for new employees.
“This is a positive step,” testified Bridget Early, director of legislative and political affairs for the Chicago Federation of Labor. “The concern with the current structure of HB705 is that the payment schedule is too steep.”
Under the existing statutory structure, the city pays about $160 million annually into the fund, far short of the roughly $1 billion actuarially based payment level. The system is headed toward insolvency in 2025, but the actual date could come earlier, warned actuaries, because it’s unclear whether the fund can use employee contributions to cover retirees annuities as assets are depleted.
The hearing highlighted the fund’s downfall from its once flush status prior to 2003. Benefit perks enacted throughout the years, three early retirement programs, and the city’s move to lower the multiplier used to calculate payments all contributed to its current ill health.
The municipal fund has $9.8 billion of unfunded liabilities and $18.6 billion of net pension liabilities under new accounting rules. The city's total net pension liabilities among its four individual funds are $33.8 billion.
The city’s pension ills have dragged its ratings down. Fitch Ratings rates the city at the lowest investment grade level of BBB-minus with a stable outlook. Moody’s Investors Service rates the city as the junk level of Ba1 with a negative outlook. Kroll and S&P Global Ratings assign a BBB-plus with a negative outlook.