Illinois Governor J.B. Pritzker has recently signed House Bill 3657 into law, a decision that has raised significant concerns among financial experts regarding Chicago’s already struggling fire and police pension systems.
This law adds an estimated $11.1 billion in new liabilities to pensions that are often cited as the worst-funded in the nation.
Despite warnings about the potential negative financial impacts, this legislation is anticipated to increase costs by around $52 million for a city facing a projected $1.1 billion deficit.
The law primarily seeks to restore benefits for older workers in the police and fire sectors.
However, critics argue that addressing past mistakes with new benefits is not a solution to the burgeoning pension crisis.
Recent actuarial valuations for 2024 have highlighted the vulnerabilities of the Chicago Police and Fire pension systems, revealing mixed investment results even during favorable market conditions.
The funds had set an expected rate of return of 6.75%, but the Chicago police fund reported a smoothed return of 5.28%, while the Chicago fire fund trailed at 4.8%.
These performance indicators are compounded by the existence of significant unrecognized investment losses that will gradually impact future funding levels.
The fire fund currently has unrecognized losses exceeding $52 million, while the police fund’s losses amount to over $65 million.
If returns do not significantly exceed projected rates in the coming years, these losses will continue to hinder pension funding levels, increasing the risk for both beneficiaries and taxpayers.
Alarmingly low funding levels are a legitimate concern for Chicago pensions.
As of 2024, the Firemen’s Annuity and Benefit Fund of Chicago revealed a distressing funding ratio of just 23.7%, alongside an unfunded liability reaching $5.7 billion.
Even with mandatory funding levels, projections indicate this ratio will remain under 50% through 2042.
The Chicago Police pension fund reported a slightly better funding ratio of 24.6% and an unfunded liability of $13.53 billion, with expectations that it will reach 57% funding by 2045.
However, these projections may be too optimistic, as historical data suggests that funded ratios are often inflated due to overly favorable assumptions.
GRS consulting has voiced strong opposition to the funding policy currently in place, stating it merely defers obligation for benefits into the future, thus exacerbating the burden on future taxpayer generations.
The actuarially determined contribution for the Chicago Police this year is estimated at $1.34 billion, yet fund managers are only required to contribute $1.04 billion as mandated by state law.
This contributes to a funding shortfall that falls hundreds of millions below expert recommendations.
Similarly, the Chicago Fire fund is facing a mismatch between the expected payment of $443 million and the actuarially determined contribution amount of $554 million.
While the city plans an advanced pension payment of $15 million in 2025, it hardly addresses the substantial $111 million gap.
As public safety personnel continue to serve the community, ensuring their retirement security has become increasingly vital.
Under the existing Tier 2 pension systems, the average monthly benefit for Chicago Police was projected at $6,585 for 2024, resulting in an annual total of $79,020.
This figure surpasses the average income for workers in the Chicago metro area, which is estimated at $71,600 annually.
With the enactment of HB 3657, the method for calculating final average salary has shifted from considering the average of the last eight years to choosing between the higher average of the last eight or last four years.
This change reintroduces the risk of inflated end-of-career pay spikes that can further escalate pension liabilities.
Consequently, average benefits for Chicago Police may increasingly align with those of Chicago Fire personnel, who have already adopted a similar final average salary calculation.
For comparison, Chicago Fire retirees currently receive an average monthly benefit of $7,882, equating to a yearly salary of $94,584.
Previously, benefits were indexed to increase at half the rate of inflation with a maximum of 3%. The revised structure now mandates an increase of at least 3% or the full inflation rate, further intensifying the cost burden.
Although intended to enhance benefits, these adjustments could pose a risk to the financial stability of the pension funds.
The most pressing threat to retirement security for public workers in Illinois arises from the escalating debts at both state and local levels.
These burgeoning debts can lead to higher taxes, discourage residents from staying in the state, and place pension funds in jeopardy of insolvency.
Instead of attempting to reverse the adjustments made under Tier 2 to improve benefits, lawmakers should prioritize addressing excessive spending, effectively managing debt, and ensuring the revenue required for necessary tax relief.
image source from：illinoispolicy
