By: Ted Dabrowski and John Klingner
Chicago’s pension plans – and the city of Chicago by extension – avoided a reckoning in 2020 after billions in federal covid aid helped the city avoid a fiscal collapse. Some of those billions were given as direct aid to the city, while billions more filtered through the economy, eventually boosting city tax revenues. The city was spared a pension squeeze for a few years.
But reality is back and the financial market’s volatility is a reminder of just how delicate the situation is for Chicago. The market’s drop this year alone has cost the city’s five major pension funds an estimated $1 billion-plus in mark-to-market losses, a big deal for a city that already has a $53 billion funding hole and pension funds that are less than 25% funded. And in case anybody’s forgotten, it’s taxpayers who’ll ultimately have to underwrite, through higher taxes, all those billions in shortfalls.
Yes, the market could come back just as quickly as it has fallen, but the current losses reveal the predicament for Chicago’s pension funds. They’re taking big risks in equities, real estate, hedge funds and private equity to keep the pension plans going, but that leaves them overexposed to running out of money if the markets have a deep and sustained downturn.
The city’s five major funds have around 50% of their dollars invested in US and foreign equities. About 10% is in private equity and hedge funds. Another 8% is in real estate. All risky assets, and some of them not so liquid when markets are down. A 10% hit on the $12.5 billion in equity assets alone – about what we’ve seen so far – would mean about $1.25 billion in mark-to-market losses.
The survival of this portfolio is at even more risk considering the funds have little money left to invest. Chicago has four of the ten worst-funded pension plans in the nation.
Take Chicago’s Police fund. It should have had $17.7 billion in assets in order to be fully funded as of December 2023. Instead, the fund had just $3.9 billion. That leaves little room for error – and risks actual insolvency if losses in a downturn are bad enough.
The Chicago Municipal, Police and Fire pension plans have funded ratios of only about 23%. Among big pension plans, they’re the 5th to 3rd-worst in the nation in terms of funding, respectively.
To understand how close Chicago pensions are to running out of cash, check out each funds’ asset-to-payout ratio – which measures how much in total assets a plan has relative to its yearly benefit payout. It’s a measure of solvency that tells you how long a fund can make its yearly payouts if it doesn’t take in any new money.
The Chicago police fund has only enough assets on hand to make 4.2 years of pension payouts. That’s one of the worst solvency levels in the country. In fact, all of Chicago’s major pension funds have critically low asset-to-payout ratios, ranging from 7.8 years for teachers to just 4.0 years for the firefighters fund.
In contrast, healthy funds like the Los Angeles Police and Fire Fund have ratios of 20 years or more.
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Chicago’s pension problem is, unfortunately, just one part of the multi-layered crisis the city is facing.
The city’s credit rating is already the lowest among major cities and under increasing pressure. Mayor Johnson’s office predicts a $1 billion-plus city deficit for next year. Downtown office vacancy rates are at record highs, risking a doom loop for the city. The city’s sister governments are also in dire straits, facing big budget deficits as well. Failing school outcomes and a nation’s-high murder total are also drags on the city.
All of these issues need serious reforms – from the option for municipal bankruptcy to a constitutional amendment on pensions to a rollback in public sector labor powers. Unfortunately, the city and state’s current leadership won’t pursue such changes.
Let’s hope Illinoisans wake up and elect the people that will do so before it’s too late.
Read more from Wirepoints:
- Chicago’s black hole: Pension debts jump even though taxpayers pour billions into city funds
- Chicago’s worst-in-nation pension crisis strikes again
- Do Illinois and Chicago really need to sweeten Tier 2 pension benefits?
- An Illinois school district, where just 7% of kids are proficient in math, rewards superintendent with $480K salary
Audio and summary 
If this bill passes, say goodbye to local control over all Illinois parks and expect to see open drug and alcohol use, needles, no sanitation and fire hazards, but no ordinary park users.
Let the animals run the zoo, and see what happens.
Stock market is DOWN BIG TIME today. More pain for the taxpayers and more to come. Get ready for record tax increases to cover the short fall. Pensions will get a 3% increase while the fund could lose 20% of its value. Taxpayers subsidize all loses and do not get any of the gains. Sound fair to me. If they had a 401K style retirement they would be in the same boat a everyone else is.
Stock market is down over 2% today, so pay up private sector worker, you under write the public sector pension losses.
Even though it is quite dumb and delusional to say the state with the highest overall tax burden has plenty of room to raise taxes, the reality is that if that were true it would have already happened.
Nickle and dime taxes is what they’ve been doing, and that is scraping the bottom of the barrel. Any major increase in taxes will only drive more people and businesses out in a state already sinking.
Long term, nothing beats returns on the market or real estate. How can you call them “risky assets”? Please name one multimillionaire or billionaire who is not invested in either. The problem lies with the liberal politicians in Chicago not making their required contributions for over half a century. The pensioners should not be punished for the lack of City Council and Mayors shorting their legally required contributions.
Wrong on two points. (1) The starting point is that the government is guaranteeing pensions to public sector workers, but then investing in risky assets to make the payouts. If it wants to guarantee payouts, the government should invest in T-bonds instead and have a matched no-risk profile. The way it works today, however, is if the market and those risky assets tank, the government just confiscates more money from the budget, or raises taxes, as a backstop. Taxpayers pay. That’s the problem and that’s not fair. That’s far different than ordinary people, rich or not, taking risks in their… Read more »
The gasb discount rates that actuarial assumptions are based on change but the pension payouts are gaurenteeted? Equity Illinois style!!!
Now, with proposed TIER II pension “fix” to correct supposedly but unproven “safe harbor” violation, pension benefits will be changed, increased, on top of actuarial assumptions changes for government services already rendered as well as future government services? The $ amounts of “Pension and Healthcare Amounts Promised by Your Taxing Districts” on your CC prop tax bill are simply a complete joke…as are the chumpie taxpayer /homeowner dopes who occupy them (me). EQUITY!!!!
The 40 year average for the teachers pension fund is around 9.3%. This far surpasses the discount rate of 7% and certainly not “overly optimistic”. But hey, if you and the voters want to invest in less risky investments and raise taxes to cover the difference, go for it. Pensions are not underfunded because of investment returns. Pensions are a multi decade obligation and people love to panic with every economic downturn. The current high cost is the direct result of habitual underfunding. It is not the result of “overpromising”. That’s just Wirepoints semantics for not wanting to pay what… Read more »
“Overpromising” is Wirepoints semantics for promising more than taxpayers are willing to pay and more than politicians have had the guts to ask them to pay.
It seem one of the primary ways pensions get “overpromised ” is pols cutting giant negotiated deals with unions and leaving out resulting massive pension liability increases in repoting to taxpayers? For example, in latest $1.5 bil 5 yr deal with CTU is resulting pension increases ever presented to public?….(not to mention where city is going to come up with $1.5 bil).
Correct me if I’m wrong—-it will never happen, but simple legislation could be proposed that when new public sector contracts are negotiated ALL resulting new long term benefits costs are included in total cost analysis of new contract. I believe, currently this is not the case?
Makes perfect sense to me. Good thinkin’!
Taxpayers don’t want to pay anything Mark. They want all the benefits without the costs. It doesn’t matter if taxpayers don’t want to pay back debt that the state has borrowed. Pensioners will be paid so nothing is overpromised.
What benefits? The good education system that they pay 5 times more than they should be. The public sector is robbing the taxpayer’s blind.
Ted, T-bonds, and I’m assuming were talking government T-bonds, have market risks like any other investment. If you buy a 20 or 30 year bond from the federal government it will be at the prevailing interest rate at the time of the purchase. But as interest rates change over time, so does the price of the bond. If rates go up the bond price goes down. If you have to liquidate the bond before it matures you risk a loss on that investment. Also, if interest rates decline, the value of the bond goes up and you can make a… Read more »
And just you wait, as lord Martwick & crew ram thru TIER II pension “fix” at the state level, which I then assume City pensions will have to follow. CTU & IFT are pushing hard in Springfield. At this point, I believe it’s just JB’s national ambitions that are standing in way of machine going for broke on TIER II “fix”….Homeowners better limber-up NOW, practice- up grabben those ankles and SSSSSSSSSSSSSSQUEALING like a new born pig!!!!!!!!!!!
Not only Chicago’s Pensions but Illinois pension funds will be down big time this year. All the while there are more and more retires going on a pension. This year the pension deficit will go to the moon. Taxpayers will end up picking up the tab sooner or later. There is no hope but higher taxes or leaving the state for the taxpayer. Higher and higher taxes will drive more residents out of state, so taxes on the remaining will have to go even higher.
Highest overall tax burden with people fleeing. At some point taxes can’t be raised in any productive way. IL is nearly there. Bankruptcy is closing in. Moving will be forced on many people as more and more businesses leave.
Illinois is no where near bankruptcy. Plenty of taxes left to be raised in Illinois.
Keep telling yourself that. High tax burden and fleeing residents say you’re wrong. I’ll be here to leave a comment for you when your pension is cut. People have to have money to survive. The next major recession ends this pension scam. IL will first have to majorly cut education due to taxes being tapped out. Then it will beg for a Federal bailout it won’t get. Then either pension checks stop or there will be cuts allowed through state bankruptcy allowance that will have to be passed. IL is too big to fail, but the pensions sure aren’t. I’ll… Read more »
I’ll be here to leave a comment when taxes are raised again even though we have a high tax burden. Let’s see who comments first?
The last comment will be me, and I will certainly enjoy it. Stay tuned. You didn’t deny you got a pension. Got ya.
Now I’m going outside. You enjoy living on this site in fear until your pension is inevitably cut majorly!
Saying there are plenty of taxes to be raised in the state with the highest tax burden is truly moronic.
Remember how moronic that statement is when taxes are increased.
I meant majorly, and they won’t be. Your pension will be majorly cut, though. Enjoy!
The high-income earners and job creators are leaving in ever increasing numbers. The only employer left will be the public sector. This will not end well for the residents who stay.
Yet, during all that time of the residents leaving, pensions represent a smaller portion of our GDP and overall revenue collected today than before the “mass exodus”.
Not if you inflation adjust the numbers. The unfunded debt has exploded during this time. Lie to yourself, this is not going to end well. People are not happy, and many are waiting for the right time to leave. People are not moving in but are moving out. The numbers clearly show this.
Just eliminate these pension funds, and go to self directed 401K retirement. No individual would choose this high risk pension fund .
Oh, if it were only that simple! It’s not when pondering what that really entails to get from here to there. You’re far from the first to have that opinion. It’s a well-worn argument at this point and has fallen flat each time it’s been offered
Bankruptcy for the City and State and let the courts handle it.
Taxpayers will still get the short stick, but at least it will be much fairer than it currently is, or so I hope.
It’s obvious Chicago will be forced into bankruptcy. Springfield will have no option other than to allow it.
The math is insurmountable, and more and more people will continue to leave both the city and state. The next major recession is game over for Chicago and many pension plans in Illinois. The majority of voters are all for the collapse.
The majority of voters in IL are Democrats who keep voting for the status quo rendering much of your strongly held hypothesis false.
Actually that is just what I meant. They are too greedy and blind to see that their voting for the status quo will lead to bankruptcy. They are dooming their pensions by not facing reality that math always wins.
A state people are fleeing with the highest overall tax burden leads only to collapse, and they are voting for it to not change.
That’s what happens to lemmings following the well-warn pathways, isn’t it? Like them we tend to have blind faith that was a solid pathway to the good future we want will ever be so. Maybe, but it’s been said the only things certain are death and taxes. Thinking other things are forever true is something else—wishful thinking or simply blind faith many times.
A lot of hot air and no substance from you as usual. Your pension will be cut. Enjoy.
Thank you; you’re just too kind. Get bent, Trent.
Wow, you really pulled one out of the archives. Without exaggeration, I heard “get bent” from a boyhood friend 60-some years ago. Luckily, he wasn’t talking to me. I wouldn’t have known how to get bent anyway.