What’s Going on with Chicago’s Pension Systems?

The City of Chicago’s four public employee pension systems are in bad shape. According to the federal General Accountability Office (“GAO”), “healthy” public pension systems should have a funded ratio of at least 80 percent.[i] That means the dollar value of its assets should cover at least 80 percent of the dollar value of the benefits it has to pay.

Each of Chicago’s four pension systems is significantly below that standard. For instance, Chicago’s best-funded system is the Laborers’ Fund, which clocks in at 44.5 percent funded — or a little over half the level considered healthy.[ii] It’s also the smallest City of Chicago pension system.

The largest is the Municipal Employees’ system, which has a funded ratio of only 22 percent, or just a tad over the Firemen’s Fund, which comes in at a meager 20.9 percent.[iii] Finally, there’s the Policemen’s system with its 24 percent funded ratio.[iv]

When you lump all four systems together, their combined funded ratio is a paltry 34 percent.[v] That’s nowhere near the GAO standard of 80 percent. In dollars and cents, the City of Chicago’s total unfunded liability is around $33.6 billion.[vi]

It doesn’t look like the situation is going to improve anytime soon. Under current law, Chicago’s paying that $33.6 billion—plus debt pursuant to a schedule that ramps up the annual contribution to get the four pension systems 90 percent funded by 2055.[vii] A laudable goal, but to reach it, state lawmakers created an unaffordable back-loaded repayment plan. Consider that, in FY 2010, the City was only required to contribute $459 million to its pensions. A decade later in FY 2020, the contribution totaled $1.679 billion.[viii] This year it jumped to $2.3 billion, a five-fold increase from 2010.[ix]

Going forward, Chicago’s pension contribution will increase by an average of at least $47 million per year through FY 2027, partially because the City’s pension systems suffered a 12 percent investment loss from January 1 through August 31, 2022 — which will add another $100 million on average per year to its repayment schedule.[x]

According to city financial statements, the greatest increase in unfunded liabilities occurred between 2007 and 2020, when the amount owed ballooned by $22 billion.[xi] There are potential culprits which could cause such a significant worsening of pension debt. First are items inherent to the pension systems themselves, like benefits, salaries, and actuarial assumptions. “Overly generous” benefits and salaries are often blamed for driving up the pension debt, but the data doesn’t support this position. In fact, over the 2007–2020 sequence, worker salaries and benefits didn’t contribute one cent to the growth in unfunded liabilities. Additionally, one key actuarial assumption — the assumed rate of return from the investment of pension assets — was lowered significantly. Whenever projected investment returns go down, the dollar value of the unfunded liability goes up, in this case accounting for 23 percent of the problem.

However, the real problem isn’t benefits or changes in actuarial assumptions. It is the decades-long failure of state law to require that Chicago make actuarially determined pension contributions. Inadequate contributions, or underpaying, account for fully 60 percent — or $13.2 billion — of the $22 billion growth in unfunded liabilities from 2007–2020.[xii] This means Chicago cannot sustainably resolve its pension funding crisis unless it meets those payments, which requires working with state lawmakers to re-amortize its pension debt in a manner that’s both affordable and grows the funded ratio of all four systems annually.

[i] “State and Local Government Retiree Benefits,” United States Government Accountability Office, January 2008, 2. https://www.gao.gov/assets/280/271576.pdf

[i] State of Illinois, Illinois Pension Code 40 ILCS 5, (Springfield, IL: State of Illinois).

[ii] CTBA Analysis of Center for Retirement Research data.

[iii] CTBA Analysis of Center for Retirement Research data.

[iv] CTBA Analysis of Center for Retirement Research data.

[v] CTBA Analysis of Center for Retirement Research data.

[vi] CTBA Analysis of Center for Retirement Research data.

[vii] City of Chicago. “Annual Comprehensive Financial Report.” Annual Comprehensive Financial Report for the Year Ended December 31, 2021, June 29, 2022. https://www.chicago.gov/content/dam/city/depts/fin/supp_info/CAFR/2021CAFR/ACFR_2021.pdf.

[viii] “City of Chicago Comprehensive Annual Financial Report,” 2010. Ended December 31, 2010. https://www.chicago.gov/content/dam/city/depts/fin/supp_info/CAFR/2010/CAFR2010.pdf.

[ix] City of Chicago. “2023 Budget Overview.” https://www.chicago.gov/content/dam/city/depts/obm/supp_info/2023Budget/2023-OVERVIEW.pdf.

[x] City of Chicago. “2023 Budget Overview,” page 58. https://www.chicago.gov/content/dam/city/depts/obm/supp_info/2023Budget/2023-OVERVIEW.pdf.

[xi] CTBA Analysis of the City of Chicago’s Annual Comprehensive Financial Reports.

[xii] CTBA Analysis of the City of Chicago’s Annual Comprehensive Financial Reports.