“Pension returns aren’t an immediate threat because they are layered in over a number of years but they have do have a cumulative effect,” said Matt Fabian, a partner at Municipal Market Analytics.

CHICAGO – It was a year of disappointing investment returns from 11 local government pension funds in Illinois.

That’s what an Illinois government commission found in its latest annual report.

The poor results, in which fiscal 2015 investment returns fell well short of assumed return rates, further illustrate the severe problems facing pensions in Illinois amid a growing national tide of concern about the fiscal health of public pension systems amid a climate of modest returns.

The investment returns are included in the Illinois General Assembly’s Commission on Government Forecasting and Accountability’s annual review of the financial condition of the 11 funds for 2015.

The report covers Chicago’s four pension funds and the retirement funds of Cook County, its forest preserve district, the Chicago teachers’ fund, the Chicago Park District, Chicago Transit Authority, the Metropolitan Water Reclamation District of Greater Chicago and the Illinois Municipal Retirement Fund. The latter serves non-public safety local government employees outside of Chicago and Cook County.

Teachers outside of Chicago are in the state’s pension system.

The unfunded tab for Chicago and its sister agencies combined with the water district totaled $35.4 billion for a collective funded ratio of 40%, the report said. Adding in Cook County and the suburban and downstate fund brings the total unfunded figure to more than $47 billion.

The report showed growth in unfunded pension liabilities was mostly limited and improved a bit for some. Several of Chicago’s funds were the exception because they experienced more volatile results after the city’s first attempts at reforms were tossed by the courts.

The report underscores the ongoing strains pension obligations create for local governments here because funded ratios remain weak for most. Chicago, its sister agencies and Cook County have all been hit with rating downgrades driven by pension pressures with the overlapping burden on the local tax base adding to the strains.

Poor investment returns stand out in the fiscal 2015 overview. About half of the funds saw losses while the other half saw just modest gains. The results marked the second year of falling investment returns for most of the funds after stronger 2013 growth. The flush 2013 results softened the impact of poor 2015 results because they are smoothed over multiple years into the actuarial results.

Most of the funds assume a 7.5% return rate with the exception of the CTA which is at 8.25% and the city teachers’ fund which is at 7.75%.

“Pension returns aren’t an immediate threat because they are layered in over a number of years but they have do have a cumulative effect,” said Matt Fabian, a partner at Municipal Market Analytics. “When you assume such a high rate of return even a single year of negative earnings can significantly increase the return you need to target going forward so not only does it upset your current funding but it encourages the government to invest in risky” investments.

Rating agencies pay close attention especially in Chicago’s case as its overhaul of pension funding could be knocked off course by returns that falter over a prolonged period.

“It steepens the ramp and makes it harder for the city to manage,” Fabian said.


The Illinois Municipal Retirement Fund remained in the strongest shape of the group with a funded ratio of 88.4%, an improvement over the previous year when it was at 87.3%. It unfunded liabilities dropped to $4.6 billion from $4.8 billion. The fund also saw only a 0.2% return on its investments while assuming a 7.5% rate.

The Chicago firefighters fund saw its funded ratio improve slightly to 23.2% from 22.7% although its unfunded liabilities worsened, growing to $3.6 billion from $3.4 billion. Growth was due primarily to several actuarial assumption changes including a reduction in the assumed rate of return to 7.5% from 8% that took effect in December 2015. The fund saw a 0.7% rate of return in 2015.

The Chicago police fund saw its funded ratio improve, rising to 28.2% from 26.7% and unfunded liabilities held steady at about $8.1 billion. It lost 0.2% on an assumed rate of return of 7.5%.

Both public safety funds are on course to a 90% funded ratio by 2055 based on changes Chicago won to a 2011 state law that required all of the state’s local public safety fund to reach a 90% funded ratio by 2040. Chicago is funding higher contributions with a $543 million property tax increase but will need to come up with a fresh revenue source in 2021 when actuarial based contributions begin.

The Chicago laborers’ fund saw its funded ratio fall to 53% from 64.3% and its unfunded liabilities jump to $1.2 billion from $754 million as the city’s first attempt at overhauling the fund was voided by the Illinois Supreme Court. The fund’s investments lost 1.5% while assuming a 7.5% rate of return.

Based on the 2015 results, the fund is on course to exhaust assets in 2027. The city’s second stab at overhauling its municipal and laborers’ funds by raising its contributions and trimming benefits for new employees is designed to stave off insolvency and puts the fund on course to a 90% funded ratio in 2055.

The General Assembly has passed the reform plan but Gov. Bruce Rauner has threatened a veto unless state lawmakers also pass reforms to the state’s weak pension system.

Chicago’s municipal fund saw its funded ratio falter as a result of the high court’s overturning of the city’s first round of pension reforms. It dropped to 32.9% from 40.9% in 2014. The 40.9% figure reflects the impact of the failed reforms. If the effect of the failed reforms is set aside, the 2014 funding level would have only been 35.2%. Unfunded liabilities shot up to $9.8 billion from $7.3 billion. The fund earned 1.8% while assuming 7.5%.

The Chicago teachers’ pension fund recorded modest improvement in its funded ratio rising slightly to 51.8% from 51.5% but its unfunded liabilities worsened slightly to $9.6 billion from nearly $9.5 billion. Its 3.5% return rate was the strongest of the 11 funds examined but still far short of its assumed 7.75% rate.

Chicago Public Schools is required to set its contributions at a rate that will reach a 90% funded ratio by 2059. The requirement was part of legislation that granted the district a partial three-year contribution holiday as its budget stress grew. Payments shot up after the holiday expired with $700 million paid last year and $720 million due this June, adding to the district’s current fiscal crisis.

The Chicago Park District’s figures mostly held steady with its funded ratio falling to 43.5% from 43.7 % and its unfunded liabilities rising to $515 million from $507 million. Its investments earned a modest 1.9% on an assumed rate of 7.5%. The fund is projected to hit a 90% funded ratio by 2048 under legislative reforms that are currently the subject of litigation.

The Chicago Transit Authority’s funded ratio eroded, falling to 53.3% from 58.2% with its unfunded liabilities rising to $1.5 billion from $1.3 billion due primarily to investment losses.

The CTA fund fell far short of its assumed 8.25% rate of return with investments losing 0.2%. It sets contributions at a rate to reach a 90% funded ratio by 2059.

The Cook County employees’ fund saw its funded ratio deteriorate to 55.4% from 57.5% as its unfunded liabilities rose to $7.2 billion from $6.5 billion. The growth was due primarily to deficient employee contributions and salary increases. The county’s fund lost 0.1% on an assumed rate of return of 7.5%.

“Under the current funding laws the Cook County Employees’ Pension Fund is projected to run out of assets by 2041,” the report warned.

The county is hoping lawmakers approve a revised funding schedule to stave off insolvency and has already put a funding stream in place to raise contributions. The county made a $460 million contribution to the fund in 2016 that’s higher than required under its statutory formula – still short of an actuarially based payment -- under an intergovernmental agreement with the fund.

The county is funneling higher payments to the fund with revenue from a sales tax increase even though it’s not yet received state legislative approval to overhaul its payment structure.

The Cook County Forest Preserve District fund saw its funded ratio fall just slightly to 60% from 60.2% and its unfunded liabilities rise to $129 million from $125.3 million. Investments recorded a 1.5% rate of return while the fund assumes a 7.5% rate. It is projected to run out of assets by 2040.

The Metropolitan Water Reclamation District’s funded ratio held steady at 55% compared to 55.2% a year earlier as did its unfunded liabilities which ended the year at $1.1 billion compared to $1 billion a year earlier. The fund lost 0.2% on an assumed rate of 7.5%.

At the state level, several of the five funds which make up the state’s pension system lowered their assumed return rates to between 6.75% and 7% after warning from the state actuary that several were too high based on their negative cash flow as the state grapples with a $126.5 billion unfunded tab. That will drive up the state’s contribution in fiscal 2018 by $1 billion to nearly $9 billion.

The Illinois Auditor General’s office in late 2015 issued a report citing the state’s actuary, Cheiron, that said three of the state funds’ interest rate assumptions were too high especially given their negative cash flow position.

The unfunded liabilities differ from the calculation of net pension liabilities for reporting purposes now required by new accounting rules.



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