April 30, 2010
The City of Chicago released the final report of the Commission to Strengthen Chicago’s Pension Funds today, April 30, 2010. Chicago Mayor Richard M. Daley announced the creation of the Commission on January 11, 2008. The intent of the Commission was to propose ways to improve the financial strength of the City’s four pension funds. The Civic Federation served as a member of the group.
The Civic Federation commends the City of Chicago for releasing report, which includes critical information that allows decision-makers and taxpayers to see the dire financial state of the City’s pension funds. Page 21 of the report shows that if nothing is done, the police and fire pension funds are likely to run out of money within ten years or even earlier.
The Civic Committee of the Commercial Club released a separate report today on the City’s pensions, showing that in the aggregate the City’s pensions are as badly underfunded as those of the State of Illinois.
The Civic Federation is strongly concerned that many of the recommendations in the report of the Commission to Strengthen Chicago’s Pension Funds do not go far enough. The severity of the City’s pension crisis cannot be overstated and no small changes will be adequate to the task of restoring the funds’ fiscal health. Major benefit changes and contribution increases are required. The risk of these funds running out of money to pay benefits is now very real.
The Civic Federation makes the following specific recommendations:
Reduce pension benefits for both new employees and prospectively for current employees, as described in Scenario 2-All (see Appendix 3). This includes using an 8-year final average salary, a 2.0% benefit accrual rate, unreduced retirement at age 67 and ten years of service for members of the Municipal and Laborers’ funds and at age 63 and ten years of service for members of the Police and Fire funds, COLA at the lesser of 1.5% or CPI with simple interest, and limiting pensionable salary to the Social Security Covered Wage Base ($106,800 in 2010).
The situation is so severe that even with these benefit reductions, both the City and the employees will have to make additional contributions. We recommend, as does the Commission, that these contributions be actuarially-based. The Commission report uses a 60:40 ratio between employer and employee contributions but we recommend a 50:50 ratio where the City and employees would split the cost of contributions, as do employers and employees participating in the Social Security system.
The City’s annual contribution must increase immediately by several hundred million dollars. The Civic Federation recommends that the City make several hundred million dollars worth of cuts to services starting in FY2011 in order to free up resources to pay the required pension contribution, otherwise the size of the tax increase needed will be massive. For years the City has failed to contribute amounts needed to keep the funds healthy, so dramatic and immediate shifts in the City’s spending priorities are needed.
The pension funds should be consolidated. The City should not have four separate pension funds for its employees. The Civic Federation recommends that either the four funds be consolidated into a single fund, or that the Municipal and Laborers’ funds be merged with the Illinois Municipal Retirement Fund and the Police and Fire funds be merged into a single Chicago Public Safety fund.
The Civic Federation recommends that the composition of the pension fund boards of trustees be revised in three ways. The balance of employee and management representation on the boards should be changed so that employees do not hold the majority of seats. A tripartite structure should be created that includes independent citizen representation on the board. Finally, financial experts should be included on the pension boards and financial training for non-expert members should be required.
We do not make these recommendations lightly, but we believe that the severity of the pension crisis demands that these actions be taken. This crisis has built up over years of making pension enhancements and failing to adequately fund the plans. The pensions promised to public employees are now much richer than what most private sector employees and taxpayers can expect to receive. Yet residents of Chicago will have to bear either service cuts or tax increases in order to save the pensions of these public employees. Major sacrifices must be made by all.