Illinois General Assembly Passes Pension Reform for the Chicago Park District

UPDATE:

On January 7, 2014, Governor Pat Quinn signed Senate Bill 1523 into law. The provisions of Public Act 98-0622 will go into effect starting January 1, 2015.

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Original blog post published on November 20, 2013

On November 6, 2013, the Illinois House passed Senate Bill 1523, House Amendments 3 and 4 and the Senate concurred with the changes the next day. The bill contains a number of provisions aimed at stabilizing the Park District’s underfunded pension fund and bringing the funded ratio to 90% funded by 2049. The bill has been sent to Governor Pat Quinn for his signature.

Current Status of the Pension Fund and Current Benefits

The Park Employees’ & Retirement Board Employees’ Annuity and Benefit Fund is a single employer defined benefit pension plan for employees of the Chicago Park District and the Fund. It was created by Illinois State statute to provide retirement, death and disability benefits to employees and their dependents. The pension fund does not provide healthcare benefits; rather, the Park District funds retiree healthcare on a pay-as-you-go basis. Additionally, members of the Park District pension fund do not participate in the federal Social Security program so they are not eligible for Social Security benefits related to their District employment when they retire.

As of December 31, 2012 there were 3,053 active members of the pension fund and 2,906 beneficiaries, for a ratio of 1.05 active members for every beneficiary. The pension fund had a market value funded ratio of 42.4%, down from 76.9% in FY2003. The pension fund’s unfunded liabilities have grown from $77.0 million to $550.4 million, a 614.8% increase over the past 10 years. The pension fund is projected to run out of funding in 10 years if nothing is done.

The chart below provides details on the District’s retirement benefits for Tier 1 and Tier 2 [1] employees. Changes to plan benefits and contribution amounts can only be made through State legislation.[2] The Park District’s contribution rate is based on a multiple of 1.1 times employee contributions made two years prior. In FY2012, the total employer contribution was $10.9 million. Employee contributions are set at 9.0% of salary.

Provisions of Senate Bill 1523, House Amendment 3

The Park District projects that with this pension reform legislation, the pension fund’s funded ratio will reach 90% by 2049 and 100% by 2054. According to testimony by the Park District at the Illinois House of Representatives’ Pension Committee hearing on November 6, 2013, the actuarial accrued liability is projected to decrease by a net of $107 million. The current actuarial accrued liability is $971.8 million. In order to meet these projections, the bill enacts a number of benefit and contribution rate changes, including:

• Retirement Age: Early retirement will increase from 50 to 58 years for Tier 1 employees under 45-years-old before January 1, 2015. For Tier 2 employees, the retirement age for full benefits decreases from 67 to 65 and early retirement age decreases from 62 to 60 as of January 1, 2015.
• Automatic Annual Increase: After January 1, 2015, the automatic annual increases for Tier 1 employees will match Tier 2 employees: 3% or ½ CPI, whichever is less on a simple interest basis. This change will also apply to current retirees. Additionally, there will be no automatic annual increase for Tier 1 or Tier 2 employees in 2015, 2017 or 2019.
• Employee Contributions: Tier 1 and Tier 2 employee contributions will increase from 9.0% to 10.0% of salary on January 1, 2015. The rate will further increase to 11.0% on January 1, 2017 and 12% on January 1, 2019. Once the pension fund is 90% funded, the employee contribution rate will fall to 10.5% but will go back up to 12.0% if the fund falls below 90% funded.
• Employer Contributions: In FY2015 the employer contribution will increase from 1.1 to 1.7 times the employee contribution made two years prior. The multiple will further increase to 2.3 in FY2017 and 2.9 in FY2019. Once the pension fund is 90% funded, the employer contribution rate is the lesser of 2.9 times the employee contribution made two years prior or the amount needed to maintain 90% funded.
• Supplemental Employer Contributions: The Chicago Park District will need to make additional contributions of $12.5 million in FY2015 and FY2017 and $50.0 million in FY2019. These contributions are intended to decrease the pension fund’s unfunded liability and will not decrease the employer’s contribution in the respective fiscal year.
• Employer Funding Guarantee: The pension fund will have the authority to enforce annual employer contributions and supplemental employer contributions by mandamus action in the courts as of January 1, 2015. Similar provisions have been made in pension reform efforts at the State level.
• Duty Disability Benefits: For Tier 1, Tier 2 and current recipients of duty disability, such benefits will be reduced from the current 75% to 74% on January 1, 2015. The benefit will be further reduced to 73% on January 1, 2017 and 72% on January 1, 2019.

The following table shows the timeline of phased-in changes to the Park District’s pension benefits and contribution rates, per SB1523, HA3 and HA4.

In addition to the above benefit and contribution changes, SB1523, HA3 and HA4 prohibit any benefit enhancements passed by the General Assembly that do not identify a sufficient matching funding source as certified by the State Actuary.

The following graph illustrates the projected funded ratio and unfunded actuarial liability (UAAL) of the pension fund under the provisions of SB1523, HA3 and HA4. It is important to note that the actuarial report provided to the Civic Federation assumes implementation of each of the legislation’s provisions one year prior to the actual language of the bill. As such, the significant drop in UAAL projected for FY2018 in the graph largely reflects the $50.0 million additional employer contribution scheduled for FY2019 under the provisions of SB1523.