In anticipation of Mayor Lori Lightfoot’s budget speech tonight (August 29, 2019) I looked at the most recent financial reports for Chicago’s four pension systems. Chicago’s 2020 budget deficit is speculated at somewhere between $700 million and $1 billion, which is larger than previous estimates. Pension contributions have been pinned as a main culprit, and I wanted to know whether the contributions were higher than previous estimates.
Recall that the gap in making the 2020 pension contributions has been estimated at $270 million. That $270 million gap has been known for awhile, and was discussed throughout the 2018 mayoral campaign. So are the pension contributions much higher than previously thought? Short answer is no. The chart below compares the previous pension contribution estimates with the most recent estimates. As the chart highlights, the most recent estimates are just $5 million more than previous estimates. In other words, the 2020 pension contributions are not substantially different than previously thought.
2020 Pension Contributions ($ Millions)
|System||2017 Estimates||2018 Estimates||Difference|
|Firemen’s Annuity & Benefit Fund||$355||$371||$16|
|Laborers’ Annuity and Benefit Fund||$72||$72||$0|
|Municipal Employees’ Annuity and Benefit Fund||$499||$499||$0|
|Policemen’s Annuity and Benefit Fund||$749||$738||-$12|
So the pension contributions for 2020 are about $1.68 billion. The 2019 contributions are about $1.31 billion, so a year-to-year increase of about $370 million. $100 million in revenue has already been identified from the water-sewer tax , so the gap should still be around $270 million. In other words, if Chicago’s deficit is much higher than previously known that change isn’t really attributable to pensions (….unless something is wildly different than what’s in the publicly available pension reports).
Note that only the contributions for the firefighters’ and policemen’s pension funds changed. This is because the laborers’ and municipal employees’ pension funds are still in the “ramp periods.” During the ramp periods the city’s pension contributions are fixed dollar amounts–meaning they do not increase or decrease as the finances of the pension systems change. Starting with city budget year 2022 that’s no longer the case, and the city’s annual pension contributions will be based on the pension systems’ fiscal health and getting them all to 90% funded by specified dates. (I’ve previously written about the funding laws here)
How the finances of the laborers’ and municipal employees’ pension funds changes between now and 2022 will directly impact the city’s required pension contributions. Both systems are significantly underfunded, and their funding declined from 2017 to 2018, as shown below.
FY2018 Funded Ratios (Ratio of Actuarial Assets to Liabilities)
|Firemen’s Annuity & Benefit Fund||18%|
|Laborers’ Annuity and Benefit Fund||45%|
|Municipal Employees’ Annuity and Benefit Fund||25%|
|Policemen’s Annuity and Benefit Fund||24%|
Moreover, the low funding of the pension systems is a concern because it requires the pension systems to liquidate assets to pay out benefits and pay for expenses. This liquidity issue can impact a pension system’s asset allocation (meaning its investments), potentially leading to lower investment returns than otherwise might be the case. Lower investment returns, in-turn can have a negative impact on the systems’s finances…meaning even more liquidation of assets. It also may mean the pension system lowers its investment rate assumption, which in the short-term would decrease its finances and increase required contributions.
In its most recent report the municipal employees’ pension fund emphasized that given its current financial condition, poor investment performance and the funding law it risks becoming insolvent.
So while the 2020 pension contributions may not be substantially different than previous estimates the pension systems’ low levels of funding remains an ongoing concern.