Chicago pension funds still among nation’s worst funded

Over-promised benefits continue to sink Chicago’s finances as the recent bear market eats into 2021 stock market gains. Investments gaining 25% last year plus federal aid didn’t offer much help to city pension systems, which have more debt than 45 states.

The 2021 upturn in the stock market and federal funding were not enough to make much progress on Chicago’s pension debt problem, which is greater than that of 45 states.

Given the general downturn in the market so far in 2022, the city will be forced to raise taxes and find other quick-cash solutions to fund its pensions and protect them from insolvency. Still, the only sustainable solution to Chicago’s ever-growing pension problem is structural reform, which can only be accomplished with a constitutional amendment.

In fiscal year 2021, Illinois’ pension liabilities shrank because of record-high investment returns ranging from about 23 to 25%, which was bolstered by pandemic-related stimulus. Illinois received $8.1 billion in COVID-19 relief funds from the U.S. Treasury Department, $1.9 billion of which went directly to Chicago.

Despite the upturn in the market and generous pandemic relief funds, Chicago pensions were still dangerously underfunded. One good year cannot undo decades of over promising and underfunding. Chicago pensions are still at risk of insolvency, especially as 2022 market losses are expected to eat into 2021 gains.

Equable Institute’s recent annual State of Pensions 2022 report showed Chicago and Cook County pension plans account for 6 of the 10 worst-funded local pension plans in the nation. According to their executive director, Anthony Randazzo, a few more bad years could leave some of the Chicago pension plans in a “death spiral.”

As of fiscal year 2019, Chicago’s eight pension funds combined were only 34% funded. Pension experts believe funding ratios below 40% are considered past the “point of no return” for pension fund viability.

Where did all this debt come from, and how did it get so bad? It's simple: the city has made pension promises it cannot afford. Because of the Illinois Constitution’s pension clause, enacting pension reform to keep those systems from going belly up will require a constitutional amendment.

In the meantime, Chicago is desperate to solve its pension problem and government leaders are delaying the crisis by relying on quick-cash solutions that will not produce any long-term results and will further harm taxpayers.

Chicago has relied on taxpayers to continuously bail it out of debt and balance its budget. The city’s property taxes have been skyrocketing in order to keep up with the ever-growing pension debt. Despite paying more in taxes, taxpayers are receiving less. In the past 10 years, pension spending increased 239% while spending on city services only increased 18%. The city would need $43,100 from each taxpayer to pay off all its bills, mainly thanks to pensions.

With rising taxes not enough to solve the city’s pension woes, on May 25, 2022, the Chicago City Council approved a $1.7 billion casino as a means of funding police and fire pensions. The casino is only projected to pay for about 9% of Chicago’s $2.3 billion in pension contributions, leaving property taxpayers to pay most of the other 91% of pension debt.

Relying on the casino for pension revenue is both unreliable and unrealistic. The revenue is not guaranteed and runs the risk of leaving Chicago short of cash. This solution also leaves 91% of the problem unresolved, meaning other measures, such as raising taxes even higher, will still be needed to fund pension obligations.

A recent bill proposal will allow speed camera revenue to go towards funding public safety pensions. In the first half of 2022, the city collected a total of $36 million in speed camera fines. Of that total, $23.7 million came from Mayor Lori Lightfoot’s recent initiative to issue speeding tickets for driving 6 to10 mph over the limit.

Chicago’s South Side is where 40% of the city's highest revenue-generating speed cameras and two out of the four cameras that have already issued over $1 million in fines are located. Again, the city has made low-income residents, specifically Black and Latino residents who carry most of this burden, responsible for solving its debts. This quick cash solution is not enough to solve the billions of dollars in police and fire pension debt. It simply costs Chicagoans, specifically low-income residents, more money for going 6 mph over the speed limit without the intended safety gains.

Raising taxes, unrealistic reliance on casino revenue and over-ticketing on speed cameras is not going to solve Chicago’s crippling pension problem in the long run. Only structural reform can do that.

A “hold harmless” constitutional amendment developed by the Illinois Policy Institute will save taxpayers money and protect the retirement of government workers. It would save taxpayers nearly $2.4 billion in its first year and nearly $50 billion through 2045. It protects workers’ benefits by treating benefits earned for work already performed as an inviolable contract. With the reform, future adjustments can be made to ensure pensions are sustainable and affordable in the long run. This plan would replace the 3% compound post-retirement increase and instead attach it to the rate of inflation.

This reform allows the state to fully fund employee pensions, especially for young workers far from retirement, as well as save taxpayers money. It's a win for everyone.