Chicagoans' Long-Term Debt and Pension Obligations Per Capita Rose 185% Since 2002

February 27, 2013

This blog examines some of the long-term obligations of the City of Chicago and its overlapping local governments using a per capita indicator based on bonded debt and unfunded pension liabilities. Rating agencies and other financial analysts commonly monitor overlapping direct debt trends as an affordability indicator when governments consider debt issuance. The indicator reflects the premise that the entire population of a jurisdiction benefits from and bears the cost of infrastructure improvements or other long-term investments of all the governments authorized to issue debt on their behalf. However, since 2011 Moody’s has combined both unfunded pension liabilities and debt burden to provide a more comprehensive view of government obligations that must be paid by taxpayers in future years.

Between FY2002 and FY2011, long-term debt and pension obligations per capita grew from $6,157 to $17,569. This represents a 185.3% increase, of which two-thirds is attributable to increases in pension obligations.

For Chicago residents, this collective long-term debt and pension obligations per capita indicator could be helpful in understanding the affordability of current retirement benefits and bonded debt. Ultimately, an examination of all long-term obligations is important to determine whether debt burden is sustainable or whether the full costs of providing government services are being deferred – an issue of intergeneration equity. When governments balance annual revenues and expenditures without hoarding excess cash or borrowing from the future, they achieve intergenerational equity among taxpayers and others who pay for and receive government services now and in the future.

Methodology

It is important to recognize that bonded debt and pension obligations are different types of government obligations. Bonded direct debt is a firm legal commitment backed by the full faith and credit of the government or a specific revenue source. For most of the governments presented in this blog, bonded direct debt is backed by the pledge to levy property taxes in order to make debt service payments. The CTA’s bonded direct debt is backed by sales taxes.

Pension liabilities are more malleable as they are a product of actuarial calculations. Also, governments frequently modify their pension contribution levels. Although Article XIII, Section 5 of the Illinois Constitution provides that membership in any pension system in the State is an enforceable contractual relationship and that member benefits “shall not be diminished or impaired,” it does not require that governments provide a specific level of funding to the pension systems.

However, the combination of these two types of long-term obligations as part of a trend analysis is still illustrative of a government’s commitment of future tax dollars.

The components of the long-term debt and pension obligations per capita indicator are: the City of Chicago’s net direct debt and the City’s portion of the local governments’ overlapping net direct debt [1], the City’s portion of the Chicago Transit Authority’s (CTA) bonded debt[2] and the City’s portion of the respective pension funds’ unfunded actuarial accrued liabilities (UAAL). UAAL are the amount by which a pension fund’s actuarial accrued liability (AAL) exceeds its assets, where the AAL is an estimate of the value of benefits already earned. It is important to note that the calculations do not include other post employment benefits (retiree healthcare) or state and federal long-term obligations. The long-term debt and pension obligations per capita indicator trends are presented for local governments in the Chicago area from FY2002 to FY2011, the ten most recent years for which audited financial data is available.

The City’s portion of overlapping net direct debt is reported by the City in its financial statements for other major Cook County governments with boundaries coterminous with the City of Chicago or located partially within its boundaries. These governments are: the Chicago Public Schools, Cook County, the Forest Preserve District of Cook County, the Metropolitan Water Reclamation District, the Chicago Park District, City Colleges of Chicago, the former School Finance Authority and the Chicago School Building Improvement Fund[3]. To calculate the long-term debt and pension obligations per capita indicator, the Civic Federation includes the City’s portion of unfunded pension liabilities for all these governments, plus the CTA.

Findings

The exhibit below provides a breakdown of the long-term debt and pension obligations per capita calculation for the fiscal year 2011. At $20.3 billion, the City’s net direct debt and overlapping net direct debt make up 42.6% of the $17,569 of long-term debt and pension obligations per capita. At $27.3 billion, unfunded pension obligations for the City’s four funds and the City’s portion of the pension funds of overlapping governments make up 57.4%. The largest components of the indicator are the City’s net direct debt, at $7.6 billion, or 16.0% of the long-term obligations, followed by the Chicago Public Schools’ Teachers’ Pension Fund (at $6.8 billion, or 14.3%) and the Municipal Pension Fund (at $6.7 billion, or 14.2%). It is important to note that most bonded debt for the local governments below are amortized over thirty years from the issuance of the bond. This means that the governments have scheduled to pay the entirety of the costs of the bond over its thirty-year life. In contrast, the pension obligations of the government are never expected to be fully paid off because the government is expected to exist in perpetuity, and instead will continue as long as the government has living retirees collecting pension payments. (Click to enlarge the chart below.)

Between FY2002 and FY2011, long-term debt and pension obligations per capita grew from $6,157 to $17,569. This represents a 185.3% increase, of which two-thirds is attributable to increases in pension obligations. A breakdown of the indicator reveals that the City’s long-term debt obligations per capita grew from $3,784 to $7,489, a 97.9% increase over the ten-year period. Meanwhile, long-term pension obligations per capita grew from $2,374 to $10,080, an increase of 324.7%.

The sum of net direct debt, overlapping net direct debt, the City’s portion of CTA’s bonded debt and unfunded pension liabilities increased by 168.1% over the ten-year period. This represents a $29.8 billion increase in long-term obligations, from $17.7 billion in FY2002 to $47.6 billion in FY2011. A closer look at the sum of long-term obligations reveals that over the past ten years, bonded debt obligations grew by 86.0%, or $9.4 billion, while unfunded pension obligations grew by 299.0%, or $20.5 billion.

The difference between total and per capita trends over the ten-year period can be attributed to changes in the population. From FY2002 to FY2011, the City’s population declined by 174,175 and the County’s population declined by 138,494. The following chart (click to enlarge) shows total long-term debt and pension obligations per capita over the past ten years.

 

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[1] Direct debt or bonded debt is a government's tax-supported debt.