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Chicago will seek pension answers over the summer

Chicago’s new mayor, Brandon Johnson, is tasking a “working group” that includes his finance team and state legislative and labor representatives with finding long-term funding fixes to ease the city’s pension funding woes.

Chicago’s $33.7 billion of pension liabilities remain a huge burden on the city’s balance sheet and budget despite progress in recent years.  

The working group Johnson announced Friday will employ state legislators — including state Sen. Robert Martwick, D-Chicago, who is the lead sponsor of several pending pension benefit bills — Budget Director Annette Guzman, Chief Financial Officer Jill Jaworski, and representatives of the city’s labor groups.

While all four city employee pension funds saw some improvement in their funded ratios in 2021, they remain low with the firefighters’ fund just 20.93% funded, the police fund at 23.54%, the municipal fund at 23.41% funded, and the laborers’ at 45.92%.

All four funds are now receiving an actuarially-based contribution — although it falls short of the recommended actuarially determined formula — to reach a 90% funded ratio beginning in 2055, but it will take years just to reach a collective 50% ratio and all remain susceptible to bad investment years that could drive up contributions.

“Together, with our state legislative partners in Springfield, I am establishing a working group to collaborate on finding a sustainable path forward to addressing existing gaps in the city’s four municipal pension systems,” Johnson said. “The working group’s mission is to find workable solutions with sustainable funding sources to ensure retirement security and taxpayer relief in the long term in time for the fall veto session.”  

The decision to look for additional funding solutions that allow the city to cover the costs of pending benefit changes and possibly improve the health of all four of its funds emerged in the final days of the legislative session.

Lawmakers were poised to pass firefighter benefit bills that would cost the city more than $3 billion in the coming decades. Johnson, who took office earlier this month, asked lawmakers and labor for breathing room to assess the costs and funding options and that led to the decision to form a working group to come with a package that deals with all four funds over the summer.

All constitutional options need to be on the table, Martwick said in an interview Friday. That includes fund consolidation, pension obligation bonds, new tax revenue streams, moving to a 100% funding goal from 90% and a true actuarially determined contribution. The latter two objectives would add to the city’s costs but would be viewed favorably by municipal bond market participants.  

“We have to look at all the tools like bonding and revenue sources,” Martwick said. “I think there is going to be a strong desire to find a way to get the funds back to fiscal health and instill in those funds legislative guardrails to make sure the funds stay on track.”

Martwick did not put asset privatization among the possibilities — some local governments have entered into water operation leases and put upfront payments toward pensions — citing the criticism associated with the city’s parking meter and garage concessions. He also said it would be difficult to push out any further the 2055-2058 amortization schedule.

“My hope is that we look at the city’s long-term financial picture as it relates to pension obligations, look at the existing revenue sources like the casino funds coming in and the potential for other sources while making reforms,” Martwick said. “It’s not just about the current budget, it’s about long-term finance and acknowledging the extent of the obligation.”

The city can’t cut benefits after previous state and local attempts were overturned by the Illinois Supreme Court based on a state constitutional clause protecting benefits from impairment or diminishment. Johnson, a former organizer for the Chicago Teachers’ Union, has said the city should honor its pension obligations.

The working group will be navigating revenue ideas that must be balanced against those that Johnson campaigned on to generate $800 million to help balance the city’s books while also paying for his agenda priorities and holding the line on property taxes. He has not said what taxes he still intends to pursue or the timing.  

Over the last decade the city lifted property taxes and turned to a 911 surcharge on phone bills and a water bill surcharge to help cover a ramping up of pension contributions begun during Mayor Rahm Emanuel’s tenure and continued by Mayor Lori Lightfoot, who lost her reelection bid this year.

Roughly $200 million that is expected from the city’s first casino license in the coming years will go toward police and fire pensions based on state authorizing legislation.

That casino funding stream eases pressure on the corporate fund and after fully phasing in actuarially based contributions last year annual growth in pension contributions is projected to be more modest in the coming years with the most severe threats posed by weak investment returns and state mandated pension benefit improvements.

To stave off further growth of unfunded liabilities in weak investment years, the city this year established a supplemental payment policy and put an additional $242 million toward the system.

Even with a supplemental contribution in the $200 million range next year, the city would still fall $330 million short of funding the actuarially determined contribution, according to the city’s mid-year fiscal forecast. The city’s statutory payment rises from $2.4 billion this year to $2.7 billion in 2028.

In Springfield  
In the session that ended on the weekend, state lawmakers weighed and eventually shelved SB 1629 and 1630, laying out a series of changes that raise benefits for employees hired beginning in 2011 when a statewide Tier 2 pension system was established. Backers billed the changes as needed for two primary reasons: to meet federal retirement rules and to honor a promise made to Chicago firefighters in 2019.

During the presentation of an updated fiscal forecast last month, Lightfoot slammed the pending pension bills and Martwick for imposing unfunded mandates on the city.

Both firefighter bills were headed to a final vote in the Senate after clearing a final committee vote earlier this month, at which point Chicago’s then-Chief Financial Officer Jennie Huang Bennett labeled the changes as one of the most expensive pension sweeteners in state history.

Bennett warned the city couldn’t afford them without jeopardizing the city’s ratings upswing and forcing a property tax hike or public safety cuts.

The city’s actuarial study conducted by Aon put a $3.2 billion present value price tag on the benefits in the bill through the city’s payment schedule, with the annual price tag at about $60 million and rising to $311 million by 2055.

The Chicago Civic Federation urged lawmakers to “first conduct a comprehensive, statewide evaluation to determine when Tier 2 benefits will violate Safe Harbor rules before moving forward on any binding legislative changes,” acting President Sarah Wetmore wrote in testimony opposing the bills.

With a vote pending, Johnson and his team asked Martwick and Senate and House leaders to put off passage in order for his finance team to review the impact on the city’s budget. The firefighters’ union had pressed for action during committee hearings saying the promise was long overdue but they agreed to the delay, according to sources.

The police fund was pressing for passage of a separate bill that had received little public attention this session. It would make permanent a cost-of-living adjustment based on birth date. Over Lightfoot’s objections, Gov. J.B. Pritzker signed legislation in 2021 that made permanent a cost-of-living adjustment enhancement lawmakers previously approved every few years for firefighters.

That enhancement for Chicago firefighters adds $180 million to the fund’s existing $5.29 billion of unfunded liabilities and $16 million to $17 million in additional annual costs that add up to $700 million by 2055, according to a 2022 review from Segal, which conducts the fund’s actuarial valuations. Police fund costs of similar legislation are typically three times that amount. The annual cost is now up to $70 million.

The appointment of a working group tasked with acting this fall comes as Johnson has not yet said whether he intends to leave in place Lightfoot’s executive order signed on her way out that directs a projected $642 million 2022 and 2023 budget surplus to cover supplemental pension contributions for 2024, 2025, and 2026.

“From a values perspective, one, the mayor is wholeheartedly committed to protecting retirement security… and two, he’s 100% committed to being a good fiscal steward for the residents and taxpayers of Chicago,” Johnson senior advisor Jason Lee said earlier this month. “We will look at that and our team will assess what kind of constraints that does or doesn’t put and whether that’s helpful to meet our priorities.”

With the city’s pension funds health deteriorating due to pension sweeteners, investment losses in down years, holidays, and a statutory funding formula tied to payroll, then Mayor Richard M. Daley in 2008 announced a task force to explore ideas for strengthening the funds.

At the close of 2006 Chicago’s retirement funds had $8.6 billion of unfunded liabilities with the fire fund 44% funded, police at 52%; laborers at 96%, and the municipal fund at 71%, for an aggregate weighted funded ratio of 62%.

The 2010 findings warned of a looming crisis with some funds on the road to insolvency. It recommended actuarial payments aimed at least an 80% funded ratio, that new funding streams be identified and new employees see benefit reductions.

Daley did not act before leaving office in 2011, but Emanuel did, enacting reforms for the two non-public safety funds in 2014 that put the plans on a slow path toward improved funding while working on a public safety package that eased a statewide mandate for public safety funds which would have driven up city payments by $550 million in 2015.

Emanuel stressed shared sacrifice with employees paying more along with the city. But the state’s high court declared the muni and laborers’ package unconstitutional in March 2016.

The Emanuel administration overhauled the reform package and plans were adopted that ramped up to an actuarially based payment schedule in 2020 that puts the police and fire on a track to 90% funding in 2055 while the municipal and laborers plan ramped up to an actuarial one in 2022 and hits 90% funding in 2058.

The funding ramps were designed to raise funding levels to an actuarial level at a pace that didn’t crush taxpayers. Property taxes, the 911 surcharge, and water surcharge were raised to cover the higher contributions.

The Emanuel administration began exploring a $10 billion pension obligation issue in the summer of 2018. Emanuel decided against seeking a third term and in his waning time recommended that the next mayor and City Council consider a $7.7 billion issue of securitization bonds and $2.3 billion of special water-sewer excise tax bonds.

The Government Finance Officers Association recommends against pension obligation bonds saying they are a risky and speculative gamble that rests on the assumption that the investments purchased with the proceeds will achieve a rate of return higher than the bonds’ interest.

Lightfoot honored the pension funding ramp during her tenure and took it a step further by implementing the supplemental contributions this year. Former CFO Bennett had left POBs on the table as an option but only if accompanied with funding and other reforms.

Emanuel and the Civic Federation backed the idea of putting a question to voters on amending the constitution’s strict prohibition against benefit cuts to allow for negotiated changes, but it never gained traction in the Democratic-controlled state legislature. Pritzker also opposes it, saying benefit promises must be honored and that even if the pension clause were lifted cuts would face a lengthy legal challenge.

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