Chicago pension task force begins work

A “working group” made up of city, state, and labor officials tasked by Chicago Mayor Brandon Johnson with finding long-term funding and structural fixes to pension funding strains held its first meeting this week with a fall legislative veto session the target for initial action.

The group has taken shape in recent weeks after being announced by Johnson at the end of the General Assembly’s spring legislative session as part of an agreement that staved off passage of pending pension bills that would have further burdened the city’s balance sheet.

“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 said in a statement after the group’s Wednesday meeting.

Chicago’s $33.7 billion of pension liabilities remain a huge burden on the city’s balance sheet and budget — despite progress in recent years under Johnson’s predecessors — with the funded ratios of its four funds ranging from 21% to 46%, for an average of 23%, the lowest among major cities.

The city released the full list of members Wednesday. The task force expects to “form sub-groups to address specific pension issues and dedicated revenue as part of a comprehensive and balanced approach,” the city said.

While work gets underway on identifying the city’s full funding burden and potential fixes to supplement the progress already made, the group expects to meet again next month, according to sources.

“The veto session is a marker in time that’s very important and, while not every aspect of the pension challenges we face will be worked out by then, we hope to have some things in place,” said one source.

Members include the city’s Chief Financial Officer Jill Jaworski, Budget Director Annette Guzman and Jason Lee, senior advisor to Johnson, who took office last month. The City Council is represented by Alderpersons Pat Dowell, who chairs the Finance Committee, Jason Ervin, who chairs the Budget Committee, and Mike Rodriguez, chair of the City Council Workforce Development  

From the legislature, the panel includes Sen. Rob Martwick, D-Chicago, who chairs the senate’s pension committee, and Rep. Kelly Burke, D-Evergreen Park, and assistant majority leader. Also in the group:  Beniamino Capellupo, senior labor advisor for Chicago.

Labor representatives include John Catanzara Jr., president of Chicago Police Department Lodge 7, Pat Cleary, president of Chicago Fire Fighters Union Local 2, Joe Healy, Secretary-Treasurer of Laborers’ District Council of Chicago, Jeff Howard of SEIU Local 73, Andrea Kluger of Chicago Federation of Labor, and Martha Merrill from AFSCME.

Steve Zahn, a former research and appropriation analyst for the state House who is now chief operating officer of the Illinois Firefighters Pension Investment Fund, and Cameron Mock, who is a former senior economic advisor to Gov. J.B. Pritzker and senior fiscal advisor who worked on pension issues, are also on the panel. Mock left state government earlier this year to take a position as specialist master at Deloitte.

All constitutional options need to be on the table, Martwick said in an interview after the working group was first announced.

That includes fund consolidation, pension obligation bonds, new tax revenue streams, such as video gaming at establishments, moving to a 100% funding goal from 90% and to a true actuarially determined contribution from the current schedule, which is only actuarially based. The latter two objectives would add to the city’s costs, but would be viewed favorably by municipal bond market participants.  

“I think there is going to be a strong desire to find a way to get the funds back to fiscal health and instill in those funds legislative guardrails to make sure the funds stay on track,” Martwick said. “My hope is that we look at the city’s long-term financial picture as it relates to pension obligations, look at the existing revenue sources, like the casino funds coming in, and the potential for other sources while making reforms.”

Martwick did not put asset privatization among the possibilities — some local governments have entered into water operation leases and put upfront payments toward pensions — citing the criticism associated with the city’s parking meter and garage concessions. He also said it would be difficult to push out any further the 2055-2058 amortization schedule.

Another source said it was early in the process and no options were put on or taken off the table at the meeting Wednesday.

The city can’t cut benefits after previous state and local attempts were overturned by the Illinois Supreme Court based on a state constitutional clause protecting benefits from impairment or diminishment. One of the high court’s rulings did provide a path using a “bargained-for exchange” but that too faces a high legal bar as past rulings suggest all labor groups would need to support and ratify changes.  

The inclusion of labor in the working group means they could be enlisted to persuade state lawmakers for the heavy lift that could be required for various revenue sources or other actions, such as consolidation, that need state authorization. Johnson, a former organizer for the Chicago Teachers’ Union, has said the city should honor its pension obligations.

The working group will research the costs of fixes needed to address shortcomings in the Tier 2 level of benefits for employees hired after 2010. Actuarial studies contend the benefit levels will run afoul of Social Security Administration Safe Harbor rules that require employees who receive a public pension and don’t pay into Social Security to receive at least an equal benefit.

The city has actuarial studies in hand from Aon while several of the city’s pension funds use Segal which also conducted a Tier 2 review of the state’s pension system on behalf of the Commission on Government Forecasting and Accountability.

The decision to establish a working group emerged in the final days of the legislative session last month.

Lawmakers were poised to pass firefighter benefit bills that would cost the city more than $3 billion in the coming decades. Johnson, who took office earlier this month, asked lawmakers and labor for breathing room to assess the costs and funding options and that led to the decision to form a working group to come up with a package that deals with all four funds.

Chicago’s then-Chief Financial Officer Jennie Huang Bennett  warned the city couldn’t afford the cost of the bills without jeopardizing the city’s ratings upswing and forcing a property tax hike or public safety cuts.

The city’s actuarial study conducted by Aon put a $3.2 billion present value price tag on the benefits in the bill through the city’s payment schedule, with the annual price tag at about $60 million, rising to $311 million by 2055.

The package included an annual adjustment change that some questioned whether it is needed to avoid the safe harbor trigger, but it was included in the state’s 2019 suburban and downstate public safety pension fund consolidation and the same benefits were promised by the state to Chicago police and fire fighters.

The working group will be navigating revenue ideas that must be balanced against those that Johnson campaigned on, to generate $800 million to help balance the city’s books while also paying for his agenda priorities and holding the line on property taxes.

Over the last decade the city lifted property taxes and turned to a 911 surcharge on phone bills and a water bill surcharge to help cover a ramping up of pension contributions to an actuarially based contribution. That schedule, to reach a 90% funded ratio between 2055 and 2058, began during Mayor Rahm Emanuel’s tenure and was continued by Mayor Lori Lightfoot, who lost her reelection bid this year.

The funding ramps were designed to raise funding levels to an actuarial level at a pace that didn’t crush taxpayers. Property taxes, the 911 surcharge, and water surcharge were raised to cover the higher contributions.

Roughly $200 million that is expected from the city’s first casino license in the coming years will go toward police and fire pensions based on state authorizing legislation.

That casino funding stream eases pressure on the corporate fund and, after fully phasing in actuarially based contributions last year, annual growth in pension contributions is projected to be more modest in the coming years with the most severe threats posed by weak investment returns and state-mandated pension benefit improvements.

Despite the progress, the funding schedule is slow-going, with funded ratios unlikely to hit 50% for years. To stave off further growth of unfunded liabilities in weak investment years, the city this year began making a supplemental payment and put an additional $242 million toward the system, which helped persuade Moody’s Investors Service to lift the city’s rating out of junk level.

Johnson has not yet said whether he intends to leave in place Lightfoot’s executive order signed on her way out that directs a projected $642 million 2022 and 2023 budget surplus to cover supplemental pension contributions for 2024, 2025, and 2026.

Even with a supplemental contribution in the $200 million range next year, the city would still fall $330 million short of funding the actuarially determined contribution, or ADC, according to the city’s mid-year fiscal forecast. The city’s statutory payment rises from $2.4 billion this year to $2.7 billion in 2028.

The city also must find a way to account for higher costs associated with a separate bill that received little public attention this past session. It would make permanent a cost-of-living adjustment based on birth date. Over Lightfoot’s objections, Pritzker signed legislation in 2021 that made permanent a cost-of-living adjustment enhancement lawmakers previously approved every few years for firefighters.

That enhancement for Chicago firefighters adds $180 million to the fund’s existing $5.29 billion of unfunded liabilities and $16 million to $17 million in additional annual costs that add up to $700 million by 2055, according to a 2022 review from Segal. Police fund costs of similar legislation are typically three times that amount.