Chicago pension funds warn that asset well is running dry

The assets of two Chicago pension plans will be depleted within the next 16 years if the state does not adopt actuarially based annual required contributions, executives from the funds testified Monday before a Chicago City Council committee.

Assets of the $5.6 billion Chicago Municipal Employees' Annuity & Benefit Fund will be used up by 2025 and the $1.4 billion Chicago Laborers' Annuity & Benefit Fund, by 2028, without any changes to the employer contribution structure, the funds' executive directors said at the council's Workforce Development & Audit Committee meeting.

Currently, the city is only required to pay a 1.25:1 multiple on employee contributions to the municipal plan and even less, a 1:1 multiple, for the laborers' plan. The pension funds are currently 45% and 65% funded, respectively.

“We can't invest our way out of this,” said James Capasso Jr., executive director of the laborers fund, during testimony.

The funds' boards of trustees have proposed that Illinois lawmakers adopt actuarially based annual contributions that includes a five-year “ramp” of payments starting in 2016. Under current state statute, the city would contribute $1.07 billion to the two funds from 2016-2020. Under actuarially-based contributions, that number would balloon to just over $4 billion.

The five-year ramp would ease the initial burden on the city and gradually increase contributions. After the five years, it would increase with inflation. Under the ramp structure, the city would be required to contribute a total of $3.1 billion to the two funds from 2016-2020. The numbers were provided in the context of achieving a 90% funded status by 2045.

Alderman Patrick O'Connor, chairman of the committee, said the city's pension contributions in 2016 alone would increase by about $1.5 billion, including projections for city teachers, police and fire plans.

James Mohler, executive director of the municipal plan, testified the pension fund is selling about $400 million a year in assets to cover benefits. The laborers plan is selling $110 million in assets a year to cover benefits, Mr. Capasso said. Both men added that achieving the 8% assumed rate of return would not increase the funds' asset sizes at all, and decreasing that assumption would increase the unfunded liabilities.

Alex Rivera, an actuary from Gabriel Roeder Smith, actuarial consultant for both plans, agreed with aldermen that the 8% assumed return rate is probably too high and cannot be supported without a funding correction.

“I think the whole point is contributions,” Mr. Capasso said. “Investments will ebb and flow.”