How did Chicago’s Pensions Become So Underfunded? Breaking Down the Numbers Behind Chicago’s Pension Crisis
The city of Chicago’s four pension funds are roughly 24 percent funded, with a staggering $33.9 billion in unfunded liabilities hanging over the city’s financial horizon.[i] This means that the city has $33.9 billion in debt owed to the pension systems, and this money will come from either raising taxes, diverting revenue from other programs to fund pensions or re-amortizing the pension debt. This situation is a culmination of shortsighted policies, political gridlock, and systemic challenges that have plagued Chicago’s pension landscape for decades.
Chicago’s pension woes are not unique, but they are particularly acute compared to the national average: The average pension funded ratio across the country hovers around 78 percent.[ii] Chicago’s dismal 24 percent funded ratio is the result of decades of fiscal mismanagement.[iii] As pension funding levels have increased nationally over the years, Chicago remains a glaring outlier, with the funds teetering on the brink of insolvency.
Chicago’s short-term approach to pension management has been dictated by state law. State legislation tied the amount of the city’s pension contribution to percentage multipliers of payroll that generated overall contribution levels that were annually less than the amount required to fully fund the pensions based on actuarial projections.[iv] (Learn more about the actuarial methodology that grounds pension projections here.) Since the pension contributions were tied solely to payroll, the contributions were not affected by a change in benefits, or assets and investments, just changes in payroll. Contributions did not change under this approach even when the financial health of the fund deteriorated. This is how Chicago’s pension debt began to accumulate. It also did not help that the state passed legislation that allowed Chicago to take “pension holidays” — that is, make little to no pension contributions — in 2006 and 2007.[v] Mayor Richard Daley wanted these pension holidays to free up some city revenue during a time when Chicago was facing some real “fiscal pressure,” but getting them passed in Springfield ironically created more fiscal pressure for the city in the long run by ballooning the debt payments owed to the pension systems.[vi] This short-term thinking led to the city underpaying being the primary driver –59 percent — of a $22.6 billion dollar growth in pension liabilities between 2007–2020.[vii]
Reasons for $22.6 Billion Growth in Chicago’s Unfunded Pension Liability (2007–2020)
In 2016, two new state laws — Public Acts 100–0023 and 99–506, changed the methodology for computing the contributions Chicago had to make to its four pension systems.[viiii] This legislation finally ended the irresponsible fiscal practice of artificially tying the city’s pension contribution to a dollar amount derived from multiplying applicable payroll by a predetermined percentage, and ignoring actuarial principles. Under the new state law, a pension funding ramp was created for each of the city’s four systems, designed to get those systems 90 percent funded by the end of their respective pension ramp periods, which run from 2055 through 2058.[ix] However, as we know, Chicago is still dealing with the pricey consequences of previous shortsightedness.
The repercussions of Chicago’s pension crisis extend far beyond the realm of finance, and seeps into the fabric of everyday life of Chicago residents. Since 2015, Chicago has been forced to divert revenue from its Corporate, Enterprise and Special Revenue Funds — which could otherwise have gone to cover public services — to instead cover pension debt.[x] This was in large part because property tax revenue is insufficient to cover the backloaded increase in contributions scheduled under the Chicago Pension Ramps.[xi]
Additionally, the city’s General Obligation bond rating from Moody’s, a BBB+, reflects a lack of investor confidence and increases borrowing costs for the city compared to peer cities. Chicago taxpayers foot the bill for these higher borrowing costs.[xii] In contrast, cities like San Francisco and Los Angeles enjoy higher, AAA and AA2 bond ratings respectively, a testament to more stable financial management.[xiii] With little room to maneuver fiscally in times of economic downturn, Chicago faces heightened vulnerability compared to its counterparts with healthier pension systems, even with recent policy moves such as the “Advance Pension Funding Policy.” (Learn more about Chicago’s Advance Pension Funding Policy here.) “Chicago’s shaky pension funds face new hit from looming downturn,” Bloomberg reported, highlighting the city’s precarious position in the face of economic challenges. Jean-Pierre Aubry, director of state and local research at the Center for Retirement Research at Boston College, noted, “Downturns are never good, and systems like Chicago don’t have much wiggle room. Other pension funds will weather it. Chicago may have to react more aggressively and more quickly.”[xiv]
In conclusion, the time for action is now. With the right approach, such as re-amortizing the city’s pension debt and frontloading city payments as is proposed in CTBA’s Chicago pension report, Chicago can emerge in a stronger position fiscally.
For more information about the City of Chicago and State of Illinois pension systems, please read CTBA’s reports at: https://www.ctbaonline.org/reports?by_topic=5
[i] Cherone, Heather. “With a Comprehensive Overhaul for Chicago’s Pension Woes Elusive, Small Fixes on Tap for Veto Session.” WTTW PBS. October 26, 2023. Accessed April 1, 2024. https://news.wttw.com/2023/10/26/comprehensive-overhaul-chicago-s-pension-woes-elusive-small-fixes-tap-veto-session.
[ii] Aubry, Jean-Pierre. “Public Pension Funded Levels Improve Amidst Rising Interest Rates.” Center for Retirement Research at Boston College. July 18, 2023. Accessed April 1, 2024. https://crr.bc.edu/public-pension-funded-levels-improve-amidst-rising-interest-rates/.
[iii] Martire, Ralph. “How Chicago got buried under a mountain of pension debt.” Chicago Sun-Times. April 14, 2024. Accessed April 16, 2024. https://chicago.suntimes.com/2024/04/12/chicago-got-buried-under-mountain-pension-debt-34-billion-ralph-martire-column.
[iv] Dana R. Levenson and Gene R. Saffold. “Commission to Strengthen Chicago’s Pension Funds,” April 30, 2010. https://newsblogs.chicagotribune.com/files/pensionreport.pdf.
[v] “The Illinois Pension Disaster: What Went Wrong?,” Crain’s Chicago Business, accessed January 26, 2024, https://www.chicagobusiness.com/static/section/pensions.html.
[vi] “The Illinois Pension Disaster: What Went Wrong?,” Crain’s Chicago Business, accessed January 26, 2024, https://www.chicagobusiness.com/static/section/pensions.html.
[vii] CTBA Analysis of historical COGFA data.
[viii] i) “Illinois General Assembly — Bill Status for SB0042,” accessed January 26, 2024, https://ilga.gov/legislation/billstatus.asp?DocNum=42&GAID=14&GA=100&DocTypeID=SB&LegID=98885&SessionID=91, ii) “Illinois General Assembly — Full Text of Public Act 099–0506.” Accessed February 12, 2024. https://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=099-0506.
[ix] i) “Illinois General Assembly — Bill Status for SB0042,” accessed January 26, 2024, https://ilga.gov/legislation/billstatus.asp?DocNum=42&GAID=14&GA=100&DocTypeID=SB&LegID=98885&SessionID=91, ii) “Illinois General Assembly — Full Text of Public Act 099–0506.” Accessed February 12, 2024. https://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=099-0506.
[x] “2024 Budget Overview.” City of Chicago, October 2023. https://www.chicago.gov/content/dam/city/depts/obm/supp_info/2024Budget/2024-Budget-Overview_CityofChicago.pdf.
[xi] “2015 Budget Overview.” City of Chicago, n.d. www.chicago.gov/content/dam/city/depts/obm/supp_info/2016Budget/2016BudgetOverviewCoC.pdf.
[xii] “City of Chicago Secures Two More Rating Upgrades for the City’s General Obligation Credit and Sale Tax Securitization Corporation.” Accessed April 24, 2024. https://www.chicago.gov/content/city/en/depts/mayor/press_room/press_releases/2023/october/chicago-rating-upgrades.html.
[xii] i) “Bond Rating | City Performance Scorecards.” Accessed April 24, 2024. https://sfgov.org/scorecards/finance/bond-rating, ii) “Offerings, Ratings, Roadshows | City of Los Angeles | BondLink.” Accessed April 24, 2024. https://cityoflosangelesinvestorrelations.bondlink.com/city-of-los-angeles-investor-relations-ca/bonds/i828#anchor-bond-ratings.
[xiv] Singh, Shruti. “Chicago’s Shaky Pension Funds Face New Hit From Looming Downturn.” Bloomberg. December 27, 2022. Accessed March 17, 2024. https://www.bloomberg.com/news/articles/2022-12-27/chicago-s-shaky-pension-funds-face-new-hit-from-looming-downturn
