Experts say Chicago has a public pension system set up to fail

Political deals, economy made things worse. But Chicago’s system is structurally flawed, experts say.

December 8, 2013

WBEZ/Alex Keefe
Minutes from the board of the Chicago Firemen’s Annuity and Benefit Fund date back to 1887. Pension fund leaders have been complaining for decades about the same sort of inadequate funding method that persists today.

Illinois lawmakers may have approved a fix for the state’s pension crisis. But Chicago is still facing a massive spike in required pension payments to help bring its own funds up to speed.

The city’s four pension systems — for police, firefighters, laborers and municipal workers — were short by a whopping $19.5 billion at the end of 2012. That does not include the ailing pension fund for Chicago teachers, which has its own $8 billion shortfall at the end of the last fiscal year.

Increased benefits for city workers, early retirement offers and market downturns put pressure on the city’s four pension funds in the late 1990s and early 2000s. But pension experts, labor leaders and politicians also point to a more fundamental problem — a quirk of state law that experts say may have set the system up to fail.

Retired Chicago firefighters George Beary, 70, says he wasn’t making a lot of money when he started at the fire department back in 1967. But he still remembers the words of consolation he got from one of his officers in the fire academy.

“When we got on the fire department, we were taken care of from the time we walked through those big red doors, to the time they haul your ass outta church to go in the ground,” Beary recalled. “You’re covered. Exact words.”

But for Beary, they don’t ring as true today.

He and a group of fire department retirees - they call themselves “oldtimers” - sipped coffee and munched on donuts one recent morning at the Chicago Firefighters Local 2 Union hall, on the city’s South Side.

Altogether, Chicago’s four pension accounts were just 36 percent funded at the end of 2012. But the one for firefighters and paramedics is the worse off by far.

For every dollar it owes in benefits, it has just a quarter in the bank.

“See the gray hair? That comes from worry," said retired Capt. Peter Qualizza.

He’s one of roughly 4,100 beneficiaries in the firefighters’ pension fund which some experts project could go broke in less than a decade.

“So everyone here has gray hair,” Qualizza said, drawing laughs from the other retirees sitting around a long conference table. “Some of ‘em color it, some of ‘em don’t, okay? But everyone of us has gray hair because we’re concerned about the future.”

Chicago’s unrealistic pension math

The roots of Chicago’s pension troubles go back decades, long before Qualizza and the other oldtimers starting going gray.

At issue is the so-called “multiplier” equation by which City Hall calculates how much money to chip into its pension piggy banks each year. It may sound complex, but the math is simple: City Hall bean-counters take the amount that workers in each fund paid into their pensions from two years prior, then they multiply that by a number that’s set in state law.

As a matter of state law, Chicago’s pension math is set by Springfield legislators. But the unique multiplier number for each of the four funds hasn’t increased since 1982.

“This is really one-of-a-kind in my experience,” said actuary Jeremy Gold, who studies public pensions all over the country. “There are no other public pension plans that I am aware of...that pays the way Chicago pays.”

Gold says the fundamental problem is this multiplier doesn’t change with the times. That means the money going into each fund stays relatively flat, regardless of whether retirees get richer benefits, stock markets crash or the system is burdened by thousands of early retirements, as it was under former Mayor Richard Daley in 1998 and 2004. (Daley declined WBEZ’s interview request.)

The relatively static funding level is akin to offering to pay your grocer the 1982 price for a gallon of milk.

A 2010 report commissioned by Daley found this inadequate funding was the main reason Chicago’s police and fire pension funds have taken a such dive in the 2000s. The report blamed benefit increases for the dire condition of the laborers’ and municipal workers’ funds, though the inadequate funding has made it harder for them to recover.

“At this point, after having been in place for 30 years, it no longer bears any relationship to the realistic cost of providing these benefits,” Gold said.

Pension problems that go back decades

In fact, the problem is much older than that.

In his downtown office, fire pension fund secretary Tony Martin flips through a massive, shopworn book containing notes from pension board meetings going back more than a century, from 1887 to Dec. 18, 1931.

Martin finally lands on a yellowed, typewritten letter the firefighter’s pension board sent to state lawmakers on Wednesday, May 4, 1927.

The letter's author is complaining about the way Chicago funds its pensions - about a system that’s awfully similar to today’s multiplier - and the board is asking state lawmakers for relief.

“It’s amazing!” Martin said. “We never really dealt with the structural issues of these pension funds.”

Martin says the stock market boom of the late 1990s only masked those structural issues - especially for police and fire pensions. But he says the chronic underfunding means investment losses hit them even harder during the Dot-com bust and the 2008 recession.

Now, the pensions are forced to sell off the very assets they’re supposed to be investing.

“Basically what’s happening is the money that’s coming in from firemen today and the money that’s coming in from the city today, is going out the door today,” Martin said. “We’re not saving for tomorrow.”

The rate at which the city’s pension funds are cashing out investments has more than tripled since the year 2000, according to a WBEZ analysis. Last year, the four funds liquidated more than $1 billion.

The more the funds liquidate, the less money they can make on investments, which could lead to even more liquidation in order to have enough money to pay out to retirees. Pension experts say this is a dangerous cycle - kind of like eating yourself to avoid going hungry.

This whole situation makes Tony Martin angry - and he says it should make taxpayers angry, too.

“They should be outraged that we’re even in this situation,” Martin said. “It should have never gotten to this point. And who is to blame?”

Blame everybody

The structural funding problem with Chicago’s four pension systems is not entirely responsible for the current crisis, experts and observers say, but it left the funds ill-equipped to deal with the market downturns of the early 2000s.

And political deals between City Hall and labor unions burdened the system even more.

“If you’re looking for who to blame, it’s everybody,” said Dana Levenson, who served as Chicago’s Chief Financial Officer from 2004 through 2007.

Levenson says even Daley’s partly responsible, when he agreed to benefit increases and early retirement offers in order to ease budget pressures on City Hall. Levenson says it would have been hard to justify short-term pain, such as property tax hikes or layoffs, because the problem hadn’t yet reached the crisis point.

“By nature, we are all crisis managers,” Levenson said. “We don’t necessarily want to do anything that is going to solve a potential crisis when that potential crisis is way off in the distance.”

After all, the pension funds for city laborers and white-collar workers started the new millenium in pretty good shape. They had so much money the city stopped paying into the laborer’s pension fund, and cut back payments to the municipal fund.

In hindsight, this was a bad idea, said Henry Bayer, who heads up the American Federation of State, County and Municipal employees, a union representing about 3,500 city workers.

“You know, if this were going on in the private sector, there’d be employer’s going to jail,” Bayer said.

But along with those cutbacks in funding in 1998 came benefit increases - increases the union fought for, even though they heaped more future debt onto the pension funds.

Although he wasn’t directly involved in the negotiations, Bayer defended the deal.

“These folks getting these pensions have no social security,” Bayer said. “We’re a world-class city, and we can’t afford a pension system for people that served the public?...I don’t accept that.”

Finally, in 2010, Illinois lawmakers tried to rectify these decades of underfunding by forcing City Hall to dump more money into the police and fire funds - about $590 million more in 2015 - a payment Mayor Rahm Emanuel says Chicago simply can’t afford.

“Should Springfield fail to pass pension reform for Chicago, we will be right back here in the council early next year to start work on the city’s 2015 budget -- a budget that will either double city property taxes or eliminate the vital services people rely on,” Emanuel told aldermen during this year’s budget speech.

Emanuel says Chicago needs a break from its state-mandated spike in pension payments. He says there is no Plan B.

And exactly what Plan A looks like is still unclear.

Alex Keefe is political reporter at WBEZ. You can follow him on Twitter and Google+.