STUMP » Articles » Public Finance Watch: Chicago Faces Doom » 27 July 2014, 03:00

Where Stu & MP spout off about everything.

Public Finance Watch: Chicago Faces Doom  

by

27 July 2014, 03:00

First, from the Illinois Policy Institute, who are great to follow for Illinois finance issues:

Chicago has four main pension systems, plus two “affiliated” pension systems, all of which are seriously underfunded. A system that is 80 percent funded – that is, which has 80 percent on hand of what it will pay out in benefits — generally is considered “healthy.” Chicago’s main pension systems don’t come close.

The highest funded ratio belongs to the laborers’ system, which is 58 percent funded, with an unfunded liability of $1 billion. The four main systems combined are 36 percent funded, with $19.5 billion in unfunded liabilities.

Without state-level pension reform, the city in fiscal year 2015 will have to contribute another $590 million – about one-fifth of the its total operating budget — to its police and fire systems.

Chicago Mayor Rahm Emanuel says that without pension reform at the state level, the city will face devastating choices, perhaps even doubling property taxes.

That article was from December 2013. This was before the recent ruling that health benefits can’t be altered for retirees (or what was promised to current employees decades out from retirement).

Now, state law can be changed to reduce the required-by-law pension contribution, but it can’t change the benefits. Got that?

A more recent offering from IPI:=

Senate President John Cullerton warned last winter that the Illinois Supreme Court would find a pension reform bill that now is law unconstitutional.

Cullerton supported the pension bill, though reluctantly. Now a July 3 Illinois Supreme Court decision on a different pension issue has many observers believing Cullerton was correct; that the state supreme court almost certainly will throw out the sweeping new pension law when it decides a lawsuit now making its way through the court system.

But there’s a new twist: Cullerton says if the pension bill gets tossed, he’s got a backup plan. Give current public employees a choicce: Have their salaries permanently frozen and keep their guaranteed 3 annually compounded cost of living adjustment in retirement; or accept a more modest annual COLA on their pension and receive pay raises while they are active employees.

Much of the current pension crisis derives from a 1989 law that guaranteed all members of the state’s pension systems 3 percent pension increases compounded annually for life. The compounding formula has been the greatest contributor to the state’s current $100 billion unfunded pension liability. The pension law now being challenged in court changes the annual pension increases to a formula based on the Consumer Price Index.

It would be nice to have a good quantification of this impact, but this wouldn’t surprise me in the least. Small percentages have a tendency to compound over time.

3% compounded for 10 years is a cumulative 34% increase. Compounded twenty years, it’s increased 81% cumulatively. Thirty years, which is about the retirement expectancy for someone retiring with normal public pension retirement ages…. a 143% increase.

So think on that.

That’s for all of Illinois, but Chicago is in a particularly bad position.

They’re playing games with their budgets. That’s always a bad sign. From Greg Hinz at Crain’s Chicago Business:

Chicago Public Schools officials are fully sticking with their decision to enact a fiscal 2015 budget that one watchdog group labeled a “gimmick-based stopgap.” But they’re also admitting that major financial problems are on the way for the troubled system unless something changes.

In an interview, CPS Budget Director Ginger Ostro said the Civic Federation is right that the decision to balance the 2015 budget by including two months of revenue from fiscal 2016 is a use of “one-time revenues” that budget experts almost universally deride. “We do have a structural (continuing) deficit that we’ve spoken about for many years,” she said.

However, taking care of business right now is more important than truly balancing the books, she went on to suggest.

“We had an opportunity to invest in the classroom and make a change in accounting,” according to Ms. Ostro. “That is reasonable,” she added, given that the alternative is to lay off thousands of workers and not add the new science, art and international baccalaureate programs that the new budget includes.

Ms. Ostro went on to suggest that the Civic Federation — which had virtually nothing good to say about the budget — is in fact on CPS’ side in the continuing effort to get more state funding and pension reform.

O RLY?

I am skeptical. Back to the piece:

Ms. Ostro did say in so many words that the Civic Federation overstated concerns about lack of transparency in the budget — a lack of detail that the federation, in fact, termed “unprecedented.”

“One question” from the federation was “inadvertently” unanswered, dealing with money in this year’s budget that has not been spent. In fact, unanticipated changes occur every budget year, she said, though she did not immediately know if the several hundred million dollars’ worth involved in this instance is typical.

Look, there are always deviations from plan, no matter the entity. The question is the materiality of the deviation.

Something that is a few basis points-worth of deviation is nothing.

According to this budget overview page the FY13 actual expenses were $5.2 billion. “[S]everal hundred million dollars’ worth” as above… that sounds like it’s less than $1 billion (so <20%), but still a substantial deviation.

When a private business has that sort of deviation, it’s not unusual for lots of people to get fired.

So, who’s up for the chopping block? Rahm? Karen Lewis?) Stephanie Neely?

There’s an election coming up in Chicago. Just saying.

ADDITIONAL: Rahm is for the accounting trickery, because of course he is.

Compilation of Chicago posts.


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