What is Chicago’s “Pension Advance Funding Policy”? And What Does It Mean for the Health of Chicago’s Pension Systems?
The City of Chicago is responsible for funding the City’s four public pension plans: Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund (“LABF”), Municipal Employee’s Annuity and Benefit Fund (“MEABF”), Policemen’s Annuity and Benefit Fund (“PABF”), and Firemen’s Annuity and Benefit Fund (“FABF”).
Chicago’s pension systems are decidedly not healthy. In fact, the four systems have the lowest funded ratios for local pension plans in the country.[i]
Chicago’s total funded ratio was 24 percent in 2022, meaning the systems collectively had $44.7 billion in liabilities, but only $10.8 billion in assets to cover those liabilities.[ii] The average pension system in the United States has a funded percent of 78.1, which is on par with the 80 percent funded the federal Government Accountability Office (“GAO”) considers healthy.[iii]
It also means the City of Chicago, and thereby Chicago taxpayers, face a significant, as in $33.9 billion, aggregate “unfunded liability” — read that as “debt” — owed to its pension systems.[iv]
The situation is so dire that projections calculated by Boston University’s Center for Retirement Research show two of Chicago’s plans could exhaust their assets by 2030, meaning that there would be no money in those systems and workers would revert to “pay as you go.”[v] Pay as you go is a system where pension benefits are paid by those currently working, instead of contributions being invested to be paid out to retirees in the future.[vi]
Recent mayoral administrations have started taking substantive action in an attempt to address Chicago’s pension funding crisis. As of August 31, 2022, Mayor Lori Lightfoot’s budget office estimated that, overall, the City’s four pension funds would experience a 12 percent investment loss for that year.[vii] This was projected to create significant fiscal pressure over time if not addressed, with the budget office estimating that a one-year 12 percent investment loss would have increased the City’s statutorily required employer pension contribution by $100 million annually over the remaining life of the pension ramps (i.e., thru 2055/2058).[viii]
To address this investment loss, Mayor Lori Lightfoot and her administration included a one-time contribution to the City’s pensions that was $242 million more than required by law in FY2023. [ix] Additionally, Mayor Lightfoot’s administration implemented a “Pension Advance Funding Policy” to continue to address the fiscal fallout of the 2021 losses.
Chicago’s Advance Pension Funding Policy Ramp (in Millions of $)
The results were positive: The Pension Advance Funding Policy implementation was cited by all major credit rating agencies as a major credit factor in the City’s recent General Obligation credit upgrades.[x] The City’s actuarial analysis estimates that the new Advance Pension Funding Policy will save the City $2.6 billion in future pension costs, if properly funded.[xi]
Mayor Brandon Johnson’s Administration continued the Pension Advance Funding Policy: The FY2024 budget included a $306.6 million supplemental payment to the funds. [xii] This amount was slightly, $32.6M, above the Pension Advance Funding Policy calculated contribution of $275M for 2024.[xiii]
However, it is important to remember that Chicago has some of the worst pension funded ratios in the country and two of the four pension systems (FABF and PABF) are on the brink of insolvency. Though the Pension Advance Funding Policy is a step in the right direction, this policy is keeping the systems above water and not necessarily increasing the funded ratios of the pension systems. To increase the funded ratios to an acceptable level of around 80 percent and begin to shoot for the ideal 100 percent funded, Chicago policymakers must take extra steps.
Stay tuned for CTBA’s upcoming Chicago Pension Report where such additional measures will be presented.
[i] “State of Pensions 2023” (Equitable Institute’s Annual Report, n.d.), https://equable.org/wp-content/uploads/2023/07/Equable-Institute_State-of-Pensions-2023_Final.pdf.
[ii] “Illinois Public Retirement Systems” (Commission on Government Forecasting and Accountability, June 2022), https://cgfa.ilga.gov/Upload/Small%20Systems_2022.pdf.
[iii] “State of Pensions 2023” (Equitable Institute’s Annual Report, n.d.), https://equable.org/wp-content/uploads/2023/07/Equable-Institute_State-of-Pensions-2023_Final.pdf.
[iv] “Illinois Public Retirement Systems” (Commission on Government Forecasting and Accountability, June 2022), https://cgfa.ilga.gov/Upload/Small%20Systems_2022.pdf.
[v] “Pensions for State and Local Government Workers Not Covered by Social Security: Do Benefits Meet Federal Standards?,” Social Security Administration Research, Statistics, and Policy Analysis, https://www.ssa.gov/policy/d
[vi] “Pay-as-You-Go Pension System,” Oxford Reference, https://doi.org/10.1093/oi/authority.20110803100311871.ocs/ssb/v80n3/v80n3p1.html
[vii] “Mid-Year Budget Forecast.” City of Chicago, April 2023. https://www.chicago.gov/content/dam/city/depts/obm/supp_info/2024Budget/MidYearBudgetForecast.pdf.
[viii] “Mid-Year Budget Forecast.” City of Chicago, April 2023. https://www.chicago.gov/content/dam/city/depts/obm/supp_info/2024Budget/MidYearBudgetForecast.pdf.
[ix] “Mid-Year Budget Forecast.” City of Chicago, April 2023. https://www.chicago.gov/content/dam/city/depts/obm/supp_info/2024Budget/MidYearBudgetForecast.pdf.
[x] “Mid-Year Budget Forecast.” City of Chicago, April 2023. https://www.chicago.gov/content/dam/city/depts/obm/supp_info/2024Budget/MidYearBudgetForecast.pdf.
[xi] “Mid-Year Budget Forecast.” City of Chicago, April 2023. https://www.chicago.gov/content/dam/city/depts/obm/supp_info/2024Budget/MidYearBudgetForecast.pdf.
[xii] “Mid-Year Budget Forecast.” City of Chicago, April 2023. https://www.chicago.gov/content/dam/city/depts/obm/supp_info/2024Budget/MidYearBudgetForecast.pdf.
[xiii] “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.
