Authors: Ted Dabrowski and John Klingner
Illinois lawmakers are debating big pension boosts for Chicago police and firefighters this week, even though those pension plans are effectively insolvent and among the worst in the nation. Police and fire plans are only 24 percent and 20 percent funded, respectively, based on official estimates.
The increase in benefits threatens the already fragile pension security of Chicago police and firefighters and places an additional burden on city taxpayers. They also risk worsening the overall financial health of the city, which already has the worst credit rating of any major city in the country.
Two separate proposals have been circulated in Springfield. One is stimulation cost of living adjustments (COLA) and: pension formula for Chicago Firefighters and has already been directed to Governor J.B. On Pritzker’s desktop. It other boosts COLAs for Chicago police and has reportedly been delayed until the Legislature’s fall session.
In total, the “sweeteners,” as former Chicago CFO Jenny Huang Bennett called them, could increase the city’s pension liabilities by roughly $5 billion by 2055. , based on CFO comments and Wirepoints estimates.
Illinois politicians apparently have no idea—or simply don’t care—how much of a pension crisis Chicago is in. They have already increased COLA benefits For Chicago firefighters, two years ago, 30 years of pension costs increased by nearly a billion dollars, and now they are adding more costs to a nearly bankrupt system.
Chicagoans are already facing a $35 billion pension shortfall for the city’s four pension funds. Add in the $12 billion shortfall in Chicago’s teacher pensions, and the total debt will reach more than $46 billion.
And those numbers are just the city’s rosy estimates. Add in retiree health insurance debt and Moody’s more conservative estimates, and Chicagoans’ total debt rises to $97 billion, more than $85,000 per city family.
The city’s huge debts are a reflection of the poor health of the pension funds. Chicago’s pension funds are generally only one-third funded.
Another way to measure the health of Chicago pensions that Moody’s uses in its credit analyzes is to look at how much money the funds have left compared to their annual benefit payments. This is called the asset-to-payment ratio, which measures how many years a pension plan can make benefit payments before running out of money. assuming no new investment or investment income is added.
Two decades ago, few Chicago pension funds had enough money to make nearly 20 years of payments. Today, everyone has less than eight, the firemen’s fund has less than four.
Those figures are dismal, especially compared to other pension funds in the country. Wirepoints examined nationwide pension data (for funds with more than $1 billion in assets) Center for Pension Research of Boston College and found that the four city foundations of Chicago all in the country’s 10 worst.
In fact, of the 15 largest funds with the worst asset-to-payout ratios, eight of them are either Chicago or Illinois pension funds.
Contrast that with pension funds like the Municipal Retirement System of Texas, which has an asset-to-payment ratio of 22 years. Or the Tennessee State and Teachers Retirement Plan, which has enough assets to make payments for 32.5 years.
…but still contributes to the benefits
The dire state of Chicago’s pension funds hasn’t stopped lawmakers from negotiating two separate proposals that would boost pension benefits.
Promotion of Police COLAs
The bill gives all Class 1 Chicago police officers (those hired before 1/1/2011) a 3 percent simple retirement cost adjustment (COLA) to their annual retirement benefit. It’s basically identical to the legislators’ fire sweetener passed two years ago.
Currently, Class 1 constables born after 1/1/1966 receive only a 1.5 percent simple COLA increase each year. The bill removes the date of birth restriction, giving all Tier 1 pensioners a 3 percent, simple, increase.
Wirepoints is not aware of any formal cost analysis done for this proposal. However, when the fire department sweetener passed two years ago, the Lightfoot administration warned that the police version of the bill would cost the city more. $57 million to $96 million in annual additional pension payments.
Sweetening level 2 for firemen
The proposal sweetens benefits for Tier 2 Chicago firefighters (those hired after 1/1/2011).
First, it increases COLA benefits. Today, retirees receive COLAs equal to the low half inflation rate or 3 percent. The bill changes the COLA to the lower of the inflation rate or 3 percent
Second, the proposal sweetens the pension formula for firefighters. Currently, a Class 2 firefighter’s starting annual retirement benefit is based on the average of his or her highest 8-year salary during the last 10 years of employment. The bill changes the highest 4-year salary in the last 5 years. A shorter period means a higher final average salary and therefore a higher starting pension.
Chicago’s previous chief financial officer warned that the proposal would increase overall costs by $3.2 billion and force the city to increase its investment in the firefighter fund by $60 million a year to $311 million a year by 2055.
Another burden on the people of Chicago
String points warned long ago that Tier 2 would face legal problems because its members effectively subsidize Tier 1 pensions, and would likely violate Social Security’s “safe harbor” rule, which says all pension plans must offer benefits that at least are as generous as Social Security.
But as Chicago’s chief financial officer points out, the proposed firefighter promotion goes too far. The proposal is “about a 30% increase in retirement benefits above and beyond the Social Security safe harbor.” That’s why he calls it “retirement sweetener, pure and simple.”
Tier 2 needs to be fixed, but the solution isn’t simply to increase the benefits it provides. It will only increase costs and harm retirement security all pensioners. This is also true of the proposed increase in Tier 1 allowances for police officers.
Unfortunately, lawmakers continue ignore reforms instead to dig deeper holes.
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