The Chicago Park District pension funding overhaul approved by lawmakers moves the fund off a path to insolvency to a full funding target in 35 years, with bonding authority.
State lawmakers approved the statutory changes laid out in House Bill 0417 on Memorial Day before adjourning their spring session and Gov. J.B. Pritzker is expected to sign it. It puts the district’s contributions on a ramp to an actuarially based payment, shifting from a formula based on a multiplier of employee contributions. The statutory multiplier formula is blamed for the city and state’s underfunded pension quagmires.
“There are number of things here that are really, really good,” Sen. Robert Martwick, D-Chicago, told fellow lawmakers during a recent Senate Pension Committee hearing. Martwick is a co-sponsor of the legislation and also heads the committee.
“This is a measure that puts the district on to a path to full funding over the course of 35 years,” he said. “It is responsible. There is no opposition to it. This is exactly more of what we should be doing.”
The district will ramp up to an actuarially based contribution beginning this year when 25% of the actuarially determined contribution is owed, then half in 2022, and three-quarters in 2023 before full funding is required in 2024. To help keep the fund from sliding backwards during the ramp period the district will deposit an upfront $40 million supplemental contribution.
The 35-year clock will start last December 31 to reach the 100% funded target by 2055.
The Park Employees’ Annuity and Benefit Fund carried $821 million of unfunded liabilities with just a 29.9% funded ratio for fiscal 2019 and under its current course would exhaust all assets in 2027 ”if all future assumptions are met and no additional contributions are made,” reads the Commission of Government Forecasting and Accountability’s recent review of Chicago-area pension systems. The district would then need to cover annual payments on a pay-as-you-go basis.
The park’s district’s 100% funding target, recommended by actuaries, differs from the more modest 90% ratio the city and suburban and downstate public safety systems are using. Chicago last year moved to an actuarial payment on its police and firefighters’ funds and will follow suit in 2023 with its municipal and laborers’ funds.
The park district’s package establishes a new tier three for employees hired after January 1, 2022, raising their annual contribution to 9% of their salary from 7%. Employees in the new tier three can claim full benefits two years earlier, at 65, and existing tier two employees can opt into the new tier, trading higher contributions for a lower retirement age.
The legislation expands the sources allowed for making contributions from a tax levy to “any source legally available.”
The new schedule removes the imminent threat of insolvency but will take decades to reach healthy funded ratios, so the bill gives the district $250 million in borrowing authority that won’t count against its bonding limits based on its tax collections.
Some committee members raised concerns over the bonding authority because the state soured on pension obligation bonds after then-Gov. Rod Blagojevich used $2.7 billion of the state’s $10 billion 2003 general obligation-backed POB to make current payments.
“This is not bonding in lieu of a payment which is what has been done so negatively in the state of Illinois. It is bonding to supplement payments to help frontload the ramp,” Martwick said. “This flattens out future payments and makes it more affordable for taxpayers.”
The district has no imminent plans to tap the authority and sought it as a backstop to provide “another tool in the toolbox to assist us with stabilizing the fund if needed,” Steve Lux, the park district’s chief financial officer, told lawmakers during the hearing.
If needed, the district could tap up to $75 million annually of the authorization to cover payouts in the event of a negative cash situation that could occur based on market performance.
“The real purpose was to prevent the fund from having to liquidate investments at a loss,” he said, adding the hope would be that the district would use the authority on a limited basis and only to assist with cash flow.
The new schedule doesn’t put the fund at even a 40% funded ratio until 2039.
“The concern was…if you have a downturn in the market or you have a couple years of bad returns that could significantly change the required contribution,” Lux said, so the POBs would help stabilize the fund.
Asked by lawmakers about the potential impact on its ratings, Lux said the greatest threat to the district’s ratings is the lack of a pension fix.
The district’s roughly $800 million of debt is rated AA-minus by Fitch Ratings and S&P Global Ratings. Both assign a negative outlook.
Kroll Bond Rating Agency rates the district AA with a developing outlook.
Moody’s Investors Service rates the district at the same junk level of Ba1 as Chicago citing governance ties with the city. The mayor appoints board members. Like the city, the district does not ask Moody’s for ratings on new deals.
The reform package followed several years of negotiation between the district and labor after state courts tossed the previous reform deal in 2018. The 2014 legislation took effect Jan. 1, 2015. The package cut benefits for employees and annuitants and raised employee and park district contributions.
Higher pension contributions in that package remained with the retirement fund but employees received reimbursement for their higher contributions after a judge voided the overhaul because like the city and state’s attempted reforms it ran afoul the state constitution’s stringent pension clause that protects promised benefits against impairment or diminishment.
Despite the pension strains and COVID-19 pandemic hits to program-related revenue, the district managed through a $99 million 2020 revenue hit after many park programs and events at Soldier Field, home of the National Football League’s Chicago Bears, were shut down, by trimming expenses.
The district also benefits from a “very high available general fund balance” of $211 million that is 67% of operations with a $32 million draw expected in 2020, Fitch Ratings said last fall. Rising tax collections also helped close the hole.
Some programming was restored last summer and the city and state are on track to fully reopen and lift all pandemic capacity constraints this week.
The district stayed on track with planned supplemental pension contributions in fiscal 2020 and 2021 as it awaited state approval for the overhaul and passage will ease some rating pressures.
“The negative rating outlook reflects the risks posed by growing pension contributions on spending flexibility,” Fitch said in a September report. “Absent passage of legislation in 2020 or early 2021, the risk of asset depletion looms.”
S&P is watching closely for the pandemic’s impact on reserves and adoption of the pension fix to resolve the negative outlook and concerns will likely remain as “the higher costs needed to reach and sustain actuarial funding could pressure CPS’s budget to a degree that creates downside credit risk, particularly if the current recession places a significant ongoing drag on revenue performance beyond the current year,” S&P wrote in September.
Kroll factored in expected legislative action in shifting its outlook to developing from negative last September.
“The developing outlook reflects the expectation of state legislature action regarding pension reform. KBRA will continue to monitor legislative progress with regard to the district’s pensions,” Kroll wrote.