Chicago Area Governments Prohibited from Improving Pension Funding Without State Intervention

June 05, 2014

State statute governs all benefits and funding of public pensions for the City of Chicago. The City cannot contribute more to its pensions than the multiple of employee contributions allowed under state statute. There has unfortunately been some confusion in the media on this point ahead of a Monday, June 9^th deadline for Governor Quinn to sign into law pension reforms for the City of Chicago’s Municipal and Laborers’ Funds.

Eight local government pension funds in the Chicago area, including all four City of Chicago funds, have their employer pension contributions set in state statute as a multiple of the total employee contribution made two years prior. The statute requires that the employer levy a property tax not to exceed the multiple amount. For all of these funds, the multiples do not automatically adjust to meet the funding needs of the pension plans.[1] As has been discussed before on this blog, low employer contributions are one of the main reasons so many public pension funds in the Chicago area are severely underfunded. As also discussed on this blog, pension reforms passed by the Illinois General Assembly but not yet signed by Governor Quinn in Senate Bill 1922 would allow an increase to the City of Chicago’s contributions to its Municipal and Laborers’ pension funds.

The following are the current multiples for all four City pension funds and their references in state statute.

• Municipal Fund, 1.25 multiple: (40 ILCS 5/8-173) (from Ch. 108 1/2, par. 8-173)
• Laborers Fund, 1.00 multiple: (40 ILCS 5/11-169) (from Ch. 108 1/2, par. 11-169)
• Police Fund, 2.00 multiple: (40 ILCS 5/5-168) (from Ch. 108 1/2, par. 5-168)
• Fire Fund, 2.26 multiple: (40 ILCS 5/5-168) (from Ch. 108 1/2, par. 5-168)

It is important to note that pursuant to Public Act 96-1495, in 2015 the City of Chicago—for the Police and Fire funds ONLY—will switch from the multiplier-based contribution to an annual actuarially-calculated contribution sufficient to bring the funded ratio of the two funds to 90% by the end of 2040. The City has projected that this will require a nearly $600 million increase to the city’s pension contribution in 2015.

The following is an excerpt from the Chicago Municipal Fund statute that demonstrates the limitation to City contributions. Emphasis is added to highlight the phrase “an amount not to exceed.” The state is basically saying here that in 1999 and thereafter, the City of Chicago must contribute an amount to the Municipal pension fund that is no more than 1.25 times what employees contributed to the Municipal Fund two years prior.

Sec. 8-173. Financing; tax levy.

(a) Except as provided in subsection (f) of this Section, the city council of the city shall levy a tax annually upon all taxable property in the city at a rate that will produce a sum which, when added to the amounts deducted from the salaries of the employees or otherwise contributed by them and the amounts deposited under subsection (f), will be sufficient for the requirements of this Article […] and for the year 1978 and each year thereafter, such levy as will produce, when extended, an amount not to exceed the total amount of contributions made by or on behalf of employees to the Fund for annuity purposes in the calendar year 2 years prior to the year for which the annual applicable tax is levied, multiplied by 1.690 for the years 1978 through 1998 and by 1.250 for the year 1999 and for each year thereafter.

In the 1990s the statute governing all four Chicago pension funds was changed to allow the City to contribute to the pension funds from sources other than the property tax.[2] This is the reference to subsection (f) in the above paragraph. (Each of the four Chicago funds’ statutes has a similar subsection allowing contributions from other sources.)

Subsection (f) allows the city to use other revenues in lieu of or in supplement to property tax revenue that are, “derived from any source legally available for that purpose, including, but not limited to, the proceeds of city borrowings.” So Chicago can use other revenues, just as long as property tax, employee contributions and the other revenue together meet and do not exceed that year’s requirement of contributing a certain multiple of what employees in the Municipal Fund contributed two years earlier.

The following is an excerpt from the Chicago Municipal Fund statute.

Sec. 8-173. Financing; tax levy.

(f) In lieu of levying all or a portion of the tax required under this Section in any year, the city may deposit with the city treasurer no later than March 1 of that year for the benefit of the fund, to be held in accordance with this Article, an amount that, together with the taxes levied under this Section for that year, is not less than the amount of the city contributions for that year as certified by the board to the city council. The deposit may be derived from any source legally available for that purpose, including, but not limited to, the proceeds of city borrowings. The making of a deposit shall satisfy fully the requirements of this Section for that year to the extent of the amounts so deposited. Amounts deposited under this subsection may be used by the fund for any of the purposes for which the proceeds of the tax levied by the city under this Section may be used, including the payment of any amount that is otherwise required by this Article to be paid from the proceeds of that tax.

So Illinois State statute is quite clear that the City of Chicago cannot currently and was not previously able to contribute more to its four pension funds than a specific multiple of what the employees contributed two years prior.

Illinois courts have also established that Chicago cannot levy or contribute more than the multiple in Houlihan v. City of Chicago, 714 N.E.2d 569 (App. Ct. Ill. 1999). In Houlihan participants in four Chicago employee pension funds brought a class action suit seeking to “recover ‘improvement interest’ allegedly owed to the funds for the delay in the City’s contribution.” The plaintiffs’ argument was that the multiple created a funding source for the pensions, but not a funding cap.

The court held that the City had no obligation to pay interest because “[a]ccording to the statutes governing the different pension funds, the maximum allowable tax levy authorized by the Pension Code is the maximum amount that the City may contribute to the funds.” The court also held the following (emphasis added):

[T]here is no dispute that the City has contributed the maximum amount allowable to the funds. As a result, under the Pension Code the City cannot contribute additional money to the pension funds. Although the participants in the various pension funds have an enforceable contractual relationship, this right only guards against diminishing or impairing benefits. Plaintiffs have not alleged that their current benefits have been decreased or terminated, or that the pension funds are in financial jeopardy. Therefore, we find that the City did not violate plaintiffs’ rights under the Illinois Constitution of 1970.[3]

Thus, both statute and the courts have established that the contribution multiple is a cap for the City of Chicago’s contributions to its pension funds. The problem at hand is not that the City has been unwilling to contribute enough to its pensions; the problem is that it has to this point been unable legally to do so.