Fixing Chicago's Pension Mess
Chicago's pensions can be saved, but only if difficult decisions are made
Call it corruption, poor management, currying favor with unions, or sheer ignorance, Chicago — and the entire state of Illinois, for that matter — has a pension problem. This is consequential but has been going on for decades. To avoid having to devote any serious consideration to Chicago’s unstable pensions, a succession of mayors have consistently held a “kick the can down the road” approach to city finances.
Chicago provides annuity and benefit funds to serve retirees who were municipal employees, Laborers, and retirement board employees, as well as public servants in the Police and Fire departments. Additionally, there is the Chicago Teachers’ Pension Fund, but this is funded by the Chicago Board of Education.
Though Chicago’s pension discussion should focus solely on the city, the four pensions are governed by legislation passed by the Illinois General Assembly and signed into law by Illinois’ governor. Thus, Chicago and Illinois are inextricably linked. Therefore, a mayor trying to untangle the problem of underfunded pensions will need approval of state lawmakers in the Illinois General Assembly and the governor’s signature to make needed changes.
What exactly is the problem? Imagine going to your bank to make a deposit of your $1,000 paycheck, you make pleasantries with the teller as you wait for the deposit to be cleared, you get your balance receipt and think: “There must be some mistake!” The deposit receipt shows only $240 of the $1,000 has been deposited. Of course, you would be angry and rightly so. This serves as an example how Chicago’s pensions are underfunded. For every dollar that is supposed to have been put into pension funds, Chicago has only put in 24 cents.
Chicago’s municipal pensions have not always been in such poor shape. In 1996, for example, all Chicago’s pensions were prospering. The Firemen’s Annuity and Benefit Fund (FABF) was over 100 percent funded. Likewise, the Municipal Employees’ Annuity and Benefit Fund (MEABF) was over 90 percent funded, the Policemen’s Annuity and Benefit Fund (PABF) was over 60 percent funded, and the Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund (LABF) was just under 60 percent funded.
How did Chicago’s pensions go awry? First, in the years post-1996, politics played a heavy role in appeasing union members. In order to keep members happy, benefits rose with no plan to pay for those increases. Second, pensions rely on sound investment returns to steadily increase retirement funds for future retiree payments. When the markets are volatile, for example, the predictions of a seven percent annual return on investments never materialize. Third, pensions have been notoriously underfunded by the city. Fourth, the addition of three percent annual cost of living increases adds to the bloat.
The outlier in this pension madness is a lack of transparency regarding how much the individual pension funds pay investment firms to grow the city’s pensions. For example: Ina 2014 article for The Bond Buyer entitled “Chicago Aldermen Want SEC Probe of Mayor’s Campaign Contributions,” writer Yvette Shields wrote:
“Several Chicago City Council members are asking the Securities and Exchange Commission and city inspector general to investigate whether campaign contributions to Mayor Rahm Emanuel from executives at firms with city pension business violate local ethics or federal pay-to-play rules.”
In a three-year period of time (2011-2014) Emanuel was given $600,000 in campaign contributions from executives at investment firms linked to the city pensions. No SEC investigation occurred, even as Emanuel’s re-election coffers grew toward $10 million.
Additionally, the quest for state pension reforms was thwarted by the Illinois Supreme Court, which ruled that promises made must be promises kept regardless of financial crisis. Though Emanuel’s initial comments upon the ruling stated that Chicago’s pension reforms were legal because they were worked out with the union heads, themselves, in 2016 the Illinois Supreme Court called Chicago’s pension reforms equally unconstitutional.
Fast forward to today. Chicago no longer has federal COVID dollars to help pay runaway pension benefits. By its own estimation, 22.7 percent of monies coming in are going toward pensions. Lori Lightfoot’s plan to allow Bally’s to build a casino to pay for pensions will never meet the revenue stream needed. According to Illinois Policy, the casino will only pay nine percent of what is needed to cover unfunded pensions.
The money needs to come from somewhere. The question becomes: Is there a legal way to reform pensions?
One method of reform has been to create tiers based on city employment start dates. The later the start date, the less pension monies a person will receive. For example: An employee at the Chicago Police Department who started before 2011 is considered a Tier 1 employee. Any police officer having started on or after January 1,2011 is a Tier 2 employee. Both tiered employees contribute to their Policeman’s Annuity and Benefit fund the same nine percent rate.
However, the amount of retirement monies available to retirees is vastly different between the tiers. Tier 1 employees’ retirements will be based on an average of their highest consecutive four years of service, provided they have at least 20 years of service. At such time, an officer will receive retirement monies of 50 percent of this average plus an extra 2.5 percent for each year they work beyond the 20-year mark — up to but not exceeding 75 percent of their average monthly salary. An officer categorized as Tier 1 can retire after performing 20 years of service, but the officer is not eligible for an annuity payment until they turn 50 years of age.
In contrast, Tier 2 employees’ retirements will be based on an average of their highest consecutive eight years of service. According to the Policeman’s Annuity and Benefit site, Tier 2 employees’ retirement calculations are based on a person reaching at least 50 years of age and having provided at least 10 years of service. Their retirement will equal 2.5 percent for each year of service BUT will receive a reduction of 0.5 percent for each month the officer is under the age of 55. As mentioned by The Civic Federation:
“Using the City of Chicago’s four pension funds as an example, approximately 50.5% of the 51,978 active employees participating in the four pension funds belonged to Tier 1 and 49.5% belonged to Tier 2 or 3 as of FY2021. (A third tier of benefitswas added to certain Chicago Funds in 2017.)”
Tiering was one way to ensure that Chicago’s pensions could achieve solvency. Nevertheless, there is a problem involving the shortage in new hires and younger members resigning. As with any functioning pension system, as the older members get set to retire, there needs to be younger members whose pension contributions will offset retirees. There are 1,700 fewer police officers in Chicago now than two years ago, which will become a problem later. Equally, Chicago’s firefighter numbers are flat. The 2024 budget reflects an increase of only eight new employees.
One creative accounting way to view the pension catastrophe for police officers is that many of the over 1,000 who left simply resigned instead of retiring. Those officers who have resigned their positions in Chicago have made lateral moves to suburban police departments. This circumstance, however, generates a series of cascading effects. First, it means that for each officer not working in Chicago, there is a nine percent shortfall in contributions paying into the system. Secondly, and more seriously, officers with less than 20-years of service who are not vested in the pension before they resign generally withdraw their accrued contributions – including 1.5 percent interest. If we take into consideration over 300 officers have tendered their resignations and left Chicago over the last five to seven years, resignations have had a staggering impact on the pensions fund.
In an attempt to understand and improve the pension fiasco, Mayor Brandon Johnson’s pension working group met this past June to develop a strategy over how to deal with underfunded pensions. At the time, Johnson noted:
“Today’s initial meeting included stakeholders representing my administration, the city council, the general assembly, organized labor and pension funds. Over the next several months, these individuals will work with a broader set of advisors from the financial and advocacy sectors to develop actionable solutions to meet the city’s obligations to retirees, workers, and taxpayers.”
Johnson was forthright when identifying those in this group. Union leaders, state legislators, Chicago’s CFO Jill Jaworski, and Chicago’ Budget Director Annette Guzman were in attendance. However, a deep dive into some of the names on this list stirs questions. Jill Jaworski, for example, received a Bachelor’s Degree in political science from The University of Chicago, yet somehow found herself working for investment bankers. Annette Guzman is a lawyer and mayoral advisor. Two other names were listed without a title. Among the pair is Cameron Mock, a former aide to Governor J.B. Pritzker, who departed nine months ago to accept a position as Specialist Master at Deloitte. The second group member, Steve Zahn, is Chief Operating Officer of the Firefighter Pension Investment Fund.
Clearly, Johnson is attempting to gather a well-rounded and well-versed team to return security to pensions. However, Chicagoans need to temper their optimism because the members of Johnson’s pension working group are all politically connected.
The same can be said of the directors of individual pension funds. Tiffany Junkins is the new Executive Director of the Municipal Employees’ Annuity and Benefit Fund (MEABF). A cursory glance at Jenkins’ LinkedIn profile reveals she has a background in early childhood education and an MS in educational administration. According to the executive director job posting, “Candidates must have knowledge of and experience with pension funds and investment structures. They also must have experience at the executive level in pension fund administration and fiduciary obligations, including asset management.”
Tiffany now presides over $3 billion in assets. Though she does have a certificate in accounting, it amounts to basic level bookkeeping. Apparently, she gained on the job training when she was Fiscal Manager at CPS for three years and City of Chicago’s Deputy Budget Director for one year.
There is also the unsettling title of Mayor Johnson’s 2024 budget: “The People’s Budget.” Not only is its title deeply misleading, it is Marxist. Johnson has become the Pied Piper, going from community to community and listening to the needs of those who live there. When the mayor’s $16.6 billion budget goes bust, the mayor will avoid all blame, for Johnson really, really tried to give the people what they asked for.
Under the terms Johnson negotiated with Chicago Police, over $300 million will be added to the 2024 budget and will include raises for officers. Those same pay increases will be tied to their pensions, yet somehow the pensions will be 90 percent solvent by 2055. The CFD has yet to begin contract negotiations with the city. Chicago’s pensions are like The Blob. In the 1990s, the problem seemed insignificant and manageable. However, as Chicago’s mayors continued on their various paths toward destruction, The Blob has grown and grown and devoured billions of dollars in its wake. Can Chicago finally rid itself of this disaster?
A solution to Chicago’s agonizing pension crisis is possible. Similar to The Blob, city leaders can kill the ever-growing mass by freezing rather than allowing further out of control spending. A budget cannot be everything to everyone. Priorities must exist. There are solutions to fiscal problems, but these solutions will mean unhappy constituents and politicians who must demonstrate political will and make difficult decisions.
If the City truly wants to reform pensions and remove the stress pensions are creating on Chicago’s underfunded retirement funds, several steps can be taken to kick start a return to pension responsibility:
First, Chicago should hire a team of independent forensic accountants to locate where monies have gone. Second, Chicago should emphasize spending on debts owed first. For example, Chicago does not have the resources to pay $76 million for a jobs program to keep its teens occupied. Instead, make Chicago more business friendly, which will not only become places for teens to get their first jobs but will also increase tax revenue.
Third, Chicago should unload investment firms that are still getting paid without showing positive results for any of the four pensions and the Chicago Teachers Union. Chicago is ranked as the most corrupt city in the nation for a reason. Pay to play needs to go. Fourth, Chicago should revamp its tier system and create anew tier for all new hires. New hires will be receiving 401(k)s rather than pensions. A 401k will allow city employees to exercise control over their retirement investments rather than allowing politically connected investment firms dabble with pensioners hard earned money. Finally, with an analysis conducted by the Illinois Policy Institute revealing 48 percent of pensioned city employees retiring before the age of 60, Chicago should consider raising the mandatory retirement age for some employees. For non-public safety personnel, the recommended age is 70. For public safety employees, the retirement age should remain 63.
Chicago’s pensions are beyond a crisis. The city is increasingly having to grapple with longer life expectancies, fewer active workers to retirees, and soaring benefit liabilities variously estimated at around $35 billion. With Chicago sinking under the weight of underfunded public worker pensions, the time has come for Chicago and Mayor Johnson to act and act decisively.
Broadly speaking, there are a range of options from which Mayor Johnson has to choose. Among the levers available: Investment management, overhauling its tier system, and increasing flexibility for active workers to control their retirement. Much of the options available to Chicago are not far-fetched. The question remaining is whether Mayor Johnson has the political strength and desire to respond to this crisis.
Mayor Johnson and his posse just need to decide that they really want a “People’s Budget” rather than continuing to live on credit and borrowed time.