In 1994 the Chicago Transit Authority drastically cut payments to its pension fund, which was deemed healthy enough to ride out a period of reduced contributions.

In the following years the agency and its bus and train operators' unions repeatedly turned to so-called pension 'holidays.'

Today, the results of those holidays are stark: The agency faces a $110 million budget crunch that is due in large part to the need to make up for years of insufficient pension funding.

While CTA officials have blamed a lack of state funds and Springfield politics for the current crisis, the pension debacle illustrates the extent to which the agency's financial woes are self-inflicted.

Indeed, public records and dozens of interviews show:

* Taking the first steps toward repairing the agency's pension fund, along with paying rapidly increasing employee wages and health care costs, will cost the CTA  $101.4 million this year, accounting for 92 percent of the CTA budget gap.

* The CTA pays among the highest wages of any major U.S. urban transit system. It devotes a bigger share of its operating budget to payroll than all but a few other big systems.
 
* The CTA's public statements have created the impression that its problems are the result of state government's refusal to provide adequate funding,  rather than management troubles at the agency.   

In response to its declining financial situation, the agency had planned route cuts and driver layoffs Sunday that would have left thousands of commuters without bus service.

An emergency state financing package was approved today that pushes the service cuts off until January, but the agency's financial picture remains grim.

CTA spokeswoman Wanda Taylor said Thursday that the agency would not make CTA President Ron Huberman, Chair Carole Brown or any other senior officials available to discuss the agency's fiscal situation.

On the verge of collapse

Many of the CTA's fiscal problems can be traced to its pension, which is "on the verge of collapse," according to a 2007 report by State Auditor General Bill Holland.

In 1993, the CTA pension was 99 percent funded, meaning it had funds available to pay nearly all of its projected expenses, according to the agency's annual pension plan reports.

That year, the CTA contributed $32 million to the plan, and employees kicked in $13 million.

The following year, the CTA decided the fund was flush enough to take a pension holiday, dropping the agency and employee contribution to $1 million each.

In the past, such holidays had taken little toll on the pension fund.

But in 1994, the plan suffered investment losses, as well as a drop in the value of its assets because of an accounting change. And it took in no new contributions.

All told, those changes pushing the funding ratio down to 77 percent, pension reports show.

Even so, between 1995 and 1999, the agency repeatedly opted for short-term pension holidays.

An early retirement incentive program adopted in 1997 further hampered the fund's ability to pay retirement costs. The program allowed employees with 25 years of continuous service to retire early with enhanced benefits and full health insurance.

In retrospect, the early retirement program was a bad idea, said Rick Harris, president of the Amalgamated Transit Union Local 308, which represents rail workers.

A $243 milllion expenditure

"More employees took advantage of the program than we expected," said Harris.

John Kallianis, the pension plan's executive director, said the early retirements increased pension costs by $243 million.

In 2001, the pension funding ratio began dropping by roughly 10 percent a year. Although greater contributions were being made by the agency and employees during this time, poor returns on investments and a 16 percent increase in pension benefits kept the plan short of what it needed to meet its projected retiree obligations.

Today the CTA pension fund has assets to cover just 34 percent of its expected costs.

Rick Mattoon, economic advisor for the Federal Reserve Bank of Chicago, said the fund's decision to assume a 9 percent rate of return on investment was also a factor in the pension fund ratio's decline between 2000 and 2003.

At the same time the agency was overestimating the market, it was  underestimating the cost of its own payroll, he said.

"A lot of pension funds choose lower rates on assumed return," said Mattoon.

Laurence Msall, president of the Civic Federation,   agrees. He said assumed rates of 9 percent "may be viewed as aggressive." 

The Civic Federation is a nonpartisan Chicago-based advocate for government efficiency.

If the pension's rate of return is lower than that, the fund would be on even shakier ground than the bleak 34 percent ration suggests, according to Kallianis.

At 34 percent, the CTA's pension funding ratio is the lowest in the state, and the fund could become insolvent within the next four months, Msall said.

A good idea at the time

Harris said he blames bad decisions for that situation.

"It's because of the incentives and the holidays," he said. "It seemed like a good idea at the time, but here we are 25 years later and we found it was never a good idea to not keep proper funding going into the pension."

The CTA now faces a state mandate to fully fund its pension, and is allocating extra dollars toward that this year, according to the agency's 2007 budget.

The pension debacle is just one sign of personnel trouble at the CTA.

The agency spends a bigger chunk of its payroll on benefits than any other major transit system in the nation, according to the Daily News analysis of 2005 federal transit data.

More than half of the CTA's employee expenses go toward maintaining the agency's generous pension and health insurance programs, the analysis found.

The CTA pension system offers retirees premium-free health insurance.

It allows some employees to retire at full pension in their 40s, after 25 years of service. The agency tightened the regulations for those hired in 2002 and later, who must be 55 to retire.

By contrast, the Bay Area Rapid Transit system in northern California charges retirees a monthly health care premium, said spokesman Linton Johnson.

The agency's minimum retirement age is 55. The pension is funded solely by BART, and contribution rates are set by the California state pension system.

BART'S pension costs account for just 39 percent of its payroll expenses.

The CTA has been generous in other areas, too. The agency pays its drivers an average of $21.44 per hour, which is among the highest rates in the country, according to the Daily News analysis.

Employees at Pace, Chicagoland's suburban bus service, make an average of $16.71 an hour. At Milwaukee County Transit, the average pay is $18.46. And at Detroit's city transportation department, it's $14.35.

In 2005, the CTA spent 77 percent of its operating budget on employee compensation, more than all but a handful of big transit systems.

Harris says the compensation is justified. "Our men and women work hard," he said.

Cheaper in NY

Premium wages have not brought the agency premium efficiency.

The Daily News analysis shows the agency ranks in the middle of the pack on most efficiency measures.

New York City Transit, which ranked best in rail efficiency, pays $1.50 per rail trip. Each rail trip costs the CTA $2.33, in part because of its costly pension and salaries.

The CTA has periodically attempted to rein in payroll expenses over the last 20 years.

But the agency's ability to do that is limited by its contracts with its two main employee unions.

The agency's current contract began in 2003 and was scheduled to expire in 2006, but is still in effect.

During negotiations, the CTA sought to boost contributions to the pension and hold the line on wages. But arbitrators capped pension contributions at six percent and  granted wage increases of three percent or more for each year.

William B. Gould, an emeritus professor of law at Stanford University and former chair of the National Labor Relations Board, said public agencies can ask lawmakers to pass legislation leading to more favorable arbitration decisions in such situations.

But the CTA's pitch to legislators in Springfield has focused on obtaining more funds, not finding ways to control payroll costs.

The blame game

Though the agency's compensation system has created fiscal problems, the CTA has framed the problem in a fashion that places most of the blame on state legislators.

Throughout the most recent crisis, Huberman, Brown and CTA public affairs staffers have repeatedly referred to the situation as a budget deficit caused by lawmakers who  failed to provide $110 million in anticipated state funding.

The bulk of the CTA's funding comes sales taxes set by the Legislature. The state does not usually provide funding beyond that.

And a number of legislators interviewed by the Daily News said the CTA had no reason to plan for a change this year.

"They had no legitimate basis to expect that," said Rep. Renee Kosel, R-Mokena, the House's assistant Republican leader. "There was nothing passed by the Legislature to indicate we were going to give them a red cent."

House Speaker Michael Madigan, D-Chicago, did not return a call seeking comment for this article, but an office staffer confirmed the details in Kosel's account.

State Sen. Senator Pamela J. Althoff, R-Crystal Lake,  also said legislators offered no assurances to the CTA.

"I don't think there was any indication at that time that the state was going to bail them out," said Althoff, who sits on the Senate transportation committee.

"There was no money in the budget," approved this year by the Legislature, she added.

Althoff said lawmakers have made it clear to the CTA that the agency must bring its pension problems and employee wages into line before petitioning Springfield for financial help.

"The message from the General Assembly many years ago was: 'Get your house in order',"  she said.  "There were actions indicating they didn't hear that message."

Staff writer Geoff Dougherty contributed to this report.

This article was made possible through a generous software donation by SAS.