The City of Chicago's four major employee pension funds have a combined unfunded liability of over $35 billion, according to the most recent financial reports. This long-standing fiscal challenge continues to place significant pressure on the city's budget, impacting taxpayers and the funding of public services.
This substantial debt, accumulated over decades, represents the gap between the retirement benefits promised to city workers and the money set aside to pay for them. The situation has led to credit rating downgrades and required substantial increases in annual city contributions, primarily funded through property taxes.
Key Takeaways
- Chicago's four city-run pension funds have a collective unfunded liability of approximately $35.4 billion.
- The pension systems for police and firefighters are the most severely underfunded, with funded ratios below 25%.
- A significant portion of Chicago property tax revenue is now allocated to making state-mandated pension payments.
- Despite record contributions, the total pension debt has continued to grow due to investment returns not meeting targets and other actuarial factors.
The Scope of Chicago's Pension Challenge
Chicago manages four primary pension funds for its employees: the Municipal Employees’ Annuity and Benefit Fund (MEABF), the Laborers’ Annuity and Benefit Fund (LABF), the Policemen’s Annuity and Benefit Fund (PABF), and the Firemen’s Annuity and Benefit Fund (FABF). Each fund faces a significant shortfall.
According to the city’s 2022 Annual Comprehensive Financial Report, the total net pension liability for these four funds reached $35.4 billion. This figure represents a critical challenge to the city's long-term financial stability.
Pension Funding by the Numbers (2022 Data)
- Municipal Employees (MEABF): 22.1% funded
- Laborers (LABF): 45.9% funded
- Police (PABF): 23.9% funded
- Firefighters (FABF): 20.8% funded
A funded ratio indicates the percentage of promised benefits that are covered by current assets. Financial experts generally consider a ratio below 80% to be a sign of fiscal distress.
What Unfunded Liability Means
An unfunded liability is the difference between the projected amount a government owes its future retirees and the assets currently available in the pension fund. When this gap is large, it means the city must find additional revenue in the future to cover these promised benefits.
This situation forces difficult choices, often pitting long-term obligations against immediate needs for city services like road repair, public safety, and sanitation.
Impact on Taxpayers and City Finances
The primary tool used by the city to address the pension shortfall has been increased property taxes. Over the past decade, Chicago residents have seen their property tax bills rise significantly, with a large portion of the revenue directed specifically toward pension contributions.
In 2023, the city contributed a record $2.41 billion to its four pension funds. While these payments are crucial for stabilizing the funds, they consume a substantial part of the city's budget, limiting resources available for other essential government functions.
The Pension Funding Ramp
Illinois state law mandates a payment schedule, often called a "pension ramp," for Chicago and other municipalities. This schedule requires gradually increasing annual contributions over several years. The goal is to reach a 90% funded ratio by a specific deadline—2055 for the municipal and laborers' funds, and 2058 for the police and fire funds.
This escalating payment plan ensures that the city cannot skip or underfund its required contributions as it did in the past. However, it also guarantees that pension costs will remain a dominant feature of the city's budget for decades to come.
Historical Roots of the Pension Problem
Chicago's pension crisis did not develop overnight. For many years, the city did not contribute enough money to keep the funds healthy. This practice, sometimes referred to as a "pension holiday," was based on less stringent state laws and actuarial assumptions that proved to be overly optimistic.
"The City’s pension funds are a significant credit challenge and will continue to place considerable strain on the City’s finances for the next several decades," stated a report from the Civic Federation, a non-partisan government research organization.
Other factors contributed to the growing debt. These include benefit increases that were not matched with new funding sources, lower-than-expected investment returns after the 2008 financial crisis, and changes in demographic assumptions, such as retirees living longer.
Proposed Solutions and Future Outlook
The administration of Mayor Brandon Johnson, like previous administrations, is grappling with how to manage the massive liability. While the state-mandated payment ramp provides a clear, albeit costly, path forward, other strategies are often discussed.
Exploring Asset Transfers
One proposal involves transferring city-owned assets to the pension funds. The idea is that these assets could generate revenue for the funds, reducing the burden on taxpayers. However, critics argue that this approach simply moves resources around without creating new wealth and could result in the loss of public control over valuable assets.
Economic Growth and Investment Returns
City officials also emphasize the importance of strong economic growth to expand the tax base and generate more revenue. Additionally, the financial health of the pension funds is highly dependent on investment returns. A strong market performance can help close the funding gap, while a downturn can worsen it significantly.
Despite making its full required payments for several years, Chicago's pension debt remains a formidable obstacle. The path to fiscal stability requires sustained, disciplined contributions and careful financial management for the foreseeable future, ensuring that the issue will remain a central topic of public debate and policy in the city.