Chicago’s pension burden continues to weigh heavily on the city’s long-term fiscal health. Its four pension plans — the Policemen’s Annuity and Benefit Fund (PABF), Firemen’s Annuity and Benefit Fund (FABF), Laborers’ & Retirement Board Employees’ Annuity and Benefit Fund (LABF), and Municipal Employees’ Annuity and Benefit Fund (MEABF) — are collectively only 26% funded and have an unfunded liability of roughly $36 billion. That puts the city’s pension systems among the 10 worst-funded in the country. 

But a bill that recently cleared the Illinois Senate provides a way to make some meaningful progress.  

Senate Bill 3404, Senate Amendment 2, sponsored by state Sen. Robert Martwick and Rep. Bob Morgan, allows local governments to offer voluntary pension buyouts to current retirees and former employees with vested retirement benefits. Modeled after buyout programs that have been in place at the state level since 2018, they offer a lump sum payment to eligible members in exchange for a smaller future benefit.

Retirees, for example, can choose to receive a one-time payment up front in exchange for a reduced cost-of-living adjustment on their pension in the future. The lump sum is equal to 70% of the difference between the net present value of their current adjustment and the net present value of a reduced one. They could decide whether it makes sense for them financially to take a lump sum payment in exchange for smaller future increases or to keep their pension as-is. 

In addition to providing flexibility, voluntary buyouts also provide financial benefit to the pension plans, reducing the plan’s unfunded liabilities and reducing the annual contributions required by statute to reach the plan’s funding goal. This is especially important for a municipality such as Chicago, where the pension funds remain vastly underfunded despite dedicating immense resources — about 17% of the total budget and 76% of property tax revenue — to annual pension contributions. 

In Chicago, implementing the buyout plans authorized by S.B. 3404 could save the city hundreds of millions of nominal dollars over the next three decades if program take-up mirrors participation levels for state plans. We at the Civic Committee project that a one-time buyout offering for retirees and terminated vested employees of all four city pension plans could result in a reduction of required pension contributions of about $760 million from now until the pension plans’ target years (2055 for PABF and FABF; 2058 for MEABF and LABF) — roughly $70 million of which would come in the first five years after implementation. We also project it would result in an immediate reduction in unfunded liability of about $270 million. The contribution savings and reduction in unfunded liability would be larger if buyout programs were extended to become an ongoing program like the state’s buyout programs have effectively become.

That’s additional financial cushion that could help reduce looming budget deficits, which is especially important given the unpopular suite of options — e.g., property taxes — the city can use to balance its budget. 

These buyout programs are not going to solve Chicago’s problems on their own, but the city must do what it can to chip away at its pension costs. But in addition to reducing costs, it would be an important step forward for Chicago reputationally as well. Implementing a buyout program in Chicago would be a signal to residents, rating agencies and investors that the city is taking its pension challenges seriously by availing itself of proven tools to address pension debt. 

We urge the Illinois House to pass — and the governor to sign — S.B. 3404 so that local governments like Chicago and others across the state have one more tool in the tool kit to address pension liabilities. 

Mary Wagoner is the senior director of state and local finance for the Civic Committee of the Commercial Club of Chicago. 

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