The Bond Buyer

Unfunded State and Local Illinois Pensions Hit $103B

Wednesday, January 25, 2012

CHICAGO — The combined burden of unfunded local and state pension liabilities on Chicago taxpayers rose to $103 billion in fiscal 2010 from just $19 billion a decade ago as double-digit investment returns in 2010 failed to stave off further deterioration of funded ratios, according to recent analysis of pension figures.

The local and state toll of unfunded obligations on Chicagoans rose to $14,897 per capita in 2010 from $10,037 in 2008 and marked a dramatic jump from just $2,442 in fiscal 2000. Two of Chicago’s four funds and Cook County’s fund remain on course to run out of sufficient assets to cover obligations in the coming years.

The total unfunded obligations of 10 Chicago-area public pension funds combined with the state rose to $103 billion based on fiscal 2010 actuarial figures, according to the Civic Federation of Chicago. The slope of the growth in unfunded obligations for the state funds and 10 Chicago-area funds shows a steep upward climb to $103 billion in fiscal 2010 from $20 billion in 2000.

The tale told in recent reports from the federation, which tracks local and state government finances, and the General Assembly’s Illinois Commission on Government Forecasting and Accountability underscores the downward spiral of the pension funds’ fiscal health.

After reforms were adopted in 2010, further reforms aimed at improving the long-term health of many of the funds stalled. Gov. Pat Quinn has pledged to renew the push in the legislative session that begins late this month.

Civic Federation president Laurence Msall said the reports’ figures underscore the need for sweeping reform. That includes a shift in how pension contributions are calculated in addition to benefit reductions. “The state and local governments can’t afford to solve the problem themselves. They are going to have to take some action on the benefits of current employees,” he said.

In a special commentary last week, Fitch Ratings said it “believes that steps toward improving the status” of the state’s pension liabilities could happen this year due to the impact of rising pension payments on Illinois’ operating budget. The pension payment will rise to 17% of the budget in fiscal 2013 from 13% in 2012.

“The growth rate far exceeds state revenue growth, meaning that pension demands are increasingly crowding out spending for other state priorities,” Fitch wrote.

The state commission’s report earlier this month pulled information from 2010 certified annual financial reports to present an overview of the condition of Chicago’s four pension funds and those of Chicago Public Schools, the Chicago Park District, Cook County, the Cook County Forest Preserve, the Metropolitan Water Reclamation District of Greater Chicago and the Illinois Municipal Retirement System, which covers many local governments outside Chicago and Cook County.

The Chicago Laborers’ fund is headed toward insolvency in 2035, the Chicago Municipal Fund will reach its tipping point in 2030, and Cook County’s pension fund will do so in 2038, according to the state report. All but one of the funds reviewed saw an increase in their unfunded obligations. The funds mostly saw strong returns in 2010 although many took a dip from even stronger 2009 gains after suffering losses in 2008.

Chicago’s Firemen’s fund uses an assumed rate of return of 8% but saw an actual rate of 17.7% in 2010. It closed out the year with $2.5 billion of unfunded liabilities for a funded ratio of just 32% compared to $2.2 billion of unfunded obligations and a funded ratio of 37% in 2009.

Chicago’s police fund uses an assumed rate of 8% while it saw a return of 12.7% in 2010. It closed out the year with $5.7 billion in unfunded obligations for a funded ratio of just 40% compared to $5 billion in 2009 and a funded ratio of 44%.

Both the Chicago police and firemen’s funds were affected by state reforms adopted in 2010 that require escalating city payments totaling $550 million beginning in 2015. Based on the changes, the fireman’s fund is on track to reach a funded ratio of 84% in 2040 and the police fund will reach 90% in 2041. If the city fails to make the actuarially required payment, the state can begin withholding grants in 2016.

The Chicago Laborers’ fund uses an assumed rate of 8% and saw an actual return rate of 15.5% in 2010. It had $542 million of unfunded liabilities for a funded ratio of 74% in 2010, compared to $416 million and a ratio of 80% in 2009. The fund was at a 125% funded ratio just a decade ago.

The Chicago Municipal Employees fund assumes a return rate of 8% and earned 13.7% in 2010. It had unfunded liabilities of $6 billion in 2010 for a funded ratio of just 50%, compared to $4.8 billion in 2009 for a funded ratio of 57%. A decade ago, it was at a 99% funded ratio.

The CTA shifted to an 8.5% assumed rate on investments last January, down from 8.75%. Its actual rate of return in 2010 was 12.6%. The CTA closed out 2010 with $814 million of unfunded liabilities for a funded ratio of 70%, compared to $652 million of unfunded liabilities for a funded ratio of 75% in 2009.

The Chicago parks use an assumed rate of 8% and saw an actual rate of return of 11.3% in 2010. It closed out 2010 with $314 million in unfunded obligations for a funded ratio of 62% compared to $270 million and a funded ratio of 67% in 2009.

The Chicago Public School Teachers use an 8% assumed rate while earning 13.4% in 2010. It had $5.4 billion in unfunded liabilities for a funded ratio of 67% in 2010, compared to $4.2 billion and funded ratio of 73% in 2009.

Cook County uses an assumed rate of 7.5% but saw an actual return of 12.4% in 2010. It closed out 2010 with $5.2 billion of unfunded liabilities for a funded ratio of 61%, compared to $4.6 billion and 63% in 2009. The Cook County Forest Preserve District uses a 7.5% assumed rate and saw an actual return rate of 13.1% in 2010. Its unfunded liabilities for 2010 totaled $98 million for a funded ratio of 65% compared to $86 million and 69% a year earlier.

A representative of Cook County’s bureau of finance said new board President Toni Preckwinkle would work this year with state lawmakers on reform. “As a result of economic market conditions and other independent variables, the Cook County pension funds, like many others in our state, remain underfunded, and one of President Preckwinkle’s goals is an improved pension funded ratio,” the representative said.

The Illinois Municipal Retirement Fund assumes a 7.5% rate of return while it saw a 13.6% rate in 2010. The fund was the most healthy among those reviewed by the state commission. It closed out the year with $4.6 billion of unfunded obligations for a funded ratio of 83.3%, similar to a year earlier.

The Metropolitan Water Reclamation District uses an assumed rate of 7.75% while its investments earned 15.9% in 2010. It closed out 2010 with $885 million in unfunded liabilities for a funded ratio of 57%. In 2009, it had unfunded obligations of $761 million for a funded ratio of 61%.

At the state level, Illinois’ unfunded pension obligations grew by about $7 billion in fiscal 2011 while its funded ratio dipped just slightly to 43% from 45%, according to the state’s latest pension figures. The state’s unfunded obligations remain one of its toughest political and fiscal challenges

The financial health of both the local and state funds have tumbled in large part because contributions are based on a formula that results in payments falling far short of the actuarially required contribution needed.

The state adopted reforms — covering both state funds and some local funds — in 2010 that established a two-tier system with new employees receiving reduced benefits and a higher retirement age. There was little near-term benefit to the funds.

Further reforms were proposed last year that would have protected the accrued benefits of current employees while reducing their future benefits. That plan stalled. Lawmakers have hesitated to take action on the benefits of current employees due to state constitutional protections on retirement benefits. Legal experts differ on whether yet-to-be earned benefits are protected.

New Chicago Mayor Rahm Emanuel’s 2012 budget did not propose any pension solutions, but chief financial officer Lois Scott has said pension reform is on the city’s agenda this year. Chicago likely also will seek some form of financial relief from state lawmakers in the $550 million spike in police and fire payments owed beginning in 2015.