Chicago's four primary pensions (Police, Fire, Municipal Employees and Laborers) were poorly structured. There were no safeguards to protect them from powerful pension raiders, unfulfilled promises of deferred payments and other bad practices. At present, the City of Chicago Employer contribution is underfunded by $28 billion.
Recently, the Illinois Supreme Court ruled that the state constitution prevents any diminution of health care benefits for retired state employees. In a 6-1 decision, the court rejected the state's argument that health care benefits are not covered by the pension protection clause. The majority found the state constitution did not support that argument.
We currently have a defined benefits plan which is wholly unsustainable. Our Accrual multiplier per year of service is currently 2.1. Ideally, we should have an Accrual multiplier per year of service equal to 1.0. This disparity makes our current pension situation tenuous. We must ultimately transition to a defined contribution plan which will allow the future benefits to fluctuate according to investment successes.
Our administration must provide a common sense solution to resolve Chicago’s unfunded pension liability that is fair to current and future pensioners as well as taxpayers. Our plan must:
- Be constitutional;
- Work within the framework of the city’s fiscal constraints
- Enable the city to properly fund current services over time, with allowances for inflation and population fluctuation;
- Include a payment schedule which is sufficient for the city to reach full funding by
- obligations under the five pension systems as those obligations become due over time; and
- Purposely increase the aggregate funded ratio of the four pension systems and to ensure their fiscal health.
We must adopt a common sense approach that is fair to current and future pensioners as well as taxpayers.
I support the state initiative to raise the retirement age, which previously allowed public employees to retire as young as 50 in some government pension systems and 55 in others.
We should weigh and assess the benefits of offering certain government employees the option of a one time lump sum payment.
We can replace the automatic 3 percent annual increases for government retirees with a capped, inflation-based cost-of-living factor and tax the pensions of non-residents who retire from work in the private sector, with an exemption for the first $75,000 in retirement income and enact a minimum age for the exemption.
Finally, we must implement a Full accrual system which would mandate that we pay our obligations as we go within the year in which they accrue.
Chicago’s annual pension contributions are funded by property tax revenues, operating revenues, and enterprise fund revenues which reflect the enterprise funds’ proportionate share of the City’s pension contributions.
City employees participate in one of four defined benefit pension plans:
• Municipal Employees’ Annuity and Benefit Fund (MEABF), includes most civil servant employees of the City, as well as non-teacher employees of the Board of Education;
• Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund (LABF), includes City and Board of Education employees who are employed in a title recognized by the City as labor service;
• Firemen’s Annuity and Benefit Fund (FABF), includes the City’s sworn firefighters and paramedics;
• Policemen’s Annuity and Benefit Fund (PABF), includes the City’s sworn police officers, captains, lieutenants, and sergeants.
An unfunded pension liability is the difference between the value of the promises made to retirees and employees for services already rendered and the funds available to pay for those promises.
Currently, the City’s six pension funds only have 50 percent of the funding needed to support the current pension system.
City’s Unfunded Pension Liabilities (projected to end of FY2017):
- Municipal Employees' Annuity & Benefit Fund of Chicago (MEABF): $11.826 billion
- Laborers' & Retirement Board Employees' Annuity & Benefit Fund (LABF): $1.334 billion
- Policemen’s Annuity & Benefit Fund (PABF): $9.99 billion
- Firemen's Annuity & Benefit Fund (FABF): $4.459 billion
- Chicago Teachers Pension Fund (CTPF): $10.889 billion
- Park Employees Annuity and Benefit Fund (PEABF): $0.654 billion
Total Current Unfunded Liability: $39.151 billion
How Much Do City Employees and their Employers Contribute to their Pension Benefits?
- Number of retired employees and beneficiaries: 71,850
- Number of active employees: 84,400
- Average retiree pension: $41,400
- Taxpayer-supported contribution rate: 12.28%
- Employees’ contribution rate: approximately 8.81% (*five funds’ percentages vary from 8.500% to 9.125%)
- Chicago Teachers: 9% (*CPS pays 7% under the collective bargaining agreement, and 2% is deducted from employees’ gross pay)
What are the two different types of pension funding?
This is all specified in the Illinois Pension Code. It is important to mention, public employees pay a significant amount towards their defined benefit pensions, an amount that is higher than Social Security contributions of private sector employees.
Funds can have their contributions set based on payroll.
Five of the six City funds (not CTPF) currently use this approach.
- Every pay period, a percentage of each employee’s gross pay is deducted by his or her employer and sent to the pension Fund of which he is a member. Those percentages range from 8.50% at LABF and MEABF to 9.125% at FABF. Shortly after the end of the year, each of these Funds calculates how much the employer or sponsor of the Fund should contribute, based on a multiple of what employees contributed by payroll deduction in the year just ended.
Funds can have their contributions set based on "actuarial funding," which bases contribution rates on the financial condition of the Fund. This is how CTPF funding is now set.
- This approach requires taxpayers to pay taxes sufficient to achieve a specific funding level by a specific date. These are called “actuarial contributions” because the employer’s contributions are determined by mathematical or actuarial calculations.