Pensions and Chicago’s fiscal cliff
During the Chicago teachers’ strike I observed that the system faced a fiscal squeeze thanks to a coming sharp rise in annual pension contributions. The City of Chicago is in a similar predicament, as Mayor Rahm Emanuel noted in his budget presentation earlier this week. One huge challenge the city faces is a mandate to greatly increase funding in its severely under-funded pension plans. The bar chart below from the city’s budget documents illustrates the sheer cliff that the city faces thanks to this new state mandate, with pension contributions projected to rise from $479 million next year to nearly $1.2 billion in 2015.
As the city itself points out about the impact of this increase, the new contribution would be…
…equal to the annual cost of keeping almost 4,400 police officers on the street or over 3,800 firefighters on duty;this amount could fund the resurfacing of over 16,000 city blocks, and is more than twice the annual operating budget for Midway airport. The City’s current property tax levy is $797 million. The levy has historically been the primary revenue source for the payment of pension obligations.
Chicago faces this increase because of a 2010 state law requiring municipalities to set their pension contributions on a path toward fully funding their pensions over the next 30 years. Chicago’s liability is so great (see chart below for funding status of its pension funds) that do so requires steep increases in contributions as soon as the legislation’s mandate kicks in during the 2015 budget year.
Emanuel argues that the state legislature imposed this requirement without reforming pensions (Chicago pensions are governed by state laws). In budget documents the mayor urges the state legislature to adjust or eliminate cost-of-living adjustments in pensions, increase employee contributions and raise the retirement age. Illinois legislators took no action on pension issues in its last legislative session, so Emanuel used his budget document to create a sense of urgency. Incredibly, some Chicago aldermen were actually shocked at the size of the city’s pension woes. Obviously, they haven’t been paying attention.