Recession would hit Chicago pension funds – Crain’s Chicago Business

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How Chicago arrived at this point is easy to understand and hard to fix. Put simply, it fell behind on contributions for its retirees — including cops, firefighters, laborers and other municipal employees — year after year as officials shortchanged payments. Now, the unfunded liability for Chicago’s four pension systems is $33.7 billion, more than twice the size of the city’s annual budget.

Chicago’s pensions have enough assets to cover only about 25% of what they owe, while on average funding ratios for US state and local pensions hover around 70%, according to research at Boston College.

These underfunded pensions are weighing on the city’s ability to pay for much-needed services. About $1 of every $5 in Chicago’s budget goes toward pensions, a challenge in a city where revenue often falls short of expenditures, 17% of the population lives in poverty and crime continues to rise — all factors that also could tip the scales on Lightfoot’s chances for reelection in February, when she could face as many as 10 mayoral candidates.

The city has faced calls for more mental health clinics, increased funding to help the homeless and greater resources to reduce environmental hazards such as air pollution that have been reported to disproportionately hurt poor neighborhoods.

And the fact that markets are headed for their worst annual gains in 14 years has made 2022 a more challenging year for pension funds. US stocks are down 19%, and the benchmark 10-year Treasury is off 12%.

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All of this comes even as a key rating company recently lifted the city’s credit rating out of junk, praising Lightfoot’s efforts to increase and accelerate payments into the pension funds. But the problem continues to challenge the Chicago’s ability to pay for much-needed services.

Now, the threat of a recession in 2023 raises questions about the city’s ability to provide advances — such as the half billion dollars given from September through November — because a slowdown could reduce tax revenue as economic activity slows. Chicago’s Purchasing Managers Index, a barometer for the region’s economic health, is already starting to send out recession warning signals. The index fell to 37, below expectations and at a level that historically has indicated an economy in recession.

Already, rising inflation undercut one of Lightfoot’s proposals to fill the gap. The mayor persuaded the City Council in late 2020 to tie annual property tax increases to the consumer price index but for 2023 decided to forgo that bump up given the highest inflation in four decades. 

On top of that, the annual property tax bills that were expected roughly around August didn’t go out until early December. The months-long delay meant that one of the biggest sources of funding for the pension funds was stalled.

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December 27, 2022 at 09:56AM

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