Chicago’s pension crisis is a roughly $35.9 billion gap between what the city has promised its retired and current public employees and what it has actually set aside to pay them. The shortfall is spread across four separate retirement funds, grew out of decades of skipped contributions and missed investment targets, and is protected from benefit cuts by the Illinois Constitution. Paying it down now consumes close to 40 percent of the city’s budget and shows up directly on property tax bills, water-sewer charges, and the city’s credit rating.
The Size of the Hole, Fund by Fund
Chicago runs four pension systems, each covering a different part of the workforce: the Municipal Employees’ Annuity and Benefit Fund (MEABF) for administrative staff and other non-sworn workers, the Laborers’ Fund (LABF) for trade and manual-labor positions, the Policemen’s Annuity and Benefit Fund (PABF), and the Firemen’s Annuity and Benefit Fund (FABF).1City of Chicago. Pension Funds
According to the city’s 2024 Annual Comprehensive Financial Report, the combined unfunded liability across those four funds is $35.9 billion. The funded ratios — assets on hand divided by what the fund owes — are grim:
- Laborers’ Fund (LABF): 42.6 percent funded, the healthiest of the four, though still well below the 80 to 90 percent range actuaries consider stable.
- Municipal Employees’ Fund (MEABF): 26 percent funded.
- Police Fund (PABF): approximately 24.5 percent funded.
- Fire Fund (FABF): approximately 24.5 percent funded.
The police and fire funds hold about one dollar in assets for every four dollars they owe. Under state law, each fund must reach a 90 percent funded ratio on staggered timelines between 2055 and 2059, following a ramp that keeps early payments lower and pushes the steepest required contributions into later decades.
How the Shortfall Grew This Large
Decades of Skipped Contributions
For much of the 1990s and 2000s, Chicago contributed far less to its pension funds than actuaries recommended. These “pension holidays” freed up cash for day-to-day operations, but the money that should have been compounding inside the investment portfolios never arrived. By the time lawmakers ended the practice, the interest accruing on the unfunded liability was growing faster than new contributions could offset it.
Investment Returns That Missed the Target
Pension math hinges on an assumed rate of return. Three of Chicago’s four funds currently assume 6.75 percent a year.2Policemen’s Annuity and Benefit Fund of Chicago. Actuarial Valuation Report for the Year Ending December 31, 2023 When actual returns fall short, the gap between assets and liabilities widens. The 2008 financial crisis and several volatile stretches since produced returns well below the target, adding billions to the unfunded total. A small miss compounds over decades because each year’s shortfall becomes part of the base on which future growth is calculated.
Fewer Workers Supporting More Retirees
An aging workforce and periodic hiring freezes have tilted the ratio of active employees paying in versus retirees drawing benefits. Each active worker’s contribution now stretches less far, and the city must make up the difference from its general budget. This pressure is structural and won’t reverse without sustained hiring growth or major benefit reforms, both of which face political and legal limits.
Why Chicago Can’t Just Cut Benefits
Illinois is one of the hardest states in the country for a government to adjust public pension benefits, because of a single sentence in the state constitution. Article XIII, Section 5, provides that membership in any public pension system creates “an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”3Illinois General Assembly. Illinois Constitution – Article XIII Delegates to the 1970 constitutional convention adopted that language specifically because the state had a history of raiding pension funds.
In 2015, the Illinois Supreme Court struck down a major pension reform law, Public Act 98-599, in In re Pension Reform Litigation. The court held that even the state’s police power cannot override the clause, writing that Article XIII, Section 5 “is a statement by the people of Illinois, made in the clearest possible terms, that the authority of the legislature does not include the power to diminish or impair the benefits of membership in a public retirement system.”4Illinois Courts. In re Pension Reform Litigation, 2015 IL 118585
Practically, that means Chicago cannot reduce cost-of-living increases for current retirees, raise the retirement age for people already in the system, or otherwise scale back what was promised when those employees were hired. The only real options are paying more into the funds or restructuring future benefits for workers not yet hired.
Tier 2 and the 2025 Public-Safety Adjustment
Employees hired on or after January 1, 2011, fall under Tier 2, which carries a later retirement age, a smaller cost-of-living adjustment, and a cap on pensionable salary. Tier 2 was designed to reduce long-term costs, and on paper it does. But most Chicago public employees do not participate in Social Security, so their city pension is their only retirement income. Federal “safe harbor” rules require a pension that replaces Social Security to be at least as generous as Social Security would be. Some analyses have concluded that Tier 2 benefits fall below that threshold for certain workers, raising the legal risk that the city could be forced to enroll those employees in Social Security and absorb a large new cost.
In 2025, Illinois lawmakers passed House Bill 3657 to improve Tier 2 benefits for Chicago police and firefighters. The bill changed how final average salary is calculated for police and raised the pensionable salary cap. City estimates put the added accrued liability at roughly $11.1 billion by 2055, with a first-year implementation cost of about $52 million. Credit rating agencies flagged the law as a factor that “worsened the City’s severely underfunded pension status.”5Kroll Bond Rating Agency. KBRA Downgrades the City of Chicago, IL General Obligation Bonds to BBB+
Who Pays for It
Property Taxes
Property tax levies are the largest single source of pension funding. The city sets a dedicated pension levy each year, and as required contributions have grown, so has the share of every property tax bill consumed by retirement costs. Between 2019 and 2025, total city pension spending rose from $1.4 billion to $2.9 billion, a 114 percent increase that outpaced growth in every other budget category. Homeowners and commercial landlords see that increase in their annual bills regardless of whether their property values have changed.
The Water-Sewer Tax
Starting in 2017, the city phased in a tax on water and sewer usage dedicated to the Municipal Employees’ Fund. The rate reached $2.51 per 1,000 gallons of combined water-sewer use by 2020 and has stayed there since.6City of Chicago. Water-Sewer Tax FAQ Every residential and commercial water customer in Chicago pays it.
Casino Revenue
When Chicago authorized a city casino, one of the primary selling points was that gaming tax revenue would flow directly to the police and fire pension funds. The temporary Bally’s casino generated $15.28 million in new gaming tax revenue for the city in 2025, far below the $200 million in annual revenue officials projected once the permanent facility opens. Whether the full-scale casino approaches that target remains one of the larger unknowns in the city’s funding plan.
Supplemental Payments
In recent years, Chicago has made voluntary “advance” pension payments above the statutory minimum. In January 2026, the city wired a first installment of approximately $129.8 million split across the four funds, with a second installment planned later that year.7City of Chicago. Notice to City Council – Advance Pension Payment January 2026 But the 2026 budget cut the planned annual advance payment from $238 million to roughly $120 million. The city estimates that each supplemental dollar paid early saves about four dollars in long-term contributions, though that math only holds if the payments continue year after year.
What It Costs the Rest of the Budget
Pension obligations and debt service together consumed nearly $5 billion of Chicago’s budget in 2025, close to 40 percent of total city spending. Pension costs alone accounted for 44 percent of all budget growth between 2019 and 2025. Every dollar absorbed by legacy costs is a dollar unavailable for infrastructure, public safety staffing, and social services. The crowding effect shows up as deferred road repairs, slower expansion of public transit, and recurring debates over headcount in departments that have nothing to do with pensions but draw from the same revenue pool.
Rating agencies have taken notice. In early 2026, both Fitch and KBRA downgraded Chicago’s general obligation bonds to BBB+ with negative outlooks.5Kroll Bond Rating Agency. KBRA Downgrades the City of Chicago, IL General Obligation Bonds to BBB+ S&P Global identified inadequate pension funding as one of three primary considerations that could trigger a further downgrade.8City of Chicago. Council Office of Financial Analysis – Ratings and Outlook Changes City of Chicago General Obligation Bonds Lower ratings raise borrowing costs on everything from infrastructure bonds to short-term financing, which squeezes the budget further and makes future pension contributions harder to fund.
Why the Crisis Resists Simple Fixes
The pension protection clause eliminates benefit cuts as a tool for anyone already in the system. Tier 2 reduced costs for newer hires but created a safe-harbor legal risk, and the 2025 public-safety adjustment gave some of those savings back. Casino revenue has so far come in far below projections. Supplemental payments help, but the city just cut them roughly in half under budget pressure. The statutory funding ramp pushes the steepest required contributions into future decades, giving current officials little incentive to front-load the pain.
What remains is a liability that grows by roughly $2 billion a year in accrued interest alone. The 6.75 percent assumed rate of return must actually be achieved, year after year, for the current payment schedule to work. Every year real returns fall short, the gap widens; every year the city defers a supplemental payment, the long-term cost multiplies. The crisis is a compounding obligation that will require sustained, above-minimum funding for decades to resolve.