Chicago’s woefully underfunded employee pension plans are demanding more from taxpayers each year. City leaders, starting with Mayor Brandon Johnson, point to the need for hundreds of millions if not billions in new revenue to stabilize Chicago’s finances.
But precious little attention is devoted to an aspect of pension fund management that, if addressed, could help considerably on the long road to digging Chicago out from its worst-in-the-nation status in terms of fulfilling retirement obligations to its municipal employees. That is the investment performance of the billions stashed in those funds.
Chicago’s pension funds are performing worse than many individual investors’ portfolios, making the shortfalls even more striking.
None of the four funds for various categories of city employees, nor for that matter the separate pension fund for Chicago Public Schools teachers, match the median annualized return of public pension funds in the U.S. as a whole from 2015 through 2024. For the public pension fund universe, that figure was about 7.18% net of fees, according to the nonprofit Equable Institute, which tracks public pension fund performance.
We asked Stuart Loren, managing director at Highland Park-based asset manager Fort Sheridan Advisors, who has testified before Chicago City Council committees on municipal finance challenges, to do some calculations to give us a sense of how much the city is falling short.
In recent years, the Chicago pension funds have beaten their own internal targets as markets roared, but over the longer haul they’ve lagged.
The closest any of the city’s funds came to the 7.18% median return was the $12.7 billion Chicago Teachers’ Pension Fund, which generated a 6.89% annualized return over the 10 years that ended June 30, 2024.
Worst performing of the city’s four separate pension funds was the Laborers’ & Retirement Board Employees’ Annuity & Benefit Fund, which held $1.2 billion at the end of 2024. The Laborers’ fund returned just 6.02% on an annualized basis. In between were the $4.1 billion Municipal Employees’ Annuity and Benefit Fund of Chicago (6.35%), the $1.8 billion firefighters pension fund (6.70%) and the $4.3 billion police pension fund (6.74%).
In the multibillion-dollar world of pension management, falling short by a percentage point or even half a point means losing out on big money. Between the four city pension funds, the difference between how they performed and how the median public pension fund performed meant more than $1 billion.
Public pension funds in general — and the city’s pension funds even more so — underperformed plain vanilla investment approaches frequently used by individual investors in their 401(k) plans. The Bloomberg proxy for a conventional portfolio made up 60% of indexed U.S. stocks and 40% indexed bonds returned 8.48% annually over those 10 years. And the Standard & Poor’s 500 index returned a whopping 13.1% annually in that time frame.
This isn’t to say the future retirements of Chicago’s municipal workforce ought to be invested entirely in the S&P. No investment adviser would recommend that level of risk.
But it is to say that management of the city’s pension funds has been subpar over many years, and more attention should be paid to the investment approaches the city is using and the managers selected to choose specific investments.
With the four city pension funds short as of year-end 2024 by a collective $36 billion of what they need to meet present and future obligations to retirees, the city can’t afford to ignore the management of its pension funds. (Since the end of 2024, that pension hole only has grown billions of dollars deeper with Gov. JB Pritzker’s signing of a bill making Chicago police and firefighters’ pension benefits substantially more generous.) A top-to-bottom review is in order.
That likely means shedding long-term asset managers who aren’t performing well. It might mean significant changes in the allocations of pension assets to certain investment categories.
Chicago’s pension funds can and should be generating higher returns. The city is leaving money on the table through its underperformance.
A more basic investment approach might be considered. The Public Employees’ Retirement System of Nevada, which manages the pensions of state employees and various municipal workers including Las Vegas police officers, has won renown within the institutional investment world for its extraordinarily small staff and simplified approach to investing. Heavily invested in stock funds and government bonds, the fund returned 8.4% on an annualized basis as of June 30, 2024.
With nearly $65 billion in assets, Nevada had just 12% of its assets in private assets, with virtually all of that private equity and real estate. By contrast, for example, Chicago’s comparatively tiny $4 billion Municipal Employees’ Annuity and Benefit Fund had 20% of its assets in high-cost hedge funds, private equity and other alternative asset classes.
What’s noteworthy, too, is that Nevada’s fund handles the retirements of a wide variety of public workers, including public school teachers, university personnel, hospital workers and workers for the city of Las Vegas and Clark County. The system has more than 75% of the assets needed to cover the retirements of nearly 221,000 members.
Many of Chicago’s municipal funds, by contrast, have less than 30% of the assets they need to meet their obligations.
Our city might well consider consolidating its municipal pension funds (the teachers’ fund is another story given that Chicago is the only municipality in the state that has to fund its own teachers’ retirements). A larger fund would reduce costs from management fees and reduce complexity.
The point here is that there is room for improvement in this critical aspect of solving Chicago’s pension crisis. We don’t pretend to have all the answers.
But it certainly is past time to ask questions. Johnson and his administration have spent much time and energy — mostly in vain — demanding more money from Pritzker and lawmakers in Springfield, in no small part due to the pressure on city services from having to plow more money into pension funds. The management of those funds is something over which they have direct control.
The city needs to make sure every pension dollar works as hard as its taxpayers.
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