Chicago provides an important case study as to how debt can rapidly increase if a city fails to make responsible pension payments. Like many other local governments, Chicago enhanced retirement benefits for public workers in the 1990s. Yet rather than pay more into the system to cover the cost of those increases, the city contributed nearly nothing to its pensions in 2001 and 2002, putting the plans and workers’ benefits at significant financial risk. The city’s pension costs predictably began to rise, but the city did not sufficiently raise its contributions to cover the new benefits workers were earning each year and to pay off the pension debt. While Chicago’s strong local economy helped to mitigate the effects of its growing pension debt for several years, unfunded liabilities spiraled out of control after the Great Recession, as the city failed to make up for its investment shortfalls and instead shortchanged funds by paying much less that what was required.
During the last several years, the city has failed to increase its payments despite the fact that debt has skyrocketed. Thus, Chicago is paying just one-quarter of the amount that is actually needed to cover the cost of benefits for current workers and to pay off the pension debt. As a result, unfunded liabilities now top $19 billion, and the city is experiencing a financial crisis. Actuarially determined contributions have increased from 19 percent of revenue to 54 percent; the city’s debt has been downgraded to junk status; and politicians were forced to pass a record $500 million tax increase just to avoid a government shutdown.