December 24, 2013
Last week the Civic Federation marked the end of the FY2014 budget season with a blog that summarized the proposed budgets for the eight local governments the Federation monitors. These governments include the City Colleges of Chicago, Chicago Public Schools (CPS), the City of Chicago, Cook County, the Chicago Transit Authority (CTA), the Forest Preserve District of Cook County, the Metropolitan Water Reclamation District of Greater Chicago (MWRD) and the Chicago Park District. This blog focuses on the recommendations made by the Federation to improve the governments' fiscal health.
While the Federation evaluated each local government’s budget and fiscal health status individually, there are two specific problems that many of the governments we analyze share. These include the declining health of their employee pension funds and future financial difficulties, often due in part to rising long-term obligations such as bonded debt and pension payments. The Civic Federation therefore made similar recommendations to multiple governments to address these issues. These recommendations include:
- Implement comprehensive pension reform; and
- Develop and implement a formal long-term financial planning process.
Recommendation #1: Implement Comprehensive Pension Reform
While the Civic Federation recommended pension reform for many governments, a comprehensive reform package for the Chicago Park District was passed by the General Assembly on November 7, 2013 and currently awaits Governor Pat Quinn’s review.
All of the local pension funds the Federation analyzes were in poor financial health as of FY2012. Each pension fund had a market value funded ratio below 60%, and the City’s Fire fund had the lowest rate of 25.4%. The Civic Federation believes the Park District has set a strong example for other local governments by developing a reform plan targeted to the needs of its own pension fund and not waiting for action from the State of Illinois.
The District has taken a significant step forward by proposing changes to its pension benefits to make them more sustainable for beneficiaries and their funding more predictable for taxpayers. If signed into law, the reforms will additionally ensure beneficiaries and current employees that the pension fund will not run out of money, as it is currently projected to do within the next ten years. Instead, Senate Bill 1523 it is projected to increase funded levels from the current dismal 42.4% to 90% by 2049 and 100% by 2054.
The Federation supports many elements of the District’s reform efforts because the legislation balances reasonable changes to benefits for current employees and retirees with phased-in increases to employee and employer contributions. According to testimony by the Park District at the Illinois House of Representatives’ Pension Committee hearing on November 6, 2013, the actuarial accrued liability is projected to decrease by a net of $107 million. The current actuarial accrued liability is $971.8 million. See this blog for details on the elements of the Park District’s pension reform plan.
The Federation also supports the District for prudently setting aside budgetary reserves that will accommodate the $12.5 million supplemental employer contributions scheduled for each of FY2015 and FY2017. The District had established a fund balance policy in 2012 to designate between 8% and 16% of the preceding fiscal year’s General Fund expenditures as reserves within the Economic Stabilization Funds. As of December 31, 2012, the most recent year for which audited data are available, the District’s Economic Stabilization Funds had a balance of $20.0 million.
Recommendation #2: Develop and Implement a Formal Long-Term Financial Plan
Many Chicago-area local governments employ the techniques of a long-term financial planning process internally, including the projection of multi-year revenue trends and the modeling of various revenue and expenditure options. However, most do not develop a formal plan that is shared with and/or reviewed by key policymakers and stakeholders. This information is crucial to help stakeholders understand what their future financial situations will be and for policymakers to make reasonable and effective long-term decisions.
For example, if the Chicago Park District’s pension reform legislation passed by the General Assembly is approved by the Governor, the District faces significant increases in its annual pension contributions to the pension fund over the next several years in addition to supplemental pension contributions totaling $75.0 million. Although the Park District has prudently allocated budgetary reserves to fund some of the supplemental payments, the District will also need to find additional resources via reserves, borrowing, expenditure cuts, tax or fee increases or some combination of these. In light of these additional ongoing costs that will undoubtedly have a significant financial impact on the District’s operating budget, it is imperative that the District develop and implement a formal long-term financial planning process that is not just reviewed internally, but that solicits input from the District’s Board of Commissioners and other key policy stakeholders, including the public. This plan should demonstrate how the District will incorporate increasing pension costs into its budget while still accommodating other priorities.
The City of Chicago is also strongly in need of a publicly available, formal long-term financial plan. In its analysis of the City budget, the Civic Federation highlighted two of the many issues issues that could be addressed with a long-term financial plan. These two issues are the increase in its pension payments starting in FY2015 and the use of debt management techniques that may have an impact on future operating budgets.
Although the City has made efforts over the past two years to reduce the size of the structural deficit in its operating budget, it faces a $590.0 million increase in its annual required pension contribution in FY2015. Since the property tax levy is the primary source of revenue for the City’s contributions to the pension funds, the levy would have to be significantly increased from its current $824.0 million level to cover the additional costs or crippling cuts would have to be made to City services, or both. The City has also relied heavily on unsustainable debt refinancing savings that balanced its current year operating budgets but also greatly increased its total long-term obligations with additional interest payments. These payments may have a major impact on the City’s budget when they come due.
The National Advisory Council on State and Local Budgeting (NACSLB) and the GFOA both recommend that all governments formally adopt a long-term financial plan as a key component of a sound budget process. A long-term financial plan typically includes the following components:
- A review of historical financial and programmatic trends;
- Multi-year projections of revenues, expenditures and debt;
- An analysis of those multi-year trends and projections; and
- Modeling of options to address problems and opportunities, which helps governments address fiscal challenges before they become fiscal crises.
A key component of financial planning is engaging all stakeholders in the process of developing the plan. The GFOA describes long-term financial planning as “not just a staff-driven process. It is consensus-driven and inclusive, involving elected officials, staff and the public.” Among other benefits, involving all stakeholders can help staff refine forecasts, institutionalize planning processes and promote strategic decision-making.
The following PDF describes the long-term financial planning process in greater detail.