Every Chicagoan owes nearly $20,000 to fully fund public pensions, says Civic Federation

Oct 02, 2014

Got an extra $20,000 in the bank? That’s what every Chicagoan owes to cover all 10 of Chicago and Cook County’s public pension funds and statewide funds to a fully funded level, according to a Civic Federation analysis.

“The pension funding crisis in Illinois is the result of decades of insufficient oversight and ignorance of actuarial reality,” Civic Federation President Laurence Msall said in a press release. “Even with recent reforms, it will be many years before these funds are fully stabilized.”

In 2012, the ten city and county funds had an average actuarial funding level of 45.5 percent, down from 74.5 percent in 2003. In total, they were short by $131.9 billion.

See the total change in unfunded liabilities since 2003:

unfunded liabilities of the 10 pension funds

This chart from the nonpartisan government finance watchdog Civic Federation shows that in 2003, each city resident would have only owed about $6,000:

pension liability per chicago resident

The report looked at funded ratios, unfunded liabilities and investment rate of return to calculate each pension fund’s health.

The funding ratio of nine of the 10 funds declined in 2012, making the aggregate total funding ratio about 45 percent, much lower than the generally considered safe measure of 80 percent. In 2012, the Fire Fund had the lowest ratio at approximately 25 percent while the Chicago Transit Authority Fund had the highest funding at about 59 percent.

Here is how each individual pension fund’s unfunded liabilities have changed since 2008, from the Civic Federation:

individual liabilities

The report cited four major reasons that these pension funds declined dramatically between 2003 and 2012: sustained investment losses, fewer active employees to beneficiaries, lower employer contributions and enhanced benefits for retirees.

According to the report, in the late 1990s and early 2000s, most of these 10 funds experience positive investment gains due to a strong investment market. With the market decline in 2008, all 10 funds experienced negative investment returns. They all saw positive returns in 2010, but then most saw negative returns in 2011.

From the report:

The effects of these gains and losses are felt for several years beyond their market occurrence due to the actuarial smoothing of assets for the funds that use smoothing.

Between 2003 to 2012, the ratio of active employees to retirees also dropped, which could make it more difficult to bring the pensions up to a fully funded ratio, according to the report. In 2003, there were 1.55 active employees for every retiree, but in 2012, there were 1.11 active employees for every retiree. (Active employees contributed 8.5 to 9.125 percent of their salaries in 2012.)

The Police, Laborers’, MWRD, Forest Preserve, and CTA Funds all had more people collecting pension payments than active workers in FY2012.

active employees to beneficiaries

Not only are there fewer employees paying into the system, nine of 10 employers’ annual required contributions (ARC) only met half of what they were supposed to in 2012.

From the report:

Chronic shortfalls in employer contributions are a very serious drag on the health of many pension funds. GASB Statements 25 and 27 require that public pension plans calculate an annual required contribution (ARC) that must be reported in the financial statements of the plan and the government employer. The ARC is equal to the sum of (1) the employer’s “normal cost” of retirement benefits earned by employees in the current year; and (2) the amount needed to amortize any existing unfunded accrued liability over a period of not more than 30 years. Although GASB does not require funding at the level of the ARC, it does require that plans report on how their actual contribution levels compare to the ARC. 

The report explains why funding at the ARC level might be more difficult up front, but makes more sense for the long run:

While funding at the ARC is more fiscally responsible, it may require employer contributions that are more volatile and/or larger than a simple funding multiple. However, failure to fund at least at the ARC effectively pushes the costs of today’s government services onto tomorrow’s taxpayers. Employer funding of public pension plans should be sufficient to keep the promises made to today’s employees for their future retirement in order to ensure intergenerational equity for taxpayers.

employer contribution

City and county employers also have encouraged employees to retire earlier or they have offered fewer years of service for more benefits. Again, this may offer some short-term relief to employers, but may cause a long-term increase in liabilities. These benefits cannot be rolled back once offered, in accordance with the state constitution.

Sometimes those enhancements are granted in exchange for short-term employee concessions on salaries or health insurance. Offering benefit enhancements may be an attractive option to employers, since achieving immediate short-term savings on other employee costs often appears to be a more pressing need than controlling longer-term pension liabilities.

Changing the way liabilities are calculated can also change value of funded ratios the pension systems. In 2004, the Cook County and Cook County Forest Preserve District changed actuaries, which changed the discount rate assumption for employees and the salary increase assumption, which was estimated to help increase funding for that year. But it can also go the other direction and contribute to a higher liability for a particular fund.

From the report:

Actuarial assumptions and methods can change for various reasons, including demographic trends, analysis of recent plan experiences or new industry standards such as GASB requirements. It is considered standard practice for actuaries to review and reassess assumptions, such as mortality rates and salary levels, every five years. There are a number of acceptable methods for computing a plan’s assets, liabilities and funding requirements. It is important to recognize that a change from one method to another can produce a significant change in a fund’s assets, liabilities or funding requirements.

actuarial value funded ratios

Reforms relating to the Municipal and Laborer’s Fund are expected to go into effect in January.

From the report:

The Municipal Fund was projected to run out of money within 10 to 15 years and the Laborers’ Fund in 15 to 20 years if P.A. 98-0641 had not passed the General Assembly. The major provisions of the law include increases to the employer contribution and employee contribution and changes to the automatic annual increase for current retirees and Tier I employees. The plan is projected to increase the funded level of both funds to 90% by the end of 2055.



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