How Chicago got buried under a mountain of pension debt

When Brandon Johnson became mayor, he inherited numerous fiscal challenges that have plagued the city’s budget for decades. One major challenge: $33.9 billion in unfunded liabilities owed to Chicago’s four public pension systems.

But Chicago hasn’t always owed a mountain of pension debt.

In fact, in fiscal year 2000 the city’s pension systems were relatively healthy, with an aggregate funded ratio of 85%. Funded ratio, roughly speaking, is simply pension assets divided by the current and future costs of retiree benefits.

While the goal should always be to get a pension system 100% funded within a reasonable period of time, by most metrics being 85% funded placed Chicago’s pensions on solid financial footing. For instance, the U.S. Government Accountability Office and the bond rating agencies Standard & Poor’s and Fitch Ratings all consider pension systems with funded ratios of 80% or greater to be healthy.

But the days are long gone when Chicago’s pension systems qualified as “financially healthy” under any metric. Indeed, after reaching the 85% peak in 2000, the financial health of the city’s pensions steadily declined.

Based on the most current data available, Chicago’s four pension systems have $44.7 billion in liabilities, but only $10.8 billion in assets. That means a whopping unfunded pension liability – read that as debt — of $33.9 billion, and a woeful 24% funded ratio.

That’s not just bad. It is among the worst-funded ratios for any public pension plan in the country.

So how did the wheels fall off? A big part of the problem is past legislation at the state level.

Don’t blame retirees’ benefits

Most people think and many talking heads continue to blame overly generous benefits and suggest benefit cuts are needed to get the pension systems’ fiscal house in order.

They are completely wrong on both counts. In fact, according to the most recent analysis done by the state’s nonpartisan Commission on Government Forecasting and Accountability, salaries and benefits did not contribute one red cent to the explosion in pension debt since 2000.

Instead, the city’s pension funding issues have been primarily driven by three factors: investment losses that were the consequence of national economic downturns, changes in actuarial assumptions and a state-imposed statutory contribution scheme that was woefully inadequate.

Consider the economic factors first. The recession that began after the “dot com” bubble finally burst in early 2000 and the Great Recession that rocked financial markets from December 2007 through June 2009 collectively led to some $15.9 billion in investment losses for Chicago’s pensions. However, due to the long-term diversified portfolio approach to investment used by the systems’ trustees, all but $4.52 billion of those losses have been recouped.

Second, state lawmakers changed various actuarial assumptions used to project growth in pension assets and costs. Those changes led to the unfunded liability growing by some $4.07 billion.

The gorilla in the room, however, is the state law that allowed Chicago to significantly underfund its pensions every single year for close to two decades. That law specified an annual pension payment that was well below the actuarial required contribution, or ARC.

Basically, the ARC identifies how much should be contributed to a pension system in a given year, so it will be adequately funded to cover its liabilities over the next 30 years. Whenever a pension contribution is set at a rate below the ARC, it creates unfunded liabilities that ultimately have to be paid, along with interest that accrues and compounds.

Of course, it also didn’t help when the state passed legislation, requested by then-Mayor M. Richard Daley, that allowed Chicago to take “pension holidays” —that is, make little to no pension contributions — in 2006 and 2007. Together, these state laws ultimately account for $13.33 billion, or 59%, of the $22.6 billion aggregate growth in unfunded pension liability from 2007-2022.

Given the city has limited revenue options available to fund its pension obligations and the city’s pension systems are creatures of state law, it is incumbent on state and city officials to devise a rational approach to covering Chicago’s outsized pension obligations — to get the pension systems financially healthy, in a way that taxpayers can reasonably afford.

Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University. He is a regular contributor to the Sun-Times.

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