Natalia Chi
In today’s political climate, it is nearly impossible to identify subjects that cross ideological lines and generate consensus. This makes his four civil service pension plans in the city of Chicago somewhat unique.
how bad Well, according to the Federal General Accountability Office, a “sound” public pension system should have a funding ratio of at least 80%. This means that the dollar value of the asset must cover at least 80% of the dollar value of the profits that must be paid.
Each of Chicago’s four pension plans falls well short of that standard. For example, Chicago’s most funded system is the Workers’ Fund, which is 44.5% funded. That is just over half the level considered healthy. It is also the smallest pension system in the city.
The largest is the Municipal Employee Scheme, with just 22% stake, slightly more than the Firefighters Fund, which has just 20.9%. Finally, we have a system of police officers with a funding ratio of 24%.
When all four systems are lumped together, their combined funding rate is just 34%. This is far from the GAO standard. In dollars and cents, the city’s underfunded debt totals nearly $33 billion. And it’s an area where no one can afford to live long.
Oh, things are about to get worse. Under current law, Chicago owes more than $33 billion on a schedule of increasing annual contributions to fund her four pension plans 90% of her way by 2055. A backload repayment plan that can’t afford. Consider that in fiscal 2010, the city only needed her to contribute $459 million to the pension. Ten years later, in fiscal year 2020, she contributed $1.679 billion. This year she jumped to $2.3 billion, and his in 2010 has tripled.
Acknowledge the problem first
Going forward, Chicago’s pension contributions will increase by an average of at least $47 million annually through 2027. At least, the city’s pension plan is because he suffered a 12% investment loss from January 1, 2022 to August 31. Adds an average of $100 million annually to your repayment schedule.
Meanwhile, the general consensus on Chicago’s pensions begins and ends with acknowledging the range of financial challenges facing the city. There is no consensus to solve the problem. But Chicagoans deserve to hear more about the solution as local elections draw near.
Desperate times call for desperate measures, so perhaps now is the time to try something radical. That is, identify and correct what is actually causing the problem.
According to the city’s financial statements, between 2007 and 2020, it saw the largest increase in outstanding debt, ballooning to $22 billion. Three potential culprits could cause a significant deterioration in pension liabilities. The first are items specific to the pension scheme itself, such as benefits, salaries and actuarial assumptions. Too many pundits blame “poor” benefits and salaries for driving up pension debt, but the data don’t support their position. In fact, from 2007 to 2020, worker salaries and benefits didn’t add a cent to the increase in unfunded debt.
However, one of the key actuarial assumptions, the assumed rate of return from the investment of pension assets, has been significantly reduced. The dollar value of your outstanding debt increases each time your projected return on investment declines. In this case, it accounts for 23% of the problems.
But the real gorilla in the room is that no state law has mandated Chicago for decades to require actuarially determined pension contributions. Inadequate contributions, or underpayments, accounted for 60% (or $13.2 billion) of the $22 billion increase in outstanding debt from 2007 to 2020.
In other words, unless we tame this gorilla by working with state legislators to re-amortize pension debt in a way that raises the funding rates of all four systems each year at an affordable price, Chicago will face a pension funding crisis. cannot be resolved permanently.
Ralph Martire is Executive Director of the Center for Tax and Budget Accountability, a nonpartisan fiscal policy think tank, and Arthur Rubloff Professor of Public Policy at Roosevelt University.
