Ted Dabrowski and John Klingner
Chicago’s pension plans – and the city of Chicago by extension – avoided a reckoning in 2020 after billions in federal covid aid helped the city avoid a fiscal collapse. Some of those billions were given as direct aid to the city, while billions more filtered through the economy, eventually boosting city tax revenues. The city was spared a pension squeeze for a few years.
But reality is back and the financial market’s volatility is a reminder of just how delicate the situation is for Chicago. The market’s drop this year alone has cost the city’s five major pension funds an estimated $1 billion-plus in mark-to-market losses, a big deal for a city that already has a $53 billion funding hole and pension funds that are less than 25% funded. And in case anybody’s forgotten, it’s taxpayers who’ll ultimately have to underwrite, through higher taxes, all those billions in shortfalls.
Yes, the market could come back just as quickly as it has fallen, but the current losses reveal the predicament for Chicago’s pension funds. They’re taking big risks in equities, real estate, hedge funds and private equity to keep the pension plans going, but that leaves them overexposed to running out of money if the markets have a deep and sustained downturn.
