CHICAGO’S UNDERFUNDED PENSION PLANS
A Report to The Commercial Club of Chicago
Friday, April 30, 2010
In December 2006, in a report entitled Facing Facts, the Civic Committee’s Task
Force on Illinois State Finance reported to the members of the Commercial Club and the
public that Illinois appeared headed toward “financial implosion.” The State’s liabilities
and unfunded obligations were enormous, largely because of the State’s unfunded
pension and retiree health care liabilities. The 2006 report was updated in February 2009,
and again in a report by Jim Farrell and Eden Martin to the Commercial Club in January
View the Full Report [PDF]
The State’s five pension plans are now underfunded to the extent of
approximately $76 Billion (estimated as of 12/31/09). A recent 50-state study by the Pew
Center on the States showed Illinois to have the worst “funded ratio” – the ratio of assets
to liabilities – in the country at the end of FY2008. At that time, Illinois had a funded
ratio of 54%; it has since deteriorated to 42%.
Added to the $76 Billion of unfunded pension obligations are the additional
liabilities of the State’s pension bonds/notes (about $13.5 Billion) and unfunded
obligations to pay retiree health care costs (estimated at $40 Billion) – for a total of about
$130 Billion in retirement-related debt.
The City of Chicago’s four pension plans have received much less attention, but
on an aggregate basis, they are almost as badly underfunded as those of the State.
On January 11, 2008, Mayor Richard M. Daley announced the formation of the
Commission to Strengthen Chicago’s Pension Funds. The funds to be evaluated were
those for the following categories of employees: firemen, policemen, laborers, and
municipal employees. The Commission’s assignment did not include the pensions of
other municipal agencies – such as the Chicago Public Schools (Public School Teachers’
Pension and Retirement Fund of Chicago), or the Chicago Park District (Park Employees’
& Retirement Board Employees’ Annuity and Benefit Fund).
All four City pension plans are “defined benefit” (DB) plans, similar to the State’s
pension plans. In these plans, a percentage of a member’s salary is contributed to the
fund at the end of each pay period, and an employer contribution is also made. Members
then accrue creditable years of service which – at retirement age – entitle them to
specified periodic payments throughout their retirement. The amount each member will
receive from the pension fund is determined at the time of retirement; and the member
receives that amount each year throughout retirement, whether he/she lives two years or
thirty years thereafter.
DB plans are thus to be contrasted to “defined contribution” (DC) plans, in which
a participant would contribute specified amounts each month or year; and the amount of
retirement benefit available upon retirement to the participant would depend on how
much had been contributed and the investment returns earned by those funds. Chicago
does not sponsor a DC plan such as a private sector 401(k) or a public sector 403(b) plan.
However, Chicago – and CPS – do offer 457 deferred compensation programs.
In certain respects, Chicago’s pension plans are even more generous than those of
the State of Illinois. The State's pension plans permit retirement with undiminished
pensions at ages 60 or even 55, with the requisite number of years of service. Chicago's
four pension plans permit retirement with undiminished pensions at age 50, with the
requisite number of years of service. This enables many retirees from Chicago's
employment, at age 50 or soon after, to "retire" and then go to work at another
government job, get paid for that job, and start generating additional pension rights.
Chicago’s pension plans – like the State’s – are now dangerously underfunded.
At the end of FY2009 (calendar year 2009), the unfunded pension liability of the City’s
four pension funds totaled about $14.6 Billion, with an aggregate funded ratio of only
43% – about the same as the State’s. (This means the funds, as a group, as of December
31, 2009, had only about 43% of the value that would be needed to meet the plan
liabilities.) The Policemen’s and Firemen’s funds were in the worst fiscal condition, with
funded ratios of only 37% and 30%, respectively.
If the assets in Chicago’s pension funds earn in the range of 4-6% in coming
years, the Firemen’s fund would run out of money in approximately 2019-2020, and the
Policemen’s fund would run out shortly thereafter. (Commission to Strengthen
Chicago’s Pension Funds Final Report, Volume 1: Report and Recommendations.)
What would it take adequately to fund the Chicago pension plans if no reforms
• In FY2009, in accordance with the State-prescribed funding formula,
Chicago funded its four plans to the extent of $443 Million, and City
employees contributed an additional $271 Million – for a total
contribution to the pension plans of $715 Million. In FY2012, assuming
no changes in plan benefits or State-prescribed funding formulas, the total
contribution would increase to $793 Million.
• The problem is that the State funding formula is set too low – geared to the
perceived ability of the City to contribute, rather than actuarial standards.
• The Mayor’s Commission found that if no reforms were made to plan
benefits, but if annual pension funding were increased to actuariallyrequired
levels, in FY2012 total contributions to the pension funds would
have to increase from $793 Million (the present State formula level) to
$1.503 Billion – an increase of $710 Million. (Commission to Strengthen
Chicago’s Pension Funds Final Report, Volume 1: Report and
Although the staff of the Mayor’s Commission did a fine job (with assistance
from Deloitte and Aon) of analyzing the facts, the mission of the Commission was also to
come up with recommended steps to deal with the problem. It was here – despite the best
efforts of the Commission’s leadership, staff and consultants – that the Commission was
unable to do its job. The majority of the Commission recommended reform as to “new”
employees – i.e., employees to be hired in the future. But they did not agree to reforms
that would prospectively alter pension terms for current employees (while protecting all
benefits they had already earned).
Three members of the Mayor’s Commission dissented because they believed the
recommendations did not go far enough. They were Lester Crown, Eden Martin, and
Laurence Msall (President of the Civic Federation)
The Mayor’s Commission concluded its work on March 24, 2010, and presented
its report to the Mayor on March 31st. During that intervening week, the Illinois
Legislature enacted pension reform which applies not only to State employees and
members of the State’s pension plans, but also to many municipal pension plans
throughout the State. In particular, the newly-enacted reforms apply to Chicago’s plans
for municipal employees and laborers, and also to Chicago’s plan for CPS teachers.
However, the Legislature exempted fire and police pension plans throughout the State.
The Mayor’s Commission recommended pension reform only as to “new”
employees – those to be hired in the future. The Illinois Legislature enacted a version of
that reform – limited to “new” employees – but not including the fire and police
Neither the reforms recommended by the Mayor’s Commission nor those enacted
by the Legislature would reduce the Chicago funds’ existing $14.6 Billion unfunded
pension liability. Nor would either version of reform reduce Chicago’s current annual
pension costs – the amounts which, under actuarial standards, should be contributed each
year to keep the pension liability from continuing to grow
By contrast, the recommendations offered by the Civic Committee at the State
level, and endorsed by Messrs. Crown, Martin, and Msall for application at the City level,
would reduce the Chicago plans’ unfunded liability by about $4.4 Billion, and would also
reduce the cost of the plans by approximately $400 Million per year, beginning
immediately following implementation of the reforms.
To Read the City of Chicago’s Commission to Strengthen the Public Pension Report, click here