April 3, 2014
Chicago Mayor Rahm Emanuel unveiled a proposal to stabilize the City’s underfunded Municipal and Laborers pension funds on March 31. The 40-year plan includes successive property tax increases to provide additional pension funding coupled with employee benefit reductions. His proposal does not address the severe funding crisis in the Police and Fire Pension Funds. Legislation based on the Mayor’s proposal was passed by the Illinois House Personnel and Pensions Committee on April 2.
The Problem: The Municipal and Laborers Pension Funds Face Insolvency
The Municipal Pension Fund has a total of 50,740 members (31,326 active members and 19,614 retirees), while the Laborers Pension Fund has 5,602 total members (2,865 active members and 2,737 retirees). Both funds have high unfunded liabilities and dramatically low funded ratios. The current funded ratio for the Municipal Pension Fund is 38% with an unfunded liability of $8.4 billion. The current funded ratio for the Laborers Pension Fund is 58% with an unfunded liability of $1.0 billion. If nothing is done, both funds face insolvency in a relatively short period: the Municipal Fund will likely be insolvent by 2023-2027 and the Laborers Fund will likely be insolvent by 2024-2031.
Currently, the City’s annual pension contributions are statutorily set as a multiple of employee contributions made two years prior. The multiple used for the Municipal Fund is 1.25; this means that annually the City contributes 1.25 times the amount of employee payroll deductions made two years prior to the Fund. The corresponding multiple for the Laborers Fund is 1.0. The amounts contributed by the City are far below what actuaries would recommend that the City contribute to ensure the funds’ fiscal stability.
The City’s Pension Stabilization Plan for the Municipal and Laborers Funds
According to the Mayor’s proposal, the City will increase its contribution to the Municipal Fund in 2015 by 0.6X for a new multiple of 1.85. There will be a payment ramp from 2016 to 2019, with the City increasing its contribution by 0.3X each year (2.15X in 2016, 2.45X in 2017, 2.75X in 2018, 3.05X in 2019). The City then will continue to fund at an increasing multiple until the Fund achieves a 90% funded ratio in 2054. After that time, funding will switch to a permanent 90% funded ratio level. A similar staged multiple increase is proposed for the Laborers Fund.
According to statements from City officials, approximately 70% of the new funding for the Municipal and Laborers Pension Funds will come from City sources:
- 50% of the yearly pension funding increases from 2015-2020 will be provided from successive annual property tax increases of $50 million. Consequently the City’s property tax levy will rise by $250 million over five years generating $750 million in additional revenues for the funds.
- 30% of the funding will be paid by allocating increased pension costs to the City’s Enterprise funds (Aviation and Water) based on their share of employees.
- About 20% will be paid for with retiree healthcare savings as well as unspecified budget savings and budget efficiencies.
City officials have said that roughly 9% of the funding will come from increased employee contributions:
- The average employee will pay about $300 more per year in additional contributions from 2015-2019.
About 21% of the funding will come from retirement system benefit reforms:
- 85% of that amount will derive from changing the annual cost of living adjustment (COLA) from a 3% compounded increase to the lesser of 3% or half of CPI using a simple interest calculation.
- 15% of that amount will derive from COLA pauses in 2017, 2019 and 2025 and a one-year additional COLA delay.
Civic Federation Supports the Pension Reform Plans for the Municipal and Laborers Funds
The Civic Federation supports Mayor Emanuel’s reform proposal to save the Municipal and Laborers Pension Funds. We urge the General Assembly to swiftly take up these reform measures.
The solution proposed by the City is not perfect; we would much prefer that all public employee retirement systems be fully funded at the level recommended by actuaries. However, this is a reasonable proposal that addresses the urgent need to begin the process of saving Chicago’s pension funds.
In our view, the Mayor’s proposal provides for a balanced approach that involves shared sacrifice among employees, the City of Chicago government and Chicago taxpayers. It provides for important cost cutting benefit reforms long sought by the Civic Federation, such as the elimination of expensive annual compounded COLA increases. It also provides much-needed new revenues for both funds. Adopting these reforms will provide both the Municipal and Laborers Funds with long-term fiscal solvency and stability.