The City of Chicago is responsible for funding the following four, defined benefit public pension plans: Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund (“LABF”), Municipal Employee’s Annuity and Benefit Fund (“MEABF”), Policemen’s Annuity and Benefit Fund (“PABF”), and Firemen’s Annuity and Benefit Fund (“FABF”). Under a “defined benefit” or “DB” system, benefits due to future retirees are based on a formula, and funded by assets of the system.[i] DB system assets come from a combination of contributions made by current workers and the public employer, as well as investment returns on those contributions.
Considered together, in 2022 Chicago’s four systems had $44.7 billion in liabilities, but only $10.8 billion in assets to cover those liabilities.[ii] This means Chicago, and hence its taxpayers, face a significant, as in $33.9 billion, aggregate unfunded liability (the “Aggregate Unfunded Liability” or “AUL”) — which is effectively “debt” that is owed to the city’s pension systems.[iii] It also means that the aggregate funded ratio across all four Chicago pension systems is just 24 percent.[iv]
Not only are Chicago’s Pensions terribly underfunded, but getting the funds back to health is based on an unaffordable backloading of debt service owed to the city’s pensions under the Chicago Pension Ramp, shown below.
Projected Chicago Pension Ramp Contributions, FY2024 -2055 ($ Millions)
As one can imagine, these payments have, and will continue to, put tremendous pressure on Chicago’s resources, by calling for annual contribution levels that increase at rates which exceed historical inflation levels.[i] This means that without increasing revenue, the city will have to cut spending on current services to fund the Chicago Pension Ramps. In fact, this has already been happening over the past nine years.
For decades, the city made its aggregate pension contribution primarily from one revenue source — the property tax.[ii] Over the last few years, however, as the backloaded payments established under the Chicago Pension Ramps continued to escalate. The city had to find other sources of revenue to help cover this expenditure, even as the Property Tax contribution has increased by 305 percent, from $346.6 million in FY 2015 to $1.3 billion in FY 2024.
Even so, by FY 2024, more than half of the pension funding is coming from property taxes, which again are the dedicated revenue stream for pension payments. Because the payment schedule created under the Chicago Pension Ramps is so backloaded, Chicago is being increasingly forced to divert revenue from its Corporate, Enterprise and Special Revenue Funds — which could otherwise have gone to cover public services — to instead cover pension debt.[iii] As the annual payments of debt service under the Chicago Pension Ramps continues to escalate, the sustainability of this practice is not a given, and tax increases may have to be put on the table.
How Chicago’s reliance on alternative revenue streams has increased is detailed in the graph below.
Chicago Pension Payment Revenue Streams FY2015 -2024 ($ Millions)
So, what is Chicago doing to try and come up with the revenue to cover pension bills that are only going to increase over the next 25 years?
In what was ostensibly justified as an attempt to develop a new revenue source to fund pensions, the City Council voted to authorize Chicago’s first casino in May 2022.[i] Revenue from casino operations was specifically earmarked to the Police and Fire pension systems.[ii]
Bally’s Corporation won the right to operate the Chicago casino, and established a temporary facility in Medinah Temple, located in Chicago’s River North Neighborhood.[iii] Bally’s made an initial upfront payment to Chicago of $40 million in FY 2022.[iv] At that time, officials in Mayor Lightfoot’s administration estimated the casino would bring in roughly $200 million in tax revenue each year by 2027.[v]
However, the casino revenue demonstrated to be unstable. By January 2024, it had become apparent that casino revenue was not meeting projections.[vi] However, as of May 2024, revenue at the Medinah Temple casino grew 13 percent to more than $11.7 million in adjusted gross receipts over April, according to data provided by the Illinois Gaming Board.[vii] To what degree this level of growth for the Medinah Temple Casino can be sustained remains unknown. Given the lackluster start to revenue generation, the volatility of casino revenue, and the negative externalities associated with running a casino in downtown Chicago, it remains to be seen to what extent casino revenue will stabilize funding for the city’s pension systems.
In an additional attempt to stabilize the pension funds, Mayor Lori Lightfoot’s administration implemented the “Pension Advance Funding Policy” which pulls additional revenue from various funds contributing to the pension payments. (Read more about the Pension Advance Funding Policy here).
There are additional measures the City of Chicago could take to pay down the pension liability and increase the funded ratios of the systems. CTBA proposes re-amortizing the city’s pension debt and frontloading city payments to relieve the City Funds which are diverting revenue and would decrease the need to come up with additional revenue streams. Read more in CTBA’s Chicago Pension Report, “Understanding and Addressing Chicago’s Pension Funding Crisis.”