Last week, between cookouts and fireworks, it came to my attention that the City of Chicago CAFR (Comprehensive Annual Financial Report) for 2018 has now been issued, alongside the actuarial reports for three of the four pension funds (the police are a bit of a laggard, it seems, and only have available their own CAFR, without the fuller analysis of the actuarial report). Interested readers can view the Municipal Employee’s report here, and follow these links for the police, the firefighters, and the Laborer’s Pension Fund (from which the numbers that follow are derived).
By one measure, the combined funded status at year-end 2017 was as high as 27%. By that same measure, it’s now 23%.
How did this happen?
First, a bit of context and explanation of the various conflicting numbers in pension reporting: there are two different ways to report pension assets and two different ways to report pension liabilities.
Pension assets can be reported on a market/fair value basis, which is just a matter of taking the total value of all assets held at the valuation date. But historically, actuaries have calculated a second number, called the Actuarial Value of Assets; this attempts to smooth out the bumps in the market. In 2017, the calculation of the actuarial value of assets was a bit lower than the actuarial value of assets because it was slowly phasing in the asset gains we’d been having over the past several years — $9.9 million instead of $10.0 million. In 2018, the losses in the stock market over the year meant that the market value dropped considerably but that the actuarial value did not include all of those losses, so that the values were reversed: a market value of $8.9 million and an actuarial value of $9.7 million.
Regarding the liabilities, there is, again, a difference in the funding-basis and accounting calculation. For funding purposes, actuaries for public plans use a discount rate based on their expectation of future asset returns (or, sometimes, the expectations dictated by meddling government officials). But for accounting, actuaries are required to calculate, based on the actuarial assumptions, contribution schedules, etc., for how long the plan can continue to pay out benefits without becoming insolvent, and use a weighting of the investment return and a municipal bond rate as a result of their calculation. This means that the liabilities used for accounting disclosures are somewhat higher than those used for funding.
Add this all together and you get six numbers:
Whether you choose to say that pension funding dropped from 26% to 23%, or from 27% to 25%, it’s not a pretty picture.
That being said, here’s the “why”: yes, it’s plain to see that there was an asset loss which contributed to the drop in funded status, and explains why the market value-based funded status is now so much lower than the actuarial value.
The Municipal Employees’ plan’s investment return, on a market basis, was a loss of 5.7% (see page 8 of the actuarial report). The Firemen’s Fund had a loss of 5.2% (p. 11 of their report). Other plans’ losses were similar.
In addition, there were other sorts of changes in the valuation and the data — most dramatically, the Firemen’s plan dropped its investment return assumption down from 7.5% to 6.75%.
But by far the largest contributor to the plans’ worsening funded status is that the city is not contributing even the minimal amount necessary to “tread water.” For years and years the city has failed to contribute the “Actuarially Determined Contribution” which is based on a determination of the amount needed to pay off the underfunding over a 30 year period. But the actuarial reports provide a second number: the degree to which contributions failed to meet even the minimum standard of the new plan accruals and accumulated interest for the year.
For the Municipal Employees, the city shorted the plan of even this minimal contribution by $600 million; for the firemen, $125 million; and for the Laborer’s, about $75 million (recall that the police actuarial report is still outstanding). In other words, the contribution for the Municipal Employees’ plan should have been more than double what it actually was; the Firemen’s plan, 30% higher, and the Laborers’, 50%. This $600 million dwarfs the unfunded increase of $200 million (on an actuarial-asset basis) for the Municipal Plan’s investment and other plan experience losses, and also exceeds the similar $50 million loss for the Laborers’ plan (the net experience/assumption liability loss due to assumption changes for the Fire plan, at about$400 million, itself dwarfed all other impacts).
And here’s another way of looking at this than simply the ruinous future contribution increases: the plans are continuing to decline in funding levels for many years to come. For the Municipal Employees, now 25%, the funded status is projected to bottom out at 19.8% in 2021 before slowly recovering according to the current funding schedule. It then takes until the year 2045 to reach even the benchmark of 30% funding, before rapidly improving to 90% as scheduled in 2058, when the rapid retirement and ultimate death of the richer-benefit Tier 1 employees contributes so much to the plan’s improved funding. For the Fire plan, the funded status, now 19%, bottoms out at 17% in 2019, reaches 31% in 2032, and 90% in 2055. And for the Laborers’ plan, already better funded, the funded status drops from 45% now to 37% in 2022 before recovering to 40% in 2041 and 90% in 2058. (Again, this is an actuarial-report detail not available for the Police plan.)
Folks, there’s nothing I like better than a claim that whatever everyone else is saying is counterintuitively wrong (well, that, and a good chocolate-and-peach gelato), but there isn’t even the smallest hint of any unexpected good news or silver lining here.
Instead, Mayor Lightfoot has her work cut out for her, even more than before.
What do you think? Share your thoughts at JaneTheActuary.com. Also, see here for a link to my January series on Chicago pensions.