STUMP » Articles » Exactly How Screwed Are Chicago Pensions? » 4 April 2017, 22:05

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Exactly How Screwed Are Chicago Pensions?  


4 April 2017, 22:05

I’m glad you asked!


2 Numbers That Show How Screwed Chicago’s Pension Plans Are
Collecting $99 million and paying out $999 million in a single year is not a formula for success.

You don’t need to be an expert in the dense, convoluted math unpinning public pension systems to understand why this is bad news.

During 2015, the two pension plans for Chicago city employees paid out $999 million in retirement benefits to 29,286 retirees. During that same year, the two funds generated just $90 million in investment income.

To call that a massive shortfall would be a, well, massive understatement.

Chicago City Wire, which reported this week on those terrifying numbers for the city’s two municipal worker pension systems, also notes that the four other pension plans in Chicago—covering teachers, firefighters, police, and park workers—are not doing much better. “All six operate as government-sanctioned Ponzi schemes, paying retirees with contributions made into the fund by active city employees, as well as taxpayers contributing on those employees behalf,” the Chicago City Wire concludes.


That [moving new employees into a DC plan] doesn’t solve the immediate problem facing Chicago’s and Illinois’ public pension issues because it would not reduce the payments owed to current workers and retirees, but it would at least save taxpayers from having to pay even more in the long run. In the short term, though, all you need to know is that collecting $99 million and paying out $999 million in a single year is not a formula for success.

Original Chicago City Wire piece: $999 million out, $90 million in: Chicago pension funds see the abyss, shrug it off

Now you could complain that one year’s worth of cash flows is cherry-picking.

Okay, let’s try a different angle.


Zero Hedge did its own analysis of Chicago’s largest pension fund (in terms of liability):

How Chicago’s Largest Pension May Run Out Of Cash In As Little As 4 Years
Take Chicago’s largest pension fund, the Municipal Employees Annuity and Benefit Fund of Chicago (MEABF), as an example. Most people focus on a funds ‘net funded status’, which for the MEABF is a paltry 20.3%. But the problem with focusing on ‘funded status’ is that it can be easily manipulated by pension administrators who get to simply pick the rate at which they discount future liabilities out of thin air.

So, rather than lend any credence to some made up pension math, we prefer to focus on actual pension cash flows which can’t be manipulated quite so easily.

And a quick look at MEABF’s cash flows quickly reveals the ponzi-ish nature of the fund. In both 2015 and 2014, the fund didn’t even come close to generating enough cash flow from investment returns and contributions to cover it’s $800mm in annual benefit payments…which basically means they’re slowing liquidating assets to pay out liabilities.

Oh my, Tyler. 3D graphs? I thought you were better than that.

Back to the piece:

Of course, like all ponzi schemes, liquidating assets to pay current claims can only go on for so long before you simply run out of assets.

So we decided to take a look at when Chicago’s largest pension fund would likely run out of money.

On the expense side, annual benefit payments are currently just over $800 million and are growing at a fairly consistent pace due to an increasing number of retirees and inflation adjustments guaranteed to workers. Assuming payouts continue to grow at the same pace observed over the past 15 years, the fund will be making annual cash payments to retirees of around $1.3 billion by 2023.

[putting graph below]

Investment returns, on the other hand, are much more volatile but have averaged 5.5% over the past 15 years. That said, the fund took big hits in 2002 (-9.3%) and 2008 (-27.1%) following the dotcom and housing bubble crashes.

But, just to keep it simple, lets assume that today’s market is not a massive fed-induced bubble and that the MEABF is able to produce consistent 5.5% (their 15-year average) returns every year in perpetuity. Even then, the fund will only generate roughly $500mm per year in income compared to benefit payments growing to $1.3 billion…see the problem?
And, putting it all together, even if Chicago’s largest pension generates consistent positive returns for the foreseeable future, it will literally run out of cash in roughly 6 years.

So, I haven’t checked Zero Hedge’s calculations on the cash flows yet. But thinking of how I would do so has inspired me to another project which will take me about a week to build.

FWIW, given the current funded ratio with even optimistic assumptions around about 33% in fiscal year 2015, and 20% according to the screenshot above, I can see them running out of cash by 2025 or before.


When the pension fund runs out, that does not necessarily mean pension benefits will stop being paid.

It can be pay-as-you-go.

For a while.

But the danger of paygo… I’ve written about why we prefund pensions, and paygo is inherently dangerous. Especially if the government entity can’t devalue a currency because it’s not sovereign over that currency.

Ask the people in Puerto Rico how that’s working out for them.


Now, this is not just from the point of view of pensions, but municipal fiscal condition in general.

Let’s see what the Truth in Accounting guys have to say:

How bad are the City of Chicago’s finances?

March 31, 2017

A follower of Truth in Accounting recently sent in an analysis he did of his hometown, Scranton (Pennsylvania), asking for some feedback.

I started to review his stuff, and checked Scranton’s recent financial reports.
Two things stuck out first – Scranton’s latest annual report, for fiscal year end December 2015, doesn’t have a date on it for when it came out.

One thing you can do, when that happens, is peek at the date on the pdf file in Adobe Acrobat. It looks like it didn’t come out until December 2016, which is pretty slow, even in government-land.

But it gets worse when you look at the auditor’s report. Scranton had an adverse opinion – i.e. they flunked their audit.

Why, you ask?

In the “Basis for Adverse Opinion” section of the auditor’s letter, while not written in the best English, it looks like the auditor was citing that the city chose to use a single discount rate for valuing the net pension liability, as opposed to a blended (lower) rate required for pension plans that expect assets to run out before meeting their liabilities.

Uhh…. GASB anybody? I think they’re supposed to be using that blended rate. But I digress.

Scranton’s bonds can’t be trading that well, can they?

On the MSRB’s “EMMA” website, you can see that bonds Scranton issued last year have had their yields rise considerably, and now run over 200 basis points above Treasuries. That means credit risk runs high, for Scranton.

But Scranton’s yields are still about 100 basis points below Chicago’s.

For those not in the know: Chicago has to pay more to borrow money than Scranton does.

Chicago has to pay more in interest than most any governmental borrower in the U.S. does.

Seems like them borrowing for operating expenses looks real dumb now, huh?


I shoved this at the bottom of the post, because it’s basically a repeat of what happened last year. It’s just different pension funds involved this time.

But here are the links, for those who care:

The stupid thing about the Rauner hoo-ha is that last year the Illinois state legislature simply overrode his veto, and they’re basically going to do it again. Pretending that they’re actually dealing with Chicago’s pension problems when they’re doing exactly nothing.

Rauner has only so much leverage. As long as the Illinois Legislature (and the Chicago pols) want to keep kicking that can, there’s not much he can do. He can try to use the bully pulpit to point out that nothing is getting solved.

Heck, he can use Mark Glennon’s calculations to point out the Democrat proposals can’t fill in the hole/

But thinking of other political moves I’ve seen lately, math doesn’t enter into this at all. Many of these people have bought into magical thinking, specifically thinking that the money they can’t afford now to pay for service from 20+ years ago, will somehow appear 10 years from now.

Right when it’s needed.

The pension funds can’t fail.


John Ruberry writes that Unfunded Pensions are Why Chicago Will be the Next Detroit:

I’ve been saying that Chicago will be the next Detroit for years, and on Thursday, syndicated talk radio show host–and former Tea Party congressman–Joe Walsh, was making the same prediction on his program.

Chicago’s pension burden is $12,400 per person–more than double that of New York City and it has the lowest bond rating of those 15 surveyed cities. The S&P report says that in 2015 Chicago “only made 52 percent of its annual legally required pension contribution.”

If you are looking for more bad news you came to the right place. More than five times as many people live in New York and Los Angeles combined–but there were more murders in Chicago last year than the total in both of those cities. As for Chicago’s population, it’s at a 100-year-low. Leading the exodus are middle class blacks.

CPS officials have been battling the union for years to force teachers to pay more into their own pension funds. Yeah, they can afford it–of teachers in the largest school districts, CPS teachers rank in the top three in pay. But hey, the union members probably are thinking, “Why should we pay more when we have so many taxpayers who can foot the bill?”

Two years ago Chicagoans were slugged with the largest property tax increase in the city’s history to pay for, yes, unfunded pension liabilities. Last year Chicago water and sewer taxes were hiked. Remember what what I wrote earlier, Chicago’s pensions are only 23-percent funded. Does anyone think that there aren’t additional massive tax increases in Chicago’s future? And when the producing segment of Chicago is even more depleted–chased out, that is–how will Chicago pay for street repair, schools, and snow removal–as well as adequate police and fire protection?

The Illinois Supreme Court recently ruled that public-worker pensions cannot be reduced.

Blogger in downtown Chicago
Here’s what I base my Chicago dystopia projection on. Defenders of the status quo place blind faith into their hope that Chicago can somehow hang on until enough pensioners die, which probably won’t be until the middle of the century. They offer no credible solutions. Nothing. They’re as delusional as Gerald O’Hara meticulously counting out his Confederate bonds in Gone With The Wind–“All we have left”–after General Robert E. Lee surrendered.

There’s a way out–changing state law so municipalities and government agencies can declare bankruptcy, which is something Bruce Rauner, Illinois’ reform governor, favors. But the Democrats and the public-sector unions will never agree to that.

Here is why I don’t agree with Ruberry.

Because Chicago doesn’t own a sweet art museum that it can hold hostage for some rich people to cough up dough to cover.

Because Chicago pensions have NEVER been given full contributions — one thing that the Detroit pensions did not suffer from. They didn’t stiff the pensions… officially.

However, unofficially, Detroit pensions suffered from the same over-optimistic valuation assumptions that most public pensions in the U.S. suffer from, and it turned out that the supposed 90%+ funded pensions weren’t as funded as that. So current retirees got their benefits whacked, in addition to those currently working and prospective new employees.

So you may be wondering why I’m not agreeing with Ruberry.

I’m not agreeing with Ruberry because Chicago fiscal collapse will be much worse that Detroit’s.

Their hole is so much bigger.

Compilation of Chicago posts.

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