The frail condition of Chicago’s largest pension fund and the flawed funding mechanisms that are to blame took center stage last week in a debate over state legislation that would hike city contributions by $800 million.
The Municipal Employees’ Annuity and Benefit Fund-backed legislation would raise the level of required contributions above the schedule in the existing ramp up to an actuarially based contribution scheduled for 2023.
The current state-mandated schedule sets the contributions at a dollar amount. The legislation would instead require a payment equal to 80% of an actuarial level in 2021 and 90% in 2022.
No action was taken and Senate Pensions Committee Chairman Robert Martwick, D-Chicago, indicated that the city’s fiscal woes make action unlikely.
But the legislation and another bill that sits on Gov. J.B. Pritzker’s desk shine a light on the city’s pension ills, the failings of non-actuarial funding formulas, and the state’s governance of local benefits — all of which factored into last week’s debate.
“I think it’s important to understand what happened to the Chicago funds and how they got to the situation they are in,” Martwick said during the hearing.
After the hearing he said wanted an airing of the legislation because the General Assembly members don't have "any understanding of the gravity of the city's crisis."
With a funded ratio of just 24%, the MEABF is still at risk of insolvency — something the ramp to an actuarial contribution eased in the near-term but did not cure — but Chicago was struggling with the existing payment schedule even before the COVID-19 pandemic hit city revenues.
“Our current funding level is extremely low and because our funding level is extremely low we’ve been forced to sell off assets to pay benefits,” the fund’s executive director, Dennis White, told the committee. “A significant downturn in the market could have significant impact on our fund going forward.” The fund warned of the downside risks due to the pandemic in its 2019 audit.
The legislation would raise contributions $800 million through 2022 on top of the existing ramp-up schedule.
Mayor Lori Lightfoot remains committed to honoring the ramp put in place by predecessor Rahm Emanuel and codified in state law, but Chicago can’t afford more, Chicago’s Chief Financial Officer Jennie Huang Bennett said. The city operates on a roughly $4 billion annual corporate fund budget, and has three other underfunded pension plans.
“At a time when the city has lost $1.7 billion in revenues due to COVID and is struggling like every other municipality across the state to balance our budgets…this pension bill adds significantly to the city’s fiscal stress at the worst time possible,” Bennett said. “These unfunded mandates jeopardize our bond ratings and the recent conversations we’ve had with the rating agencies affirm this.”
Those were the arguments laid out at a Senate Pension Committee hearing last week
The city lost $886 million of tax revenue in 2020 due to the pandemic and $783 million in 2021.
Chicago can expect about $1.8 billion of relief in the American Rescue Plan President Biden signed into law last week but the city must tread cautiously against using the funds for recurring costs that would damage its ability to reach structural balance over the next several years and likely draw a downgrade. The package bans the deposit of any stimulus dollars into public pension funds.
The city would struggle to implement the proposed pension bill because the payment year for 2022 has already been levied giving the city little time to meet the mandate and no specific funding mechanism, Bennett warned.
All four Chicago pension funds are operating under state laws that mandate increased city until they reach actuarial funding levels. The city hit the actuarial mark for police and fire pensions last year and will hit it for the municipal and laborers’ funds in 2023.
While statutory contributions fall short, Bennett blamed some of the municipal fund’s woes on rosy investment assumptions noting the fund’s 7% assumed rate and a 5.7% average returns over 20 years.
The funding ramps were designed to raise funding levels to an actuarial level at a pace that didn’t crush taxpayers. Property taxes, a 9-1-1 surcharge, and water surcharge were raised to cover the higher contributions.
The new track removed the near-term risk of insolvency for the municipal and laborers while funds pushing off a state-imposed funding hike for police and fire. Market participants praised the city for taking action amid legal rulings that the Illinois constitution bars any benefit cuts or higher employee contributions but also see the funding schedules as flawed because it will take years before funded ratios improve.
The municipal employees’ board, which manages the 100-year-old fund with 32,000 active members, 18,000 inactive, and 25,000 annuitants, voted at a January meeting to seek the additional funding.
The fund closed out 2019 with $4 billion in assets. It has suffered a 30% loss in assets over the last nine years. It liquidated $411 million in assets in 2019 as city and employee contribution fell short of the $955 million in benefits paid out and it liquidated $366 million to cover $974 million in benefits last year.
“Given the low funded ratio, the fund is still at risk of potential insolvency if an economic recession or investment market downturn were to occur in the near term,” Segal Consulting warns in audited statements White read aloud at the hearing.
The city’s contribution for payment year 2020 was $421 million, rising to $499 million in 2021 and then $576 million in 2022 under the ramp schedule. In 2023, the contribution will be calculated as a level percent of payroll sufficient to raise the fund to a 90% funded ratio by the end of 2058 resulting in a spike about $350 million with about $2.2 billion due for all four funds.
Martwick questioned whether the city would seek to put off the actuarial contribution. Bennett stressed that no extension was under consideration as such a move would likely draw rating downgrades. The city is building the increase into its fiscal planning as it did when the police and fire spike hit last year.
“The ramp that’s been established I think strikes that balance of long term sustainability as well as affordability in the city,” Bennett said.
The municipal employees' fund’s
The collective net pension liabilities of the city’s four funds rose to $31.8 billion in 2019 from $30.1 billion in 2018 and $28 billion in 2017 as rising contributions and investment returns failed to keep pace with costs and actuarial changes. The funded ratios ranged from 18% to 42%.
City contributions are rising $1.81 billion this year from $1.68 billion.
Emanuel had proposed an up to $10 billion pension obligation bond to raise funded ratios, but Lightfoot scrapped the proposal when she took office in 2019. Bennett has said the city is exploring a smaller version but only if it’s accompanied by some types of funding and policy reforms although state law precludes benefit cuts.
The pension committee did pass another funding mandate. The bill allows retired firefighters battling certain diseases or disabilities to put their pensions on hold and claim disability in order to obtain more affordable city health coverage.
Pension fund officials said they only expect one or two retirees to use the benefit annually but Bennett warned of an $8 million upfront cost and $40 million price over the coming decades. The bill “increases the city’s pension cost without providing an associated funding source,” Bennett said.
The state’s ability to impose pension funding mandates over the city’s objections was underscored after lawmakers approved House Bill 2451 during their
The city has warned it could add up to $30 million to annual contributions and up to $850 million over the 35-year funding schedule. Civic groups have joined Lightfoot in urging
Local governments across the state and the state government itself are saddled with retirement liabilities that consume a big chunk of their general funds, driving tax increases, service cuts, asset sales, and borrowing. The statewide tab of unfunded pension liabilities stands around $208 billion.
A big fix is needed, the Civic Federation says. In the absence of a state takeover, more consolidation of funds extending beyond administration and investments would help. Pension measures could surface during the legislature’s spring session but whether action is taken is a guess given the state’s budget woes. Martwick said he hopes to take a deep dive into various measures in his committee during the spring session.
