CHICAGO – The funded ratios of Chicago’s municipal and laborers' pension funds further eroded last year and prospects remain bleak for both as they careen toward insolvency.

The funded ratio of the Municipal Employees' fund fell to 30.5% in 2016 from 32.9% in 2015 and the funded ratio of the Laborers’ Fund fell to 50.36% from 52.99%.

The Laborers' and Retirement Board Employees' Annuity and Benefit Fund of Chicago and the Municipal Employees Annuity and Benefit Fund of Chicago saw their unfunded liabilities and net pension liabilities increase by modest amounts in 2016 after skyrocketing the previous year, according to newly published 2016 actuarial reports. The impact on the city’s $33.8 billion 2015 net pension liability tab is unclear as the city’s other two funds that cover police and firefighters have not yet published their 2016 figures.

The city adopted a plan to stabilize the two funds that requires state legislation to implement, legislation that has fallen victim to the same gridlock and hostility that has left the state government without a budget for almost two years.

The actuarial reports for the year ending Dec. 31 warn that both funds are in a negative cash flow position and as they exhaust assets to cover liabilities and shift investment strategies, the ability to hit targeted return rates gets harder, and insolvency could come sooner than projected.

“Chicago is a welcoming city and always will be, and we will not be blackmailed by President Trump's Justice Department,'' Mayor Rahm Emanuel said Monday.
Chicago Mayor Rahm Emanuel's fixes for two city pension funds still need final state approval. Bloomberg News

“Mayor Emanuel is committed to ensuring that both the Municipal and Laborers’ pension funds are put on a path to solvency, and the most recent actuarial reports underscore the need for Gov. Rauner to step up and sign the city’s pension reform legislation that provides certainty to taxpayers and finally puts these funds on an ARC [actuarially required contributions],” said finance department spokeswoman Molly Poppe.

Earlier this year, Gov. Bruce Rauner vetoed the legislation Chicago needs to implement its plan and an override could not be attempted because the measure was passed by a previous legislature.

The Senate passed an identical version earlier this year in Senate Bill 14 and the House more recently adopted it. In the previous vote, Republicans provided support but as tensions have mounted over the budget gridlock that support fell away leaving the party line vote at 63-45 vote.

The withdrawal of Republican support means the legislation lacks the 71 House votes needed for a veto override. Senate Democrats enjoy the three-fifths majority that would be needed on an override.

Rauner and his fellow Republicans are tying support for the city’s plan to passage of state pension reforms.

If not enacted soon, the city’s gains in stabilizing its credit could fade, S&P Global Ratings has warned.

“While the governor's veto itself, in our view, does not create immediate credit pressure, it does present additional uncertainty as to whether the city will be able to adequately address its pension challenges in the near term,” S&P wrote in a March report. “Timely action on pension funding is crucial to the city's budgetary stability….potential delays to increased contributions beyond 2017 could lead to credit deterioration.”

Emanuel won City Council approval for a new water-sewer tax to fund higher contributions to the municipal fund last year. An emergency phone surcharge is in place to cover higher payments to the laborers' fund and state lawmakers recently approved raising rates again. It would generate another $27 million that the city could use for the fund and to cover 9-1-1 costs and upgrades. City Council approval is still needed.

The city is setting aside the revenue to put towards the funds once the legislation is approved. The legislation would enact funding scheme changes under a revised formula aimed at putting the funds on a path to a 90% funded ratio in 2057. The revisions also require new employees to contribute more to the funds.

After a five-year ramp of increasing city contributions, the city commits to making an actuarially based contribution. The current formula, which has allowed the funds' health to falter, is based on a multiplier tied to recent employee contributions.

Enactment of the state law would mark the final step in putting the city's pension fixes in place. A big property tax was enacted to fund higher contributions to the city’s police and firefighter funds. Lawmakers overrode a Rauner veto to put them in place.

After 2022, the city's proposed funding schemes will fall short of what's needed and improved funded ratios will take decades to achieve. Critics attacked the plan for those two shortcomings and analysts have said the legislation falls short of attaining long term stability.

The city’s pension ills have dragged its ratings down to junk Ba1 from Moody’s Investors Service. The city's other ratings are in the BBB category. Fitch Ratings and S&P shifted their outlooks on the city’s credit to stable from negative after it came up with its pension fix.

MUNICIPAL FUND

The plan’s unfunded liabilities grew to $10.46 billion in 2016 from $9.84 billion in 2015. The funded ratio fell to 30.5% in 2016 from 32.9% in 2015. The actuarial figures reflect a smoothing of assets over five years. Using the market value of assets, the funded ratio last year declined to 29.5% from 32.3% in 2015 with unfunded liabilities rising to $10.62 billion from $9.91 billion.

The municipal fund has about 70,000 members.

“The funding method mandated by the Illinois Pension Code is insufficient to avoid insolvency, and without a change, the fund is in imminent danger of insolvency and the assets are projected to be depleted within the next 9 years (during 2025),” the report from Segal Consulting said.

“As the insolvency date approaches, invested assets will likely be rebalanced into more liquid, lower return assets in order pay the benefits that are due. To the extent that actual returns are less than the 7.50% assumption as a result of this rebalancing, the fund would become insolvent earlier than 2025,” it continued.

The city will pay $164 million into the fund based on the current formula built into state statutes. That’s $841.9 million short of the more than $1 billion the city should pay into the fund based on an actuarially determined contribution level.

The fund saw a market return of 6.3% that when smoothed resulted in an 8% return. The fund assumes a 7.5% return.

The net pension liabilities increased slightly to $18.86 billion from $18.62 billion.

The net pension liability figure that the city was required to begin reporting last year is based on the application of the new calculation and reporting requirements from the Governmental Accounting Standards Board Statements 67 and 68 which among other changes require the use of a blended discount rate in calculations and a shorter amortization schedule.

The changes also require that the net pension liability figure be recognized on the fund and employer’s balance sheets. The new statements also shed the use of an actuarially required contribution for plans like Chicago’s which have statutory payment formulas. The shift to what’s being called an actuarially determined contribution that has a similar goal of setting payments at a level to keep funds healthy.

LABORERS' FUND

The laborers’ actuarial unfunded liability on a smoothed basis rose by 7.27%, according to the 2016 report prepared by Gabriel, Roeder, Smith & Co. Unfunded liabilities grew to $1.25 billion in 2016 from $1.16 billion in 2015. The funded ratio fell to 50.36% from 52.99% in 2015.

“The increase in the unfunded actuarial accrued liability is mainly attributable to unfavorable investment return on the actuarial value of assets due to the recognition of investments losses in 2014, 2015 and 2016, and contributions less than normal cost plus interest on the unfunded actuarial accrued liability,” read the report.

The fund suffered an investment loss in 2016 of $30.2 million relative to the 7.5% expected rate of return on a market value of assets. The loss on an actuarial value of assets was $9.5 million.

On a market basis, the unfunded tab rose to $1.34 billion from $1.23 billion with the funded ratio sliding to 46.54% from 50.15%. The fund, which serves about 8,000 members, remains on course to deplete assets in 2027.

“Given this negative cash flow situation and the funding policy, the ability to achieve higher returns over the long term is in jeopardy because assets may need to be liquidated in order to pay annual benefits," the report said.

That could result in a change in the asset allocation to one comprised of a larger percentage of short term investments, and the fund may no longer be able to support the current 7.50 % investment return assumption, it said.

An actuarially based contribution for 2016 would be set at $124 million while the city under the old statutory formula its legislation would change calls for a contribution of only $14.6 million.

The plan’s net pension liability rose slightly to $2.53 billion from $2.47 billion in 2015.

City treasurer Kurt Summers, a trustee on the two pension boards, also said the latest results should sound alarms on the need for the overhaul’s approval.

"As a trustee on the pension boards of both the LABF Chicago and MEABF Chicago and as the Treasurer for the City of Chicago, I cannot stress enough the dire implications for our city resulting from the inaction in Springfield,” Summers said in a statement. “Chicago's workers, taxpayers and bond holders need Gov. Rauner and the state of Illinois to protect these funds from deteriorating or the futures of over 75,000 active members, retirees and their families. It is unacceptable and fiscally irresponsible to continue to ignore this obligation without consideration of the very real impact it has on this city and its residents.”

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