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Chicago Struggles with Pension Fund

June 21, 2016

Downtown Chicago

Chicago’s pension fund crisis has reached a critical breaking point with recent events and decisions. Shortfalls in the funds accrued for years as Chicago consistently contributed less into the system than actuaries had recommended. In effect, the failure to set aside adequate contributions has been equated with borrowing from future retirees to avoid raising revenue. Meanwhile, city workers continued to pay their share under the pension plans.  

Here are some alarming facts about Chicago’s retirement and pension fund system (MEABF, or Municipal Employees’ Annuity and Benefit Fund):

  • The fund is currently only 32% funded.
  • Absent any viable plan, the fund is set to run out of money in only 10 to 12 years. 
  • Net pension liability rose to $18.6 billion at the end of 2015, up from $7.1 billion just one year prior.

It is estimated that, in total, Chicago shorted the municipal pension fund by around $4.2 billion over the last decade. Recent events have added a staggering amount of nearly $11 million to these figures. The high liability figures may also be attributed to another cause — new accounting rules require the use of more modest assumptions once pension plans go broke. These rules were adopted in order to keep governments from using exaggerated investment-return predictions to mask the scale of the actual liabilities. 

Mayor Emanuel’s Pension Rescue Plan Struck Down

Chicago’s pension woes are compounded by the striking down of Mayor Rahm Emanuel’s proposed pension rescue plan. Emanuel’s plan included benefit cuts and requirements that employees pay more into their retirement. The Illinois Supreme Court ruled that the pension plan was unconstitutional, as it violated an Illinois State Constitution clause that states benefits “shall not be diminished or impaired” once granted.

In an opinion, Justice Mary Jane Theis wrote that the proposed modification benefits “unquestionably diminish the value of the retirement annuities the members of (the city workers’ and laborers’ funds) were promised when they joined the pension system.” She also stated that the plan exceeds the authority of the General Assembly, which had previously approved the plan in 2014. 

What’s Next for the Windy City

At the moment, the city administration has not provided details on its next steps to deal with the fund’s snowballing liabilities. However, there are indications that the city may return to formulas that set contributions short of amounts recommended by actuaries. Other efforts will include a property tax increase to bolster police and fire funds (this has been approved already).

The city of Detroit is facing similar challenges with its own pension fund system. In an attempt to provide financial solutions, Detroit recently settled a lawsuit surrounding the financing of the Westin Book Cadillac Detroit hotel for $22 million. The city and two of its pension funds will split the money to help alleviate their burdens. It is unclear whether Chicago plans to take similar actions— at this point, these types of settlements may do little to scratch the surface of Chicago’s multibillion-dollar pension fund problem. 

The city of Chicago has its fair share of work cut out for the near future. It is also facing issues in other areas, including city pension funds for police officers and firefighters, as well as fiscal crises in the public school system. If you have any legal questions or concerns regarding pension funds and other institutional investors, contact us today at Kessler Topaz. Our team of attorneys is dedicated to the furtherance of financial security and workable engagement strategies.