STUMP » Articles » Public Pensions Watch: Chicago Still Faces Doom » 4 August 2014, 13:16

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Public Pensions Watch: Chicago Still Faces Doom  


4 August 2014, 13:16

Last week, I indicated that Chicago Faces Doom, and it involved several bits, one of the largest being its pension liabilities.

So recently, it has been admitted that no, Chicago is not going to be making its ‘required’ pension contribution

Mayor Rahm Emanuel and aldermen won’t grapple this fall with the financial reckoning the city faces over its underfunded police and fire pension systems, budget officials acknowledged Thursday.

Instead, the Emanuel administration plans to take advantage of a state law that gives it until December 2015 to decide to make changes to its property tax levy. For years, both the current and former mayor have been saying property taxes would have to be hiked or services drastically cut to come up with the extra $550 million.

By the end of next year, the February city elections and any potential April runoffs will be history. Delaying a decision also will buy the city more time to get the General Assembly to enact pension changes that could significantly reduce the required payments to the two retirement funds.

The mayor also has increased a host of fees, fines and taxes. He’s held the line on property tax hikes at City Hall, though Chicago Public Schools has increased them under his tenure. Some revenues, like real estate property taxes, sales taxes and income taxes, have rebounded slightly as the economy has slowly improved.

Those tactics have allowed Emanuel to stop dipping into one-time revenue sources like predecessor Richard M. Daley did. The former mayor relied on proceeds from the $1.15 billion lease of the city’s parking meters at the end of his 22-year tenure before his 2011 retirement.

Nevertheless, overall day-to-day operating costs are expected to go up about $270 million next year, to about $3.5 billion. The Emanuel administration says that’s because of higher city worker and laborer pension costs under recently enacted changes to those systems, along with rising costs for wages and benefits.

How the budget gap is closed remains to be seen, although the mayor has ruled out increases in property taxes and sales taxes — partly because the city expects to raise about $50 million this year and next from just-enacted higher telephone fees for emergency services, Holt said.

So, it’s not clear to me if that’s $50M per year, or $50M total for the two years. Because that $50M looks paltry against the $270M increase, and if that $50M is for two years, not one… it’s even worse.

Here’s the deal: first of all, from what I can tell, Chicago’s pension plans are not part of the Illinois pensions. Here’s info on the six Chicago pension funds and here are the Illinois plans — looks like different lists to me.

I don’t know what discount rates are used by the Chicago funds, but the Illinois plans have discount rates ranging from 7% to 8%.

When the liability is underfunded, and one does not make an extra contribution to make up for the underfunding, the unfunded portion of the liability grows the next year even if no new service gets accrued the next year. And of course, new service gets accrued, which also needs to be paid for.

Pretend you had a credit card charging 8% interest, and you had a balance. And not only did you not pay down the balance, you also charged more to the card.

Anybody who has had a profligate friend or family member with out-of-control credit card spending knows how that particular spiral ends. Luckily, usually the credit cards have somewhat of a sane limit, and recently minimum payments have been upped by many providers to make sure at the very least the interest charged is covered, so the debt doesn’t grow due to that.

But public pensions don’t work that way — the “credit limit” is implicit, and the illusion that the taxpayer can always be soaked for the pensions when they actually have to be paid have allowed these plans to get into precarious situations.

While stories talk about the looming pension payment spike of 2016, I assume there will be a ‘grand deal’ of some sort among all the Illinois politicians that allow them to ignore that the pensions will fail. Because they’re not spending what they fully owe (under nice discount assumptions) on the pensions now is equivalent to saying they do not intend to fully pay for the pensions in the future.

Look at this graph:

You think that current (and future) residents are going to make up that gap? Each resident paying down that credit card tab?

That phone tax barely covers anything in the Chicago budget. It’s a joke.

Those credit cards are not going to be paid off, and the pensions will get cut, de facto or de jure, in the future.

If Chicago were forced to deal with their pension costs, and other operational costs, right now, they might get cut less than when undeniable facts force the cutting.

MORE ON THE PHONE TAX: I found more details on the phone tax in this article:

The increase would boost 911 surcharges on wireless phones and landlines by $1.40 — to $3.90 a line — starting Sept. 1. It also would increase the tax on pre-paid wireless phones by 2 percentage points, to 9 percent, on Oct. 1. The move will raise 911 fees by $16.80 per year — or $67.20 a year for a family with four phone lines.

The fee hike is expected to raise about $10 million this year and another $40 million next year, Budget Director Alexandra Holt said. That would allow the city to free up $50 million in general revenue now dedicated to the 911 system and emergency preparedness.

Again, a joke. This is nothing in relation to the budget hole.

Compilation of Chicago posts.

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