Investment losses last year eroded funding ratio gains achieved a year earlier by Chicago’s pension system, casting a shadow over a healthy pickup of taxes on the city’s audited financial results.

The city’s overall net position for accounting purposes deteriorated to negative $27.6 billion in 2022 from negative $27.1 billion in 2021 due to growth in the pension liabilities. It hovered between negative $28.4 billion and negative $29.5 billion between 2017 and 2020.

The general fund ended 2022 with a total fund balance of $1.3 billion, including an unassigned balance of $307.3 million. That compares to a total fund balance of $633 million and $318 million unassigned balance a year earlier with the uptick coming from a “strong recovery of economically sensitive revenues that were impacted in 2020 due to the COVID-19 pandemic, and a decrease in expenditures as efforts were made to implement operational efficiencies,” the annual financial statement said.

The net pension liability, or NPL, rose to $35.4 billion from $33.7 billion as the funds were stung by double-digit investment losses, and the upward trajectory continues a trend as the NPL figure had risen from $32.96 billion in 2020.

While all four funds hit a milestone by posting modest increases in their weak funded ratios in 2021, all four lost ground in 2022 due to those investment losses. The municipal fund worsened to 20.68% from 23.41%, the laborers’ fund fell to 39.95% from 45.92%, police dropped to 21.50 % from 23.54%, and the fire fund fell to 18.81% from 20.93%.

The ongoing uptick in net pension liabilities, slip backward on funded ratios, and warnings from the fund actuaries lend support to former Mayor Lori Lightfoot’s urging that her successor Brandon Johnson at least maintain supplemental contributions begun this year and to Johnson’s move to establish a working group tasked with coming up with long-term funding fixes. The working group began meetings last month.

“Through strategic planning and addressing structural deficits, we have the opportunity before us to improve the financial health of the city of Chicago,” Johnson said in an introduction to the annual comprehensive financial statement for 2022, dated June 30. “While the city still faces several long-term structural challenges, we are charting a better path forward for the city’s finances.”

The municipal employees fund accounted for $15.16 billion of the liability up from $14.1 billion in 2021, the laborers $1.69 billion from up from $1.57 billion, the police $12.73 billion up from $12.49 billion, and the firefighters for $5.86 billion up from $5.5 billion.

The pension investment losses drove the net position deeper into the red.

“The net deficit increased in 2022 by $510.3 million due to an increase in net pension liability due to the short-term impact of the global market volatility on recognized investment income, offset by a growth in economically sensitive revenues as the city continued to recover from the impacts of the COVID-19 pandemic for both governmental and business-type activities,” the city’s report read.

Lightfoot’s mid-year budget forecast as she prepared to hand the reins over to Johnson warned of the potential hit.

“Even with the recent progress on pension funding, however, the city of Chicago still has the lowest funded ratios of any large city in the country,” the April budget forecast read. “The city’s pension funds are at an average 23% funded ratio and an extended economic downturn and poor investment performance in FY2022 could have created near-term solvency issues for the pension funds in their ability to pay pensions.”

Between 2014 and 2023, the city increased its pension contributions by $2.2 billion, $1.3 billion of which occurred in the last four years.

The actuarial reports carried warnings and recommendations for the pension working group to consider, including targeting a 100% funded ratio and shortening the amortization period of the unfunded liabilities to 15 or 20 years from the current ones that extend out to at least 2055. Both recommendations would drive up payments.  

All four funds completed a payment ramp upwards toward an actuarial-based contribution begun under Mayor Rahm Emanuel’s tenure and completed by Lightfoot that are aimed at bringing the police and fire to 90% funding by 2055 and the municipal and laborers by 2058.

But the statutory payment fell short of an actuarially determined contribution, or ADC, recommended by experts and the schedule takes several years to reach even a 50% funded ratio for several of the funds, leaving them vulnerable to market downturns or new funding pressures from enhanced benefits.

Lightfoot implemented a supplemental pension contribution in the 2023 budget, sending $242 million to the funds.

The action helped win an upgrade from Moody’s Investors Service, lifting the city out from junk rating territory. The supplemental payment policy beginning this year sizes the extra payments to at least keep the net pension liability stable. Lightfoot also signed an executive order directing a budget surplus to cover additional payments in the next few years.

The police funded ratio is not projected to not reach 50% for another 21 years, the police fund report said in suggesting the city “seriously consider making additional contributions to ensure that there are sufficient assets available in the fund in all years to pay the promised benefits.”

“While the new statutory funding policy is an improvement over the prior funding policy, it does not comply with generally accepted actuarial standards … we recommend strengthening the policy,” the laborers’ report reads.

“Given the low funded ratio and the expected timing of employer contributions, the fund is still at risk of potential insolvency if an economic recession or investment market downturn were to occur in the near term,” the municipal fund’s actuarial report warns.

Johnson has not yet decided whether to stick with Lightfoot’s plan committing the surplus to future supplemental contributions. The working group is made up of city, state, and labor officials tasked with finding long-term funding and structural fixes to pension funding strains. It held its first meeting this week with a fall legislative veto session the target for initial action.

The group has taken shape 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. The city can’t cut benefits due to constitutional protections.

Net position
The city’s net deficit of $27.6 billion includes a $29.9 billion net deficit of governmental activities which was offset by a $2.3 billion gain in business activities, which covers the city’s airport and water and sewer enterprise funds.

The overall changes were “due to an increase in pension expense and corresponding net pension liability, due to changes in pension assumptions as well as the impact on recognized investment income related to the global market volatility, offset by an increase in economically sensitive revenues, such as sales tax and recreation taxes, as the city continued to recover from the impacts of the COVID-19 pandemic. 

General fund revenues ended the year $513.5 million over the 2022 budgeted levels as a result of historically high collections from transaction taxes while expenses were $115.2 million less than budgeted.

The report laid out the 11 positive rating actions over the course of 2022 raising the outlook or ratings on the city’s general obligation, Sales Tax Securitization Corp., water and sewer, and airport credits.

The city owes $5.8 billion of principal and $4.3 billion of interest on general obligation bonds, $4.5 of principal and $2.5 billion of interest on STSC bonds, $16 billion of principal and $11 billion of interest on revenue bonds.

The Policemen’s Annuity and Benefit Fund of Chicago suffered a 10.61% loss on a market basis and 3.83% gain on an actuarially smoothed basis while assuming a 6.75% rate of return, according to the 2022 actuarial report from Gabriel, Roeder, Smith & Co.

An $800 million statutory contribution fell about $283 million of an actuarially determined contribution.

The funded ratio for actuarial purposes dropped only slightly — due to smoothing — to 23.81% from 23.98% with unfunded liabilities of $12 billion.

The Municipal Employees’ Annuity and Benefit Fund suffered an 11% market value loss while smoothing resulted in a 4.4% gain while assuming at the time a 7% rate of return, according to an actuarial report from Segal.

The funded ratio improved slightly — due to smoothing — rising to 22.8% from 22% and unfunded liabilities were $14.48 billion. The city’s statutory payment of $976 million for 2023 falls $297 million short.

“Each year there is a contribution deficiency leads to an increased deficiency in all future years,” the report noted. The city prepaid a portion of what is owed in 2023 to help stave off the need to sell assets to cover benefit payments.

The Firemen’s Annuity and Benefit Fund of Chicago suffered a 12.1% investment loss for 2022 but smoothed, it landed at a positive 3.4% while assuming a 6.75% rate of return, according to the actuarial report from Segal. The funded ratio improved slightly to 20.77% on a smoothed basis from 20.13% and it has $5.7 billion of unfunded liabilities.

The city’s $399 million 2022 payment was $110 million short of an ADC.

The Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago suffered an investment return loss of 13.22% while under smoothing it gained 5%, according to the actuarial report from GRS. A $112 million contribution this year fell short of a $153 million ADC.

The unfunded liability $1.55 billion rose slightly from $1.53 billion in 2021 and the funded ratio held nearly steady at 44.49% compared to 44.5% in 2021.

The net pension liability and funded ratios based on that calculation must be reported on a government’s financial statements under Governmental Accounting Standard Board rules. It differs from the traditional unfunded liability calculation in that it takes the accrued liability and compares it to the market value of assets.

The unfunded liability figure uses the actuarial value of asset which often smooths various actuarial measurements, like investment returns over multiple years, to blunt the impact and that’s the figure typically used to determine an employer’s future contributions.

The city’s net OPEB liability of $1.8 billion.

Links to the individual fund reports are at:

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