Chicago should be talking about its big pension problem

In today’s political climate, it’s nigh impossible to identify any subject that generates consensus across ideological lines. Which makes the City of Chicago’s four public employee pension systems somewhat unique, because virtually everyone agrees they’re in bad shape.

How bad? Well, according to the federal General Accountability Office, “healthy” public pension systems should have a funded ratio of at least 80%. That just means the dollar value of its assets should cover at least 80% of the dollar value of the benefits it has to pay.

Each of Chicago’s four pension systems is significantly below that standard. For instance, Chicago’s best funded system is the Laborers’ Fund, which clocks in at 44.5% funded—or a little over half the level considered healthy. It’s also the smallest city pension system.

The largest is the Municipal Employees’ system, which has a funded ratio of only 22%, or just a tad over the Firemen’s Fund, which comes in at a meager 20.9%. Finally there’s the Policemen’s system, with its 24% funded ratio.

When you lump all four systems together, their combined funded ratio is a paltry 34%. That’s a far cry from the GAO standard. In dollars and cents, the city’s total unfunded liability is in the $33 billion neighborhood. And that’s a neighborhood no one can afford for long.

Oh, and things are about to get worse. Under current law, Chicago’s paying that $33 billion-plus debt pursuant to a schedule that ramps-up the annual contribution to get the four pension systems 90% funded by 2055. A laudable goal, sure — but to reach it, state lawmakers created an unaffordably back-loaded repayment plan. Consider that, in FY 2010, the city was only required to contribute $459 million to its pensions. A decade later in FY 2020, the contribution sat at $1.679 billion. This year it jumped to $2.3 billion, a five-fold increase from 2010.

First, admit the problem

Going forward, Chicago’s pension contribution will increase by an average of at least $47 million per year through FY 2027. I say at least, because the city’s pension systems suffered a 12% investment loss from Jan. 1 through Aug. 31, 2022 — which will add another $100 million on average per year to its repayment schedule.

Meanwhile, the prevailing consensus about Chicago’s pensions begins and ends with acknowledging the scope of the fiscal challenges the city faces. There’s no meeting of minds around resolving the issue. But Chicagoans deserve to hear more about solutions as the municipal election approaches.

Since desperate times call for desperate measures, maybe now is the moment for trying something radical: identify — and then redress — what’s actually causing the problem.

According to city financial statements, the greatest increase in unfunded liabilities occurred between 2007 and 2020, when the amount owed ballooned by $22 billion. Three potential culprits could cause such a significant worsening of pension debt. First are items inherent to the pension systems themselves, like benefits, salaries and actuarial assumptions. Way too many talking heads blame “overly generous” benefits and salaries for driving up pension debt, but the data doesn’t support their position. In fact, over the 2007-2020 sequence, worker salaries and benefits didn’t contribute one red cent to the growth in unfunded liabilities.

However, one key actuarial assumption — the assumed rate of return from investment of pension assets — was lowered significantly. Whenever projected investment returns go down, the dollar value of the unfunded liability goes up, in this case accounting for 23% of the problem.

But the real gorilla in the room is the decades-long failure of state law to require that Chicago make actuarially determined pension contributions. Inadequate contributions, i.e. underpaying, account for fully 60% — or $13.2 billion — of the $22 billion growth in unfunded liabilities from 2007-2020.

Which means Chicago cannot sustainably resolve its pension funding crisis unless it tames this gorilla, by working with state lawmakers to re-amortize its pension debt in a manner that’s both affordable and grows the funded ratio of all four systems annually.

Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank, and also the Arthur Rubloff Professor of Public Policy at Roosevelt University.

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