Chicago and Cook County Pension Challenges

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1 Fact Sheet: Chicago and Cook County Pension Challenges June 218 Chicago and Cook County Pension Fund Challenges 1

2 FACT SHEET: CHICAGO AND COOK COUNTY PENSION CHALLENGES Overview This document provides a high-level, side-by-side comparison of the four pension funds paid into by the City of Chicago and the two pension funds paid into by Cook County, Illinois. Data is chiefly drawn from the actuarial valuation reports issued for each fund as of December 31, 216. Across the country, public pensions have been continually politicized. This is done through three primary methods: Making investment decisions based on political factors Using high assumed rates of return to calculate unfunded liabilities Using outdated actuarial tables to calculate pension funding requirements Political Investment/ Divestment Being an elected or appointed official requires prudent management of taxpayer dollars and those of the men and women who labor to protect and serve their states and communities. This fiduciary responsibility requires the highest standard of care, meaning that fund managers should focus investment strategies on generating the greatest returns with an acceptable level of risk. For decades there have been movements to urge pension divestment from various economic sectors, including from tobacco, energy, defense, and weapon manufacturers. Ultimately, these strategies are driven by outside political pressure, and experts have assessed that divestment campaigns have never resulted in increased value for pension plans. Assumed Rates of Return Calculating unfunded liabilities based on accurate-market driven assumptions is essential to public pension fund integrity. Today, most public pensions use high rates of return that the market no longer supports. Using these optimistic standards, only 3% of public pension funds are considered adequately funded. This unpleasant reality is only made worse when unfunded liabilities are calculated using even a 6% rate of return. However, the problem will only continue to worsen if states and localities don t adjust calculations to reflect accurate returns. Actuarial Tables For the first time since 28, in December of 217 the IRS released new actuarial tables accompanied by additional requirements for private pension managers, but public pensions are not required to adopt the new tables. These tables show that Americans are living longer and longer, and it is expected that by 229, women will be living until 9 and men until 88. While this is positive news, most states use outdated tables from 2. Vermont and California have adopted the new actuarial tables, and their unfunded liabilities increased by $1 million and $7.5 billion respectively. As more states adopt the updated actuarial tables, the estimated $6 trillion in unfunded liabilities nationally will skyrocket. With this lens we can take a closer look at the state of pensions in Chicago and Cook County. While some reforms have recently been implemented, there s more that can be done. Ultimately, Chicago and Cook County could become examples for the rest of the country to follow. Chicago and Cook County Pension Fund Challenges 1

3 CHICAGO PENSION SYSTEMS 1. Municipal Employees Annuity and Benefit Fund (MEABF) Covers most civil servant employees of the City, as well as non-teacher employees of the Board of Education. 2. Policemen s Annuity and Benefit Fund (PABF) Covers the City s sworn police officers, captains, lieutenants, and sergeants. 3. Firemen s Annuity and Benefit Fund (FABF) Covers the City s sworn firefighters and paramedics. COOK COUNTY PENSION SYSTEMS 1. County Employees and Officers Annuity and Benefit Fund of Cook County ( County Fund ) Covers all Cook County employees excluding the Forest Preserve District personnel. 2. Forest Preserve District Employees Annuity and Benefit Fund of Cook County ( Forest Fund ) Covers the County s Forest Preserve District personnel. 4. Laborers and Retirement Board Employees Annuity and Benefit Fund (LABF) Covers City and Board of Education staff who are employed in a title recognized by the City as labor service. CITY OF CHICAGO PENSION FUND MEMBERS COOK COUNTY PENSION FUND MEMBERS 6, 25, Active Members 5, Active Members 2, Inactive Members Retirees # of Members 4, 3, Inactive Members Retirees # of Members 15, 1, 2, 5, 1, County Funds Forest Funds Total MEABF PABF FABF LABF Total Chicago and Cook County Pension Fund Challenges 2

4 CHICAGO GOVERNANCE MEABF Governed by 5-member Retirement Board: 3 members elected by active members and 2 ex-officio members, the Comptroller and Treasurer of the City. PABF Governed by 8-member Retirement Board: 4 members elected by active members and 4 ex-officio members selected by the Mayor. FABF Governed by 8-member Retirement Board: 4 members elected by active members and 4 ex-officio members selected by the Mayor (Treasurer, Comptroller, Clerk, and Deputy Fire Commissioner). LABF Governed by 8-member Retirement Board: 2 members elected by current employees; 2 members appointed by the Civil Service Commission or Department of Personnel; 2 ex-officio members, Comptroller and Treasurer of the City; 1 member elected by retirees; and 1 member appointed by the local labor group representing the majority of participating employees. $ Amount (in Billions) Ratio (%) $1b CITY OF CHICAGO Actuarial Liability Actuarial Value of Assets Unfunded Liability MEABF PABF FABF LABF Total CITY OF CHICAGO FUNDING STATUS RATIOS (AS OF DECEMBER 31, 216) 7% $1b $4b 76% 79% $1b Funded Ratio Unfunded Ratio 5% $25b 72% COOK COUNTY GOVERNANCE The County Fund and Forest Fund are governed by the same entity, the 9-member Retirement Board of the Cook County Pension Fund: 4 members elected by employees of the County and Forest funds; 3 members elected by annuitants of County and Forest funds; and 2 ex-officio members appointed by the Comptroller and Treasurer of Cook County. $ Amount (in Billions) COOK COUNTY $7b Actuarial Liability Actuarial Value of Assets Unfunded Liability County Funds Forest Funds Total COOK COUNTY FUNDING STATUS RATIOS 43% (AS OF DECEMBER 31, 216) 4% County Funds Forest Funds Total 43% $7b Funded Ratio Unfunded Ratio 2 1 MEABF PABF FABF LABF Total Chicago and Cook County Pension Fund Challenges 3

5 CHICAGO ASSUMED INVESTMENT RATE OF RETURN MEABF 7.5% FABF 7.5% PABF 7.25% LABF 7.5% CHICAGO RECENT PENSION REFORMS MEABF and LABF Fixed Payments for 5 Years and Actuarially Based Employer Contributions Starting in 222 To prevent insolvency, City contributions were substantially increased for years 217 to 221, and starting in 222, employer contributions will be made on an actuarial basis. Tax Increases To fund the increased employer contributions, MEABF will draw from a new water-sewer utility tax, and LABF will draw from an increase in the City s phone surcharge, though these sources will likely be insufficient to cover costs when the City begins contributing at an actuarially-calculated level. Requiring Increased Contributions for New Employees New employees hired after July 6, 217, are required to contribute 11.5% of their salary, which represents a 3% increase. PABF and FABF Fixed Payments for 5 Years and Actuarially Based Employer Contributions Starting in 221 To prevent insolvency, City contributions were substantially increased for years 216 to 22, and starting in 221, employer contributions will be made on an actuarial basis. Tax Increases To meet the increased employer contributions to PABF and FABF, the City will use revenue from a multi-year increase in property taxes, though these sources will likely be insufficient to cover costs when the City begins contributing at an actuarially-calculated level. COOK COUNTY ASSUMED INVESTMENT RATE OF RETURN County Fund 7.5% Forest Fund 7.5% COOK COUNTY RECENT PENSION REFORMS County Fund Increased Employer Contributions In 215, the County Fund explicitly tweaked its funding policy to start making contributions above the statutory rates. The revised policy adds an annual 2% escalation factor that applies to the amortization payments. Tax Increase In 216, Cook County passed the Home Rule Sales Tax, which bolstered employer contributions to $464.3 million in 216. The prior year the County paid the statutory contribution amount of $186.8 million. Forest Fund No major reforms implemented in recent years Chicago and Cook County Pension Fund Challenges 4

6 CHICAGO OUTLOOK MEABF* Anticipated to achieve a 9% funded ratio by 258 under PABF* Anticipated to achieve a 9% funded ratio by 255 under FABF* Anticipated to achieve a 9% funded ratio by 255 under LABF* Anticipated to achieve a 9% funded ratio by 258 under *Actuaries recommend the City consider making additional contributions to ensure there are sufficient assets available to pay promised benefits. The magnitude of the increases in funding that will be necessary when the City begins to contribute to all four pension funds at an actuarially-calculated level is currently unknown and no plan for funding those increases has been made public. COOK COUNTY OUTLOOK County Fund Beset by decreases in the active plan population and an insufficient funding methodology, actuarial studies estimate that assets in the County Fund will be depleted by 238, should no reforms be implemented in the interim. Forest Fund Beset by an insufficient funding methodology, actuarial studies estimate that assets in the Forest Fund will be depleted by 242, should no reforms be implemented in the interim. FACTORS CONTRIBUTING TO UNFUNDED LIABILITIES Funding Formulas Employer contributions for both the City and County were not actuarially-determined to ensure the pension funds were fully funded, which helped to drive growth in the unfunded liabilities. Aging Beneficiary Population The historic, statutorily-set employee and employer contribution percentages did not change to account for shifts in basic demographic factors, such as the lifespan of retirees. As retirees live longer, they collect benefits longer and the projected future benefit costs of the pension funds increase. Workforce Policies and Decreasing Active Member Population When the City incentivized early retirement to help balance the City s budget, employees retired and thus stopped paying into the pension funds and started collecting from the pension funds sooner than otherwise anticipated. Reductions to the overall size of the City s and County s workforces have also resulted in employee contribution reductions to the pension funds. Automatic Increases and Changes in Benefits The City previously authorized automatic annual increases, regardless of cost-of-living estimates, as well as additional benefit offerings that increased the strain on assets. Economic Declines For the City of Chicago, the recession of the early 2 s reduced assets significantly, whereby the four funds went from 87% funded to 62% funded. The Great Recession of 27-8 also reduced assets, whereby the four funds went from 62% funded to 38% funded. Chicago and Cook County Pension Fund Challenges 5

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