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Chicago’s pension liability jumps $11.5 billion

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Illinois

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Chicago’s pension-fund shortfall just got $11.5 billion bigger.

Thanks to the defeat of the city’s retirement-fund overhaul by the Illinois Supreme Court and new accounting rules, Chicago’s so-called net pension liability to its Municipal Employees’ Annuity and Benefit Fund soared to $18.6 billion by the end of 2015 from $7.1 billion a year earlier, according to an annual report presented to the fund’s board on Thursday. The fund serves some 70,000 workers and retirees.

The new figure, a result of actuaries’ revised estimates for the value in today’s dollars of benefits due as long as decades from now, doesn’t change how much Chicago needs to contribute each year to make sure the promised checks arrive. But it highlights the long-term pressure on the city from shortchanging its retirement funds year after year — decisions that are now adding hundreds of millions of dollars to its annual bills and have left it with a lower credit rating than any big U.S. city but once-bankrupt Detroit.

posted by Rich Miller
Friday, May 20, 16 @ 9:24 am

Comments

The financial legacy of the Gravitas Twins, Daley and Emanuel, and their lap-dog City Councils continue.

It should be noted that all Chicago media and the city’s “business community” — including big hitters like Rauner, Griffin and Zell — were in the tank for both Daley and Emanuel every step of the way.

Comment by wordslinger Friday, May 20, 16 @ 9:34 am
I think the Governor is trying to reform the situation while the Speaker and Senate President just want more money for CPS with no reforms. When will Cullerton call his pension reform bill?

Comment by Lucky Pierre Friday, May 20, 16 @ 9:38 am
The only reform allowed regarding pensions, per the ISC is to pay the bill.

Comment by PublicServant Friday, May 20, 16 @ 9:43 am
Casino, Casino, and Casino.

But that would only be about 25-30% of the fix. Graduated state income tax, welfare/workman’s comp reform, and reigning in a run away education system have to be in the mix. Police and fire can not strike neither should teachers. Arbitration for all public service unions.

Rauner is wrong on the arbitration issue as is the CTU. Entities against arbitrations are one ones with poor bargaining positions/facts.

Comment by Rollo Tomasi Friday, May 20, 16 @ 9:46 am
- Lucky Pierre -

Isn’t Rauner about local control? How do you reconcile Rauner trying to take over CPS?

Take local control, I want that. Don’t do what I want locally, I take you over? That makes no sense.

Comment by Oswego Willy Friday, May 20, 16 @ 9:47 am
What Wordslinger said.

Comment by Keyrock Friday, May 20, 16 @ 9:47 am
What makes no sense Willy is no reforms of city and state government. Just more money from taxpayers.

Rauner believes CPS is on the precipice of bankruptcy. Democrats can’t make reforms because it affect government unions and want to keep borrowing. There will be no money from Springfield without reforms.

Comment by Lucky Pierre Friday, May 20, 16 @ 9:55 am
Wordslinger +1 . It’s unfortunate that the general public have such short term memories. I’m tired of this playlist on repeat.

Comment by TD Friday, May 20, 16 @ 9:56 am
If you don’t fund the system properly, it gets behind.

Comment by Anonymous Friday, May 20, 16 @ 9:59 am
With the financial policies of the last three mayors without any structural reforms. I do not know how Chicago can stay afloat in 20-30 years. A dwindling population, a bigger property tax coming in the future, CPS is a mess. No incentives for young people to stay in the city and start a family.

Comment by Almost the Weekend Friday, May 20, 16 @ 10:01 am
Default and bankruptcy, in just a short time!

Comment by Anonymous Friday, May 20, 16 @ 10:08 am
Chicago, if it can bring itself to raise revenue by eight to ten percent, can cope. I’m more worried about the state as a whole, which needs to find a combination of as much as double that in revenue increases and spending cuts. Remember the following:

a) The legislature and Governor Quinn already cut pension benefits going forward to below what they were when Governor Edgar and a previous legislature decided they needed to go up from what was considered a hopelessly uncompetitive, poor, skinflint benefits package.

b) What’s left is a contractual obligation that we cannot get out of. The state cannot declare bankruptcy, period. State law has to be changed for cities to do so.

c) Therefore the only solution is growth. That’s all Illinois can do to avoid a crisis that would threaten US federalism as we know it. (That or a federal constitutional amendment to allow state bankruptcy, which itself might trigger a constitutional crisis)

d) So the question is, what do we do to achieve growth and at the same time financially meet obligations we cannot legally escape?

Comment by Angry Chicagoan Friday, May 20, 16 @ 10:09 am
Two facts.

1) the jump in the number is a combination of reporting rules changes and changes in assumptions used to calculate the liability.

2) there is no legal pension reform that will fix it, or even significantly reduce it.

The solution is time, about 30 years worth, while continuing to pay enough into the pension fund(s) to keep it able to meet it’s annual expenditures. That won’t meet actuarial standards but it will keep it solvent.

Comment by RNUG Friday, May 20, 16 @ 10:11 am
Rahm only has himself to blame at this point… five years of continuing the status quo, he owns it now. No more excuses.

Comment by From the 'Dale to HP Friday, May 20, 16 @ 10:13 am
–If you don’t fund the system properly, it gets behind–

The problem isn’t the funding, it the system itself. Defined benefit retirement plans are always a bad deal and end up bankrupting the business or government offering them.

Comment by Anon Friday, May 20, 16 @ 10:17 am
LP, you say “reform” a lot, without ever providing any specifics as to what you mean or any supporting evidence of what allegedly would be accomplished.

Is chirping “reform” a drinking game, or is that simply as deep as you can go?

Comment by Anonymous Friday, May 20, 16 @ 10:20 am
Anon DB plans are always a bad deal

You’re wrong. IMRF is not allowed to skip payments and is funded at 95+ %. Member not only get a monthly check——they get a 13th check.

Please explain how properly and adequately funding a db plan will inevitably lead to bankruptcy and a “bad deal”

Comment by Anonymous Friday, May 20, 16 @ 10:27 am
And wordslinger is right, the business community has backed these financial practices for decades. Time to limit their influence at City Hall. They are only making things worse.

It’s funny, they painted Chuy as the guy who didn’t know what he was doing when it came to finances. Ironically, and sadly, they are the ones who don’t know what they’re doing.

Comment by From the 'Dale to HP Friday, May 20, 16 @ 10:27 am
–Defined benefit retirement plans are always a bad deal and end up bankrupting the business or government offering them.–

Wow, then there must be just thousands of bankrupted local governments popping up all over the country every year. It’s so inevitable.

Corporations are a different story, as they aren’t going concerns with taxing powers. They’ve been able to abuse the bankruptcy courts over the years to shed pension liabilities for which they never made their actuarial contributions.

Comment by Anonymous Friday, May 20, 16 @ 10:36 am
Luckily Daley sold off the parking meter and skyway revenue and we have all that upfront money put aside for this totally unexpected rainy day. Oh, never mind….

Comment by Anonymous Friday, May 20, 16 @ 10:41 am
I think the proposed reforms well documented. Chicago reforms would include over time getting the teachers to pick up their share of the pensions. They would go from 2 percent to the full 9 percent. Workers would probably have to contribute a higher portion of health care costs similar to just about every private sector job out there.

Workers comp reform would also reduce costs for city and state government. I think the inevitable tax increase would be way more palatable if some of these reforms were implemented first.

Comment by Lucky Pierre Friday, May 20, 16 @ 10:43 am
Wordslinger +1

=similar to just about every private sector job out there.=

If that was true, and based on your exact wording it is not, I wonder why everyone (literally) who works for us but has a spouse at Caterpillar, RR Donnelly, State Farm, Country Companies (the list goes on) don’t take our insurance and take theirs?

Comment by JS Mill Friday, May 20, 16 @ 10:55 am
== Defined benefit retirement plans are always a bad deal and end up bankrupting the business or government offering them. ==

Care to explain why the properly funded IMRF is doing fine?

And why, in dollars and cents, SERS, TRS, JRS, GARS and SURS would still be in trouble if they had been properly funded?

Comment by Anonymous Friday, May 20, 16 @ 10:57 am
== Chicago reforms would include over time getting the teachers to pick up their share of the pensions. They would go from 2 percent to the full 9 percent. ==

That would be legal because the employer pickup of the employee portion is the result of a contract with current workers. Employer pickup is not a pension benefit. And technically, it is not pension reform either…

Comment by RNUG Friday, May 20, 16 @ 11:05 am
10:57 was me

Comment by RNUG Friday, May 20, 16 @ 11:07 am
=+ Chicago reforms would include over time getting the teachers to pick up their share of the pensions. They would go from 2 percent to the full 9 percent. ==

That would be legal. Employer pickup of the employee portion of the pension payment is not a benefit of the pension system; it is the result of a contract with the employees. And technically, it is not pension reform, just a change in the method of pay (compensation) for current labor.

Comment by RNUG Friday, May 20, 16 @ 11:13 am
Sorry for the double post. Wasn’t showing up.

Comment by RNUG Friday, May 20, 16 @ 11:20 am
RNUG +5

Comment by Mama Friday, May 20, 16 @ 11:20 am
But, but look at the shiny new Star Wars toy on the lakefront! Plenty of money for that.

Comment by Anonymous Friday, May 20, 16 @ 11:30 am
=== But it highlights the long-term pressure on the city from shortchanging its retirement funds year after year — decisions that are now adding hundreds of millions of dollars to its annual bills and have left it with a lower credit rating than any big U.S. city but once-bankrupt Detroit. ===
The real Daley legacy.

Comment by anony Friday, May 20, 16 @ 11:38 am
==SERS, TRS, JRS, GARS and SURS would still be in trouble even if properly funded==

Where’s the data on that statement? How would anyone know what they’d be if properly funded? Government employees have always been the citizens’ free ride to low taxation, courtesy of their retirement savings. Have any of these ever been “properly” funded by the state (not employees—-they’ve always been docked from their paychecks in a timely fashion) —as in EVER? Don’t believe so, so how could a statement be made that if properly funded they’d be in trouble?

Where’s the data?

Comment by Anonymous Friday, May 20, 16 @ 11:42 am
Do you think that paltry 4% (or even 8%) you pay into retirement is enough on its own without investment in some sort of market? Ever hear of inflation, deflation, bull markets, or bear markets ? They all have an effect on those investments and are completely unpredictable.

Comment by DGD Friday, May 20, 16 @ 12:08 pm
== Where’s the data? ==

Lots of studies out there saying they would have been fine if funded when they should have been. Use the Google.

Nothing out there to defend your statement …

Comment by RNUG Friday, May 20, 16 @ 12:18 pm
Nothing but common sense.telling someone you’re going to pay them x amount at retirement is always going to be riskier than paying a certain percentage of their salary while they’re working.

Comment by DGD Friday, May 20, 16 @ 12:22 pm
===Nothing but common sense===

@DGD, you ought to get some of it then. They pay these guys called actuaries a lot of money to calculate future expenditures. If the actuarially required payments had been made by the employer when they should have been made, risks would have been minimal, and the reasonable pensions wouldn’t be causing any problems today. Man up and pay your bills, like the rest of us do, and say thank you to the next public employee you meet for keeping your state income tax ridiculously low for the last few decades.

Comment by PublicServant Friday, May 20, 16 @ 12:38 pm
Public Servant @ 12:38

YES!

Comment by AnonymousOne Friday, May 20, 16 @ 12:45 pm
“The new figure, a result of actuaries’ revised estimates for the value in today’s dollars of benefits due as long as decades from now, doesn’t change how much Chicago needs to contribute each year to make sure the promised checks arrive.”
————————-

That appears to only be true IF (and it’s a really big ‘IF’) the annual investment returns meet the 7.5% expected investment return. Don’t make the investment return for even 1 year, the taxpayers need to make up the difference for that same time period. Ouch!!!! Double Ouch!!!!

That’s going to be hard.

Secondly, both the City of Chicago and Cook County need to see a lesson that is occurring with IMRF currently. Actually, all the local government tax districts who are IMRF members.

Those tax districts (some, not all) are starting to lose employees and/or program/service reductions each year due to all the additional money that has to be paid to IMRF. IMRF required contributions aren’t decreasing or staying the same, it’s always increasing. And generally by more than Tax Caps allow for. So operations get hallowed out.

Btw, plan on seeing borrowing and/or issuing pension bonds are going to get a lot harder to use in the future for making up pension funding shortfalls. Within the last few days there’s been ’sort of’ a deal cut on Puerto Rico.

Short take: The bond holders are going to take it in the neck, while pensions are going to be protected. It’s likely going to be a matter of degree, but there’s a real possibility for a ton of litigation over this one.

The really interesting possibilities are going to occur over (a) All the bond insurance that was purchased for all these bond issues (anybody remember AIG?), and (b) CDO (Credit Default Obligations) trades and obligations. That last one may be nothing, but if a credit default event is called, then it becomes a really big deal.

That might ‘upset’ the muni bond market just a little.

That will be some fun times! /s

Comment by Judgment Day Friday, May 20, 16 @ 12:48 pm
Seems that Democratic Super Majority sure ain’t what it used to be

Comment by lech W Friday, May 20, 16 @ 12:59 pm
The pension funds are invested in the stock market. The average annual rate of return for the stock market from 1928-2015 is 7.92%. For the period from 2006-2015 the ROI is 7.87%. The actuaries erring on the safe side placed their knowledge on an expected return of 7.5%. If you’ll look at the ROI of the pension funds you’ll see that they either met or exceeded that the vast majority of years since their inception. Many years by much more. Triple in some cases. The facts contradict the FUD.

Comment by PublicServant Friday, May 20, 16 @ 1:03 pm
Sorry the 7.92 was for a portfolio of Stocks and t-bills, the Average for just the stock market is even higher.

Comment by PublicServant Friday, May 20, 16 @ 1:12 pm
“The facts contradict the FUD.”
————-

You are working on the basis that past history will correctly project future performance. Even with all sorts of variables constantly changing.

Personally, I hope you are right.

BUT, if we follow your logic on following historical trends, that would also mean we are long overdue for a major downturn in the markets. In which case we probably won’t hit those anointed 7.50% annualized returns. Which means we have to immediately infuse additional amounts of taxpayer cash (or borrowing, if we can).

What’s the plan if you are wrong?

Comment by Judgment Day Friday, May 20, 16 @ 1:50 pm
Per Commission on Government Forecasting & Accountably “only” 44% of the growth of the State’s unfunded pension liability since 1996 is due to insufficient employer contributions. Clearly, that is the single biggest issue (by far). However, people consistently underweight the risk of other drivers of pension funding requirements (including returns and actuarial assumptions). Worse is that those other factors are very challenging to predict. That is why private companies got out of the pension business — they wanted greater predictability of their funding requirements over the long term. Predictability is good thing when budgeting.

Comment by A Watcher Friday, May 20, 16 @ 2:08 pm
@Judgement Day- if insanity is doing the same thing over and over again, and expecting a different result as the GOP is so fond of pointing out, why wouldn’t the reverse be true? I’ll side with the actuaries on this rather than your unfounded pessimism.

Comment by PublicServant Friday, May 20, 16 @ 2:18 pm
Actuaries are good at calculating risk until some large scale negative event occurs like the crash in 2008, which coincidentally is when underfunded government pension funds started making the news.

Comment by DGD Friday, May 20, 16 @ 3:53 pm
==The problem isn’t the funding, it the system itself. Defined benefit retirement plans are always a bad deal and end up bankrupting the business or government offering them. ==

Not even close. Big employers closing down their defined benefit plans in the 80’s in order to get their hands on the overfunding that inevitably occurs when you fully fund a plan and the stock market has a better-than-average year became such a scandal that Congress had to enact a penalty for doing it. IIRC, one fortune 500 company didn’t have to make any contributions to its plan for 2 or 3 years before it decided to close it down and grab the overfunding.

Comment by Whatever Friday, May 20, 16 @ 4:08 pm
The actuaries will tell you that they are guessing at the investment return. I remember reading an analysis from the actuary that said there was a 50% chance that future returns would be between 5-9%, that means 50% they are not in that range.

Comment by Name/Nickname/Anon Friday, May 20, 16 @ 4:27 pm