Chicago’s largest pension fund urges city to contribute sooner
The fragile state 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 increase the city’s contributions. $ 800 million.
Legislation backed by the municipal employee pension and benefit fund would raise the level of contributions required above the expected schedule in the current ramp-up to an actuarial contribution scheduled for 2023.
The current state mandated schedule sets contributions at a dollar amount. Rather, the legislation would 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, said the city’s financial difficulties made action unlikely.
But the legislation and another bill that sits on Gov. JB Pritzker’s desk spotlight the city’s pension issues, failures of non-actuarial funding formulas, and state governance of local benefits – which were all taken into account in 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’re in,” Martwick said during the hearing.
After the hearing, he said he wanted the legislation to be disseminated because members of the General Assembly “have no understanding of the gravity of the city’s crisis.”
With a funding ratio of just 24%, the MEABF is still at risk of insolvency – something the ramp to actuarial contribution has eased in the short term but has not resolved – but Chicago was struggling with the payment schedule existing even before the COVID-19 pandemic hit the city’s revenue.
“Our current funding level is extremely low and because our funding level is extremely low, we have been forced to sell assets to pay for benefits,” Fund Executive Director Dennis White told the committee. “A significant market downturn could have a significant impact on our fund in the future.” The fund warned of downside risks from the pandemic in its 2019 audit.
The bill would increase contributions by $ 800 million until 2022 on top of the current ramp-up schedule.
Mayor Lori Lightfoot remains determined to honor the ramp put in place by her predecessor Rahm Emanuel and codified in state law, but Chicago can’t afford more, said Chicago CFO Jennie Huang Bennett. The city operates with an annual corporate fund budget of around $ 4 billion and has three other underfunded pension plans.
“At a time when the city has lost $ 1.7 billion in revenue due to COVID and is fighting like every other municipality in the state to balance our budgets … this pension bill adds more significant to the city’s fiscal stress at the worst possible time, ”Bennett said. “These unfunded mandates put our bond ratings at risk and recent conversations we have had with rating agencies confirm this.”
These were the arguments presented at a Senate Pension Committee hearing last week on SB 212, which is sponsored by State Senator Ram Villivalam, D-Chicago.
The city lost $ 886 million in tax revenue in 2020 due to the pandemic and $ 783 million in 2021.
Chicago can expect around $ 1.8 billion in relief from the US bailout that President Biden signed off last week, but the city must be cautious against using the funds for recurring costs that would affect its ability to achieve structural equilibrium over the next few years and likely lead to downgrading. The package prohibits the deposit of any stimulus money into public pension funds.
The city would find it difficult to implement the pension bill, as the payment year for 2022 has already been taken, leaving the city little time to fulfill its mandate and no specific funding mechanism, Bennett warned.
The four Chicago pension funds operate under state laws that impose a city increase until they reach actuarial funding levels. The city hit the actuarial bar for police and fire pensions last year and will hit it for municipal and labor funds in 2023.
Although statutory contributions are insufficient, Bennett blamed some of the municipal fund’s problems on optimistic investment assumptions, noting the fund’s hypothetical rate of 7% and an average return of 5.7% over 20 years.
Fundraising ramps were designed to raise funding levels to an actuarial level at a rate that has not crushed taxpayers. Property taxes, a 9-1-1 supplement and a water supplement have been increased to cover higher contributions.
The new lead removed the risk of short-term insolvency for municipalities and workers, while funds pushed for increased state-imposed funding for police and firefighters. Market participants praised the city for taking action amid legal rulings that the Illinois constitution prohibits any cutbacks in benefits or higher employee contributions, but also view the funding schedules as flawed because it It will be years before funding ratios improve.
The City Employees Council, which manages the 100-year-old fund with 32,000 active, 18,000 inactive and 25,000 annuitants, voted in a January meeting for additional funds.
The fund closed 2019 with $ 4 billion in assets. It has suffered an asset loss of 30% over the past nine years. It liquidated $ 411 million in assets in 2019, with the city and employee contribution being less than the $ 955 million in benefits paid, and it liquidated $ 366 million to cover $ 974 million in benefits l ‘last year.
“Given the low funding ratio, the fund is still at risk of potential insolvency should an economic recession or investment market downturn occur in the short term,” Segal Consulting warns in audited statements that White read. aloud during the hearing.
The city’s contribution for the 2020 payout year was $ 421 million, rising to $ 499 million in 2021 and then to $ 576 million in 2022 according to the ramp schedule. In 2023, the contribution will be calculated as a percentage of payroll sufficient to bring the fund to a 90% funding ratio by the end of 2058, resulting in an increase of approximately $ 350 million, of which approximately $ 2.2 billion is due for the four funds.
Martwick wondered if the city would seek to postpone the actuarial contribution. Bennett stressed that no extension was being considered as such a move would likely result in downgrading of grades. The city is incorporating the increase into its financial planning like it did when police and the peak fire hit last year.
“The ramp that was established, I think, strikes that balance between long-term sustainability and affordability in the city,” Bennett said.
The net pension liability of the municipal employees’ fund rose to $ 13.2 billion in 2019, from $ 12.9 billion in 2018 “mainly due to the fact that the contributions received during the year are lower at the cost of benefits accrued during the year and interest on the unfunded liability, ”the actuary reads. report. The net position increased to 23.64% against 23.29% in 2018.
The collective net pension liability of the city’s four funds grew to $ 31.8 billion in 2019, from $ 30.1 billion in 2018 and $ 28 billion in 2017, the rise in contributions and returns investments that have not kept pace with costs and actuarial changes. Funding ratios ranged from 18% to 42%.
City contributions are up $ 1.81 billion this year, up from $ 1.68 billion.
Emanuel had proposed a pension bond bond of up to $ 10 billion to increase funding ratios, but Lightfoot dropped the proposal when she took office in 2019. Bennett said the city was exploring a smaller version. , but only if it was accompanied by certain types of funding and policy. although state law prevents benefit cuts.
The pension committee adopted another funding mandate. The bill allows retired firefighters struggling with certain illnesses or disabilities to suspend their pensions and claim disability in order to obtain more affordable city health coverage.
Pension fund officials said they only expected one or two retirees to use the benefit each year, but Bennett cautioned against an initial cost of $ 8 million and a price tag of $ 40. million dollars over the next few decades. The bill “increases the cost of the city’s pensions without providing an associated source of funding,” Bennett said.
The state’s ability to impose pension funding mandates over the city’s objections was highlighted after lawmakers approved Bill 2451 in their lame session in January. It expands the age group of firefighters who receive a simple automatic cost of living adjustment of 3% instead of a COLA of 1.5%.
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 joined Lightfoot in urging Pritzker to veto him. Pritzker did not say what he intended to do with the legislation.
Local state governments and the state government itself are grappling with pension liabilities that consume a large portion of their general funds, resulting in tax increases, service cuts, sales of ‘assets and loans. The statewide unfunded pension liability tab is about $ 208 billion.
A big solution is needed, according to the Civic Federation. In the absence of state takeover, further consolidation of funds beyond administration and investment would be helpful. Retirement measures could surface during the legislature’s spring session, but whether any action is being taken is an estimate given the state’s budget woes. Martwick said he hoped to dive deep into various measures within his committee during the spring session.