Chicago’s pension systems for public-service employees are a mess. Right now, the Chicago Fire Pension fund is only 24% funded. The Police Pension Fund is at 31%. There are major funding issues with the teachers’ pension fund and the fund for municipal workers. But there are a couple of things the unions have in common. The most significant is that the employees have consistently paid in their required shares. The City hasn’t always done so, or has failed to provide necessary increases through the years.
And here’s something else the major pension funds have in common – at some time in the past, they were 100% funded, and quite stable. So what happened?
Let’s start with the teachers.
Jay Rehak is President of the Chicago teachers’ Pension Fund.
“In 1995,” he tells us, “the State of Illinois and the City of Chicago made a deal that the City would take over the pension payments. So you have the employee constantly making his or her 9% payments, but for ten years, from 1996 to 2005, the City of Chicago paid absolutely no money into the pension fund.”
1995 was a watershed year in the history of teacher pension funding, according to George Schmidt, Editor of Substance News and a union activist for decades. “That’s when the real coup d’eta happened,” he says.”The General Assembly passed legislation that put the Chicago Public Schools in the hands of the Mayor, and it passed legislation that ended the separate property tax line on the tax bills to cover the pensions.”
And that’s a key event. A separate, dedicated property tax line was fed directly into the pension fund, keeping things stable. But when Springfield removed it, the City was allowed to use that money not only to pay pensions, but for other fiscal needs. And, not surprisingly, it stopped paying pension contributions.
“So,” Schmidt continues, “you had the teachers paying in, the property tax paid in, and for a hundred years, including the Great Depression, the teachers’ pension fund remained solvent, and then suddenly, after 1995 it became a financial football which was at the mercy of City Hall and other political leaders.”
The situation is different with Police and Fire, but it’s no less dire.
“In Fire and police, we didn’t have any so-called holidays,” explains Dan Fabrizio, political action director at the Chicago Firefighters Union. “We have a flawed funding mechanism. We have what they call a multiplier. So for every dollar we put in the City was supposed to put in $2.26. They have done that, but we’ve asked them to increase. Back in ’82 we asked them to increase and they gave us a nickel. Back in ’95, they gave us $50 million, and then subsequently took it away later on because they said they needed it. But every actuary that’s looked at our funding mechanism has said that it’s a flawed mechanism and it’s accounted for 60% of our debt today. Last year we were $169 million short on the actual required contribution.”
The normal cost in the fire fund is $80 million, Fabrizio tells us. “We’re paying half of that in our contributions. So in essence we’re paying half of our (pension) contribution.”
Rehak explains that teachers are not eligible for Social Security. “Social Security, people pay 6.2% of their salary and the employer pays 6.2%,” he says. “In our pension fund we pay 9%, which is almost 50% more, but in the private sector if an employer doesn’t pay their 6.2% they put those people in jail. In our situation we put our 9% in, the other guys don’t put anything in, and all we do is have legislation that says, y’know what? We’ve got to cut benefits.”
Because the City side has lagged for so long, the debt balloons each year, not unlike an unpaid credit-card bill. So he unfunded liabilities keep climbing, and the numbers have become so large that there’s probably no solution that can please anybody. But these key union leaders make it clear that they don’t think they’re to blame. And if the solution is going to involve a combination of new funding and benefit cuts, they’re not willing to trust government to make the cuts and deliver the revenue sometime later.
“so now,” says Rehak, “we’re in a situation where the employer – and the politicians – are saying, we didn’t do our job, but they’re going to ask our members to have their benefits reduced… The problem is, even the solution that was just offered for the Municipal funds, you notice that the benefits were reduced, but the actual funding has not been resolved. Because the Mayor still hasn’t done the property tax increase. It’s like Lucy and the football here, where they’re constantly saying – we’re gonna do both, but one of them happens. The benefits are attacked, but the funding isn’t there. We believe the funding mechanisms must be secure before we deal with anything else.”
Pensions are often thought of as just cash payments to individuals, and when tax money helps fund them, taxpayers can be resentful. But you have to take a larger view, Rehak insists.
“People in a global economy, and the people of Illinois, have to understand that the money that is distributed by our pension fund – essentially all of that money is going locally. So at the Chicago Teachers’ Pension Fund we distribute 1.2 billion dollars a year to the local economy. 90% of that stays in Chicago and the Chicagoland area. The global economy impacts when you have people who are taking money out of the local economy. That’s a problem. But pensions keep that money inside the community. So the restaurants and the local businesses of this town and this area benefit a great deal from pensions.”