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Debt balloons for Chicago-area pension plans

Jason Grotto, Chicago Tribune –

The debt from 10 Chicago-area pension plans swelled more than 600 percent to $27.4 billion between 2001 and 2010, according to a study released Monday by the nonpartisan Civic Federation. That’s $8,993 for each man, woman and child in Chicago, according to the report.

The shortfall comes on top of more than $83 billion in unfunded pension liabilities at the state level, driving the cost up to nearly $15,000 per Chicagoan, the report shows.

“While they’re debating what to do about the state funds, these local funds are continuing to decline,” said Laurence Msall, Civic Federation president. “Inaction during the past 10 years means it’s not just politically more difficult to fix this problem but also mathematically more difficult.”

The report bolsters the urgency for pension reform expressed by Mayor Rahm Emanuel and Gov. Pat Quinn in recent months. In May, the mayor traveled to Springfield to testify before a House pension panel, saying essential city services and education reforms would suffer if dramatic changes aren’t made to the city’s pension system.

“Chicago’s quality of life and economy will falter,” Emanuel warned, calling for raising retirement ages, increasing employee contributions and freezing cost-of-living increases for retired workers for 10 years, among other measures.

The Civic Federation studied a decade’s worth of financial reports from 10 local government pension plans, including the funds covering Chicago police officers, firefighters, municipal employees and laborers, as well as pension plans for employees of the Chicago Transit Authority, Chicago Public Schools, Chicago Park District, Forest Preserve District of Cook County, Metropolitan Water Reclamation District of Greater Chicago and Cook County government.

The main driver of the increase in pension debt continued to be a severe lack of contributions. The nearly $1 billion local governments put into the pension funds in 2010 was less than half of what was required to cover benefits promised to workers, the report found.

In percentage terms, Chicago’s plan for municipal employees received the lowest amount of required contributions in 2010. The city put in just 32 percent of what was needed to cover benefits. With more than $6 billion in unfunded liabilities, the municipal pension plan also has the largest debt load of any Chicago-area fund.

The Chicago Teachers’ Pension Fund received the highest percentage of required contributions in 2010. The fund received 81.7 percent of the money it needed that year, about $290 million. Projected budget shortfalls for 2011, however, led CPS to seek a partial pension holiday from the General Assembly, which drastically reduced the amount the district was required to pay into the fund during the next three years.

Last year, the teachers’ pension fund received $187 million, $400 million less than the amount it should have gotten. When the holiday ends in 2014, the district’s pension costs are expected to more than triple to $647.8 million, adding even more stress to the CPS budget.

“The school district essentially balanced its budget by borrowing from the pension fund,” Msall said. “This kind of legislative manipulation not only damages the pension system but also the education system because while the partial pension holiday provided some budget relief, the cost over the long haul is far greater.”

The report also found that dramatic investment losses from 2008 continue to affect the funds’ bottom line because they spread investment performance over a three- to five-year period. The average rate of return for the 10 funds reached a low of negative 21.1 percent in 2008. Although investment income has bounced back, hitting an average of 13.5 percent in 2010, the pension crisis is now so severe that it’s impossible for the funds to invest their way out of the problem.

Another contributing factor to the financial decline of Chicago-area public pension plans is a decrease in the ratio of active workers to retirees. The Civic Federation found that the ratio dropped from 1.7 active workers for every retiree in 2001 to 1.23 in 2010. That means fewer people are contributing to the funds at a time when the funds need contributions more than ever.

Overall, the area’s pension debt has grown by an average 24 percent a year. Some funds are in danger of going insolvent in less than a decade, including the firefighters fund and the police pension plan. The firefighters fund has the lowest funding ratio of any local pension plan, with just 32.4 percent of the assets it needs to cover its liabilities. The figure for the police plan is 39.7 percent.

“By ignoring this issue for so long, you’ve guaranteed that any pension reforms will have to be much larger to be effective,” Msall said. “Government will have to pay dramatically more or dramatically reduce the actual benefits that will be paid to employees and retirees.”

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