Chicago’s deep, deep pension hole

When Chicago Mayor Rahm Emanuel proclaimed recently that his city’s four troubled pension plans were “on the road to financial recovery,” a reader not versed in political doublespeak might have taken the statement at face value. Silly reader.

This commentary in “The Bond Buyer” separates the rhetoric from reality in devastating fashion. Similar tot he Illinois pension morass, Chicago pension funds, despite recent worker concessions and tax increases, remain in a deep, deep hole:


Look at the chart to the right and then read these paragraphs, the heart of the commentary:

(Emmanuels’s) statement might be read to suggest that the city has finally overcome the challenges of funding its pension commitments. The reality is far worse, as the adjacent graph shows.

In the graph, the blue bars show Chicago’s annual contributions to the four pension plans combined, and the red line shows their combined funded ratio. Where possible, the graph uses recently released official projections. In all other respects, the graph reflects our own projections based on official actuarial assumptions and statutory funding requirements.

For the 10 years through 2014, Chicago contributed less than $470 million per year to the plans. These contributions were insufficient even to maintain the funded ratio, which went from a poor 61% at the end of 2005 to a dangerously low 31% at the end of 2015.

By 2019, the city’s annual pension contribution is expected to be $1.3 billion – an increase of $827 million, or 176%, above the 2014 contribution. Over the three years thereafter, the annual contributions are expected to jump another $741 million, to $2.0 billion in 2022. All of Chicago’s recent and proposed tax increases combined will be insufficient to fund these increases. We estimate the shortfall will be $647 million in 2022 alone.

After 2022, we project contributions will increase every year through 2055. Over that period, the annual contribution will increase by another $1.9 billion, to $4.0 billion in 2055 – 8½ times what the city was paying in 2014.

Do these steep increases provide steady progress toward proper funding? No. In fact, the plans’ funded ratio will actually drop over the next several years – from 31% in 2015 to 26% in 2021 – and their unfunded liabilities will increase until 2033. It will take until 2030 for the funded ratio to return to 31%; until 2050 for the funded ratio to be restored to where it was in 2005 (61%); and until 2057 for the ratio to reach 90%.

The commentary goes on to stress that “we are not attacking pensions,” but rather stressing that Chicago needs to step up in a much bolder way to ensure that retirees receive the funds to which they are entitled. And there’s nothing like the present moment to test the city’s resolve:

Chicago must, at a bare minimum, contribute enough every year, including 2016, to ensure that the plans’ funded ratio not drop below, and that their unfunded liabilities not exceed, 2015 levels. We estimate this would add $1.1 billion to the 2016 contribution. If the city cannot muster the resources and political courage to take this first step now, surely the city will lack the resources and discipline needed to dig out of a far bigger hole down the road.

This one bears watching over the next few months.

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