Chicago’s pension debt being fueled by heavy, growing interest

With $18.5 billion of the city’s $52.4 billion shortfall driven by interest on pension debt, it’s clear Illinois’ largest city needs the state to pass constitutional pension reform.

Chicago is a city in serious money trouble, and pension debt is one of the biggest culprits – mostly from accumulating interest the city refuses to face.

The unfunded liability of pensions for the Chicago area has grown to $56 billion dollars. That’s more than New York, Michigan, Florida or 40 other states.

According to a new forensic analysis from the Equable Institute, more than one-third of the Chicago area’s $52.4 billion dollar shortfall from 2023 – $18.5 billion – is the result of interest piling up on past pension underfunding. That’s a compounding burden that has been created by decades of political cowardice and a funding policy that’s too weak to stop it.

Looking at other major factors contributing to this debt fleshes out the story. The Equable brief found $9.5 billion, or 18% of the debt, comes from assumption changes or adjustments made based on factors such as longer-than-expected lifespans or changes in the assumed returns on investments. Another $5.7 billion (11%) comes from poor investment returns. Other sources include things such as benefit or demographic experience – a higher-than-expected cost-of-living adjustment – that make up $3.2 billion, or 6%.

These costs, while large, pale in comparison to the $18.5 billion piled up by poor funding practices.

That number might be larger than what’s captured in the data because some of the unreported changes worth $13.3 billion – 25% of the total – could also be the result of interest. This category was once the largest source of the debt. Its causes can be boiled down to one of the other named factors, but because of a lack of transparency in financial documents prior to 2011, it’s impossible to accurately pinpoint their exact cause. Prior funding policy, which tied the city’s contributions to payroll rather than benefits or actuarially sound metrics, suggest a large portion of this debt is also attributable to interest in addition to other factors such as benefit experience.

That disastrously low contribution policy may no longer be in place, but the preferences of city leaders to put off the inevitable remains steadfast. Instead of paying what it takes to fully fund pensions, the city is aiming for 90% funding between 2055 and 2059. That’s a 35-year amortization schedule that’s digging the hole deeper. While technically legal as the city pays its “required” contributions, it is far from a wise choice.

Actuaries recommend a 100% funding target within 20 years. Chicago’s plans double that timeline and aims lower. It’s not fiscally responsible and it doesn’t fully address the problem. That’s why pension costs are expected to eat up 15.4% of the city’s corporate fund in 2025.

This isn’t just a budgeting issue: it’s a moral one. Every dollar that goes to pay interest on the debt is a dollar that’s not fixing potholes, hiring teachers or making neighborhoods safer. No wonder so few people feel like they get their tax dollar’s worth.

Chicago must start aiming for 100% funding and, if possible, shorten the timeline to get there. That’s not an invitation to raise taxes, either. Instead, lawmakers should pursue pension reform by getting state leaders to put an amendment to the Illinois Constitution on a statewide ballot.

Two former Chicago mayors have asked for that reform. Constitutional pension reform is necessary to reduce excessive benefits that only add fuel to growing debt, such as the  $135 million-a-year pension pickups for Chicago Public Schools teachers.

The next generation of Chicagoans deserve more than a heaping pile of debt as their inheritance.