No surprise: pension woes weigh heavily on Chicago's balance sheet

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Chicago’s net unfunded pension burden rose by $2 billion to $30 billion in 2018 and the funded status eroded to a collective 24% ratio from 26%.

Rising pension contribution requirements and how to fund them weigh heavily on Mayor Lori Lightfoot’s new administration. There was also some good news tucked in the city’s 2018 comprehensive annual financial report, released Friday, and the recently released pension fund CAFRs.

The city’s public safety contributions are on course to rise by $283 million next year — as long projected — when a phase-in period with rising statutory contributions shifts to an actuarially based funding level for the police fund and firefighters fund. That shift occurs two years later for the municipal and laborers’ funds.

“It is no secret that our city faces extraordinary financial challenges, driven by a legacy of pension liabilities, mounting personnel contract increases, and growing debt service obligations — all of which have been long in the making. While these costs loom large for next year and beyond, our administration will be looking at how city government functions to develop a sustainable road-map for the future,” Lightfoot said in a letter introducing the CAFR.

The funds experienced negative returns in 2018 after double-digit returns in 2017 but other actuarial factors that contribute to the liability calculations and help set an actuarial payment favored the public safety funds, Lightfoot’s chief financial officer, Jennie Huang Bennett, said in an interview Friday. That will keep the contribution near the original $283 million projection.

Former Mayor Rahm Emanuel’s chief financial officer, Carole Brown, had warned in May that the public safety contribution figure could balloon by another $100 million due to poor 2018 investment returns, adding to a tally of more than $700 million of additional debt, pension, and labor costs that must be absorbed next year.

The roughly $280 million figure “was something we had been factoring into our budget for next year, so had it been $100 million higher” that would have just added to the gap that must be closed, Bennett said.

The CAFR “locks down a piece of the puzzle,” Bennett added. “We need to know where the numbers ended for 2018 and now we have it finalized” and that along with the annual financial analysis’ release at the end of the month that provides a forward-looking picture “will help drive where we think 2020 will go.”

The police fund projects an actuarially required contribution of $737 million next year, up from the $579 million statutory contribution for 2019, the final year of the phase-in period, and down slightly from a previous ARC estimate of $749 million.

The firefighters’ fund projects an ARC payment of $371 million next year. That’s up from the $245 million statutory contribution this year and up slightly from the previous ARC estimate of $354 million.

In addition to the $737 million police payment and the $371 million firefighters’ contribution, the city will pay $499 million to the municipal employees' fund and $72 million to the laborers’ fund under payments set in statute as part of the phase-in period for those two funds.

That brings the total 2020 pension contribution to nearly $1.7 billion.

All but the $283 million is covered by the existing property tax levy that was previously raised to cover the phase-in cycle of the public safety contributions, a water-sewer surcharge to cover the municipal phase-in period, and a 9-1-1 surcharge to cover the laborers’ fund.

The total contribution rises to a projected $1.8 billion in 2021 and then $2.1 billion as the ARC hits on the muni and laborers funds. That’s when the city will need to come up with another $300 million. The city is phasing in higher contributions under Emanuel’s overhaul of the four pension funds to reach a 90% funded ratio between 2055 and 2057. It will take years just to begin improving the funded ratios.

Budget Gap
Bennett declined to put a number on the city’s budget gap heading into 2020 and declined to rule out any options for closing it. Lightfoot has previously warned that it’s more than $700 million. Bankers are pitching pension obligation borrowing, an option Lightfoot has criticized in the past, and analysts are warning the city against a heavy reliance on one-shots or returning to scoop-and-toss debt restructuring practices it recently ended.

Bennett said chipping away at costs through improving efficiencies, such as the $22 million in savings announced last week by shedding the city’s bank-supported credit lines, is still underway. “We are continuing to work on efficiencies which is first and foremost” the goal, Bennett said.

“We are committed to trying to make progress toward a structurally balanced budget” but it’s “too early to commit to taking things off the table” and “to say we are committed to do this or not committed to something,” Bennett said.

The savings from efficiencies — such as reining in workers’ compensation and other costs — “will impact the other strategies we will take going forward,” Bennett said. “We are really looking at all the different options.”

Lightfoot has acknowledged revenue hikes will be needed but won’t show her hand on whether that means new taxes or increases to property or other taxes. She has endorsed a levy on professional services on big law or accounting firms. Gov. J.B. Pritzker panned the idea of a state takeover of the city and other local government pension funds.

The city intends to hold its annual investor conference in the late summer or early fall. The city runs on a calendar-year budget, and its next budget is traditionally unveiled in October. This year Chicago is operating on a $10.7 billion budget that includes a $3.8 billion general fund known as the corporate fund.

Deloitte & Touche LLP performed the audit and no material weaknesses were found.

Positive news in the CAFR included an increase in the city’s fund balance, to $332.3 million from $288.4 million in 2017 with the unassigned portion rising to $161.9 million from $155.5 million.

The city had a $215 million balance — of which just $93 million was unassigned — in 2015 and it’s steadily been on the rise in recent years. The fund balance hit a low of $33 million in 2012.

“General fund balance is what a lot of rating agencies look at,” said Bennett, who previously served as CFO for Chicago Public Schools, where dwindling balances played a big role in the district’s rating deterioration.

Bennett said it was still too early to say whether the city remains on course this year with budgeted revenue and expenses.

General fund expenses were $113.9 million less than budgeted due to positive variances for debt service transfers in 2018.

The city closed out the year with $8.2 billion of general obligation debt, down by $1.5 billion in 2018 due to the refunding of callable bonds using the Sales Tax Securitization Corp. structure. The STSC’s 2018 borrowings achieved $81.2 million in present value savings.

The city’s net position of governmental activities, which provides a fuller overall picture of the city’s financial health based on its long-term expenses and assets, ended 2018 at a negative $29.354 billion. That’s an increase of $996 million which followed a $938 million increase the prior year.

A big piece of the deficit increase last year was due a $558.7 million increase due to new reporting standards on other post-employment non-pension costs under the Government Accounting Standards Board’s Statement No. 75 rule. It requires governments to count the benefits as a liability, and to more comprehensively and comparably measure the annual costs. Increased expenses of $437.9 million accounted for the remainder.

The city’s books benefit from a $550 million long-term reserve set up with the 2005 Skyway toll road lease and it has deposited $20 million into an operating liquidity fund in $5 million increments over the last few years.

The city’s GO bonds are rated at BBB-minus by Fitch Ratings, A by Kroll Bond Rating Agency, junk-level Ba1 by Moody’s Investors Service, and BBB-plus by S&P Global Ratings. All assign a stable outlook.

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