May 16, 2011
An actuarial projection of the future solvency of the Chicago Park District’s pension fund has estimated that the fund will exhaust its assets in the year 2025. The projection takes into account the reduced pensions for employees hired on or after January 1, 2011 pursuant to Public Act 96-0889.
The Park District’s pension fund was relatively healthy just ten years ago. In FY2001 it had a funded ratio of 96.7% based on the actuarial value of assets and 89.3% based on the market value of assets. Actuarial value of assets smoothes investment gains and losses over a period of five years. The investment declines of FY2001-FY2002 and FY2008-FY2009 caused significant asset losses reflected in the market value of assets funded ratio trend below.
The negative investment returns of FY2001-FY2002 and FY2008-FY2009 have been followed by double-digit recoveries. But the fund should not rely on investment returns to recover from its 49.5% market value funded ratio.
There is no built-in mechanism to increase Chicago Park District employer or employee contributions when investment losses significantly damage asset levels. Employee contributions are a fixed percentage of pay (9.0%). Employer contributions are set by state statute as 1.10 times the employee contributions made two years earlier. The result is that significant investment losses can quickly plunge a fund like the Chicago Park District’s into a declining spiral from which no reasonable investment gains can save it.
In contrast to the Chicago Park District, all other Illinois park districts participate in the Illinois Municipal Retirement Fund (IMRF). Employer contributions to the IMRF are based on the actuarial needs of the fund, so contributions rise when investment losses mount. Although this creates a greater financial burden on local governments during difficult economic times, it prevents the short slide to insolvency that the Chicago Park District fund is projected to experience.