Report shows continued deterioration of Chicago-area local pensions

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Weak investment returns, assumption changes, and low contributions combined to drive up the cumulative tab of unfunded liabilities for 11 Chicago-area local government pension funds in 2018.

The deteriorating health of many of the funds was reflected in a rise of unfunded liabilities to $56.1 billion in 2018 from $51.6 billion in 2017, according to data tracked by the state legislature’s non-partisan Commission on Government Forecasting and Accountability.

Its annual analysis covers Chicago’s four pension funds and funds for the Chicago Park District, Chicago Transit Authority, Chicago Public Schools teachers, the Metropolitan Water Reclamation District of Greater Chicago, Cook County, Cook County Forest Preserve, and the Illinois Municipal Retirement Fund.

The latter covers general employees employed by local governments outside Chicago. Public safety employees are now covered by two funds with one for firefighters and one for police after the consolidation of more than 600 local funds last year.

Looking at the eight Chicago funds alone, the tab totaled $44.7 billion of unfunded liabilities for a collective funded ratio of 35.2%. Their position deteriorated from the prior year when the tab stood at $41.8 billion for a funded ratio of 37%. The total tab is significant in that it reflects an overlapping burden that impacts the local tax base with the exception of the IMRF, which covers employees statewide.

The $56.1 billion from Chicago area funds for the last reported year of 2018 adds to the state’s $137.2 billion burden for fiscal 2019, and $11 billion for the last reporting year of local public safety years reviewed by COGFA. The state’s system is collectively funded at 40% and the non-Chicago public safety funds at 55.47%: both saw their unfunded tab grow from the prior year.

That puts the statewide unfunded burden at $204 billion for the last reporting year. That’s up from two years earlier when the figure was at $185.2 billion of collective public pension fund unfunded liabilities across 671 funds reported for fiscal 2016.

The high liabilities and low funded ratios for most of the 11 funds underscore the pressure facing Chicago, Cook County and several of the city’s sister agencies as the COVID-19 pandemic further pressures their finances. Investment losses loom while some governments will be pressured to meet their obligations due to tax revenue losses.

Pension strains exacerbated by the pandemic contributed to S&P Global Ratings’ recent decisions to lower Chicago's and Cook County’s rating outlooks to negative from stable and to downgrade the park district’s rating by two notches.

Moody’s Investors Service recently shifted its outlook on the nationwide local government sector to negative from stable.

“The full impact on pension costs will not arrive for several years, but the economic fallout from the coronavirus is threatening local governments' ability to afford higher pension liabilities,” wrote Moody’s analyst Natalie Claes.

Chicago and the park district are trying to stay on course for the costly move to actuarially based contributions to maintain their ratings and Cook County must keep up supplemental contributions to its fund to stave off insolvency.

Options to bolster pension funding are limited as local governments face an already crushed tax base; the Illinois’ constitution bars outright benefit cuts.

Pension obligation bonding is no panacea, Moody’s warned in a recent report.

“Moody’s regards POBs neutral at best and usually negative for a government's credit quality,” said analyst Tom Aaron. “The current low market interest rates and the prospect of investing after a stock market correction may increase the appeal of POBs, but governments must accept higher exposure to investment market volatility and higher long-term pension costs.”

Chicago Mayor Lori Lightfoot dropped predecessor Rahm Emanuel’s $10 billion POB proposal. Lightfoot’s administration is exploring using POBs to stabilize its system according to market sources, but the administration has declined to comment.

City Police & Fire
The firefighters' fund's unfunded liability rose to $5 billion from $4.5 billion and its funded ratio eroded to 18.4% from 20.1%. Ten years ago it was at a 36.5% funded ratio.

The fund posted a 5.2% investment loss. It assumes a return of 6.75%.

The police fund mostly held steady with its unfunded liability rising to $10.1 billion from $9.9 billion and its funded ratio at 23.8% compared to 23.7% in 2017. A decade ago it was at a 43.6% funded ratio. It suffered a 5.4% investment loss. It assumes a 7.25% rate of return.

A ramp to actuarial contributions ended this year for the city and it’s now slated to make actuarially based payments designed to reach a 90% funded goal by the end of 2055 for police and firefighters.

City Municipal & Laborers
The municipal employees’ fund deteriorated, with unfunded liabilities up to $12.6 billion from $11.8 billion and the funded ratio down to 25% from 27.4%. A decade ago it was 57% funded.

The fund took a 5.7% investment hit. It assumes a rate of return of 7%.

The Chicago laborers’ tab rose to $1.5 billion from $1.3 billion and its funded ratio dropped to 44.7% from 48.3%. It was at a 79.4% funded ratio.

The fund suffered a 6.4% investment loss and assumes a 7.25% return.

The city is currently ramping up to an actuarial contribution for muni and laborers after payment year 2022 with contributions then designed to bring the funded ratio to 90% by 2058.

IMRF
The IMRF leads the 11 for its health with just $4.5 billion in unfunded liabilities and a 90.9% funded ratio, though its unfunded liability grew from $3 billion and its funded ratio was down from 92.9%.

Ten years ago its funded ratio was at 83.2%, making it one of the only funds to see improvement over the last decade.

The fund recorded a 4.4% investment loss for 2018. It assumes a return of 7.25%.

If local governments fail to make actuarially required contributions, the IMRF can intercept tax revenues that flow through the state.

Cook County
Cook County’s 2018 results with a $6.79 billion unfunded tab and funded ratio at 60.8% was nearly on par with its 2017 results with the tab at $6.74 billion for a 60.1% funded ratio. Ten years ago the system was at 63.2%.

The fund suffered a 3.8% investment loss for 2018. It assumes a 7.25% rate of return.

“Under the current funding policy the Cook County Employees’ Pension Fund is projected to run out of assets by 2041 if all future assumptions are met and no additional contributions are made,” the report warns. The county makes supplemental contributions annually for more than $300 million that push off insolvency but they are not reflected in the actuarial results because state legislation is required to count them.

The county’s forest preserve district recorded a $133.8 million unfunded burden for a 60.3% funded ratio compared to $126.6 million and a funded ratio of 61.7% in 2017. A decade ago the account was 68.8% funded. The fund suffered a 4.3% loss. It assumes a 7.25% return rate.

“Under the current funding policy the Cook County Forest Preserve Pension Fund is projected to run out of assets by 2038 if all future assumptions are met and no additional contributions are made,” the report warned.

Reclamation District
The water reclamation district saw its unfunded liabilities grow slightly to $1.1 billion from $1 billion and its funded ratio of 56.5% erode slightly from 58.3%. A decade ago it was 60.7% funded. The fund saw a 7.5% investment loss. It assumes a 7.25% return.

Park District
The Chicago Park District’s fund deteriorated with the unfunded liability rising to $775.5 million for a funded ratio of 32.1% compared to $653.9 million and a funded ratio of 37.1% a year earlier. A decade ago the fund was 67.2% funded.

The fund suffered a 5.1% loss. It assumes a 7.25% rate of return.

CTA
The CTA held steady between 2017 and 2018 with its unfunded tab at $1.65 billion for a 52.6% funded ratio in 2018 and $1.62 billion and 52.6% funded for 2017. A decade ago it was 74.8% funded. The fund suffered a 3.5% loss. It assumes a return of 8.25%.

The CTA plan is designed to bring the funded ratio up to or no less than 90% by Dec. 31, 2059.

Schools
The teachers’ fund worsened with the unfunded liability rising to $11.95 billion from $10.9 billion and the funded ratio down to 47.9% from 50.1%. A decade ago it was 73.3% funded.

The fund saw a positive 9% return. While most of the funds operate on fiscal year that matches the calendar year, the district’s fiscal year ends June 30. It assumes a 7% return.

“For fiscal years 2014 through 2059 the Board of Education is required to make contributions calculated as a level percentage of payroll sufficient to bring the fund’s total assets up to 90% of the fund’s total liabilities by the end of FY 2059,” the report notes.

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Public pensions City of Chicago, IL Cook County Chicago Transit Authority Board of Education of the City of Chicago Illinois
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