Yvette Shields of Bond Buyer: Investment losses sting Chicago pensions, 2022 balance sheet
Investment losses last year eroded funding ratio gains achieved a year earlier by Chicago’s pension system, casting a shadow over a healthy pickup of taxes on the city’s audited financial results.
The city’s overall net position for accounting purposes deteriorated to negative $27.6 billion in 2022 from negative $27.1 billion in 2021 due to growth in the pension liabilities. It hovered between negative $28.4 billion and negative $29.5 billion between 2017 and 2020.
….
The net pension liability, or NPL, rose to $35.4 billion from $33.7 billion as the funds were stung by double-digit investment losses, and the upward trajectory continues a trend as the NPL figure had risen from $32.96 billion in 2020.
….
“Even with the recent progress on pension funding, however, the city of Chicago still has the lowest funded ratios of any large city in the country,” the April budget forecast read. “The city’s pension funds are at an average 23% funded ratio and an extended economic downturn and poor investment performance in FY2022 could have created near-term solvency issues for the pension funds in their ability to pay pensions.”
Between 2014 and 2023, the city increased its pension contributions by $2.2 billion, $1.3 billion of which occurred in the last four years.
By the way, this does not include the Chicago Public Schools’ pensions. The funds included in the above:
It looks like all of these are as of December 31, 2022, so it’s not as much of a lag as if it were June 30, 2022.
Yahoo Finance mirroring Bloomberg: Chicago Pension Debt Rises to $35 Billion as Mayor Hunts for Fix
Decades of chronic underfunding helped balloon Chicago’s pension liability, weighing on the city’s budget and credit ratings. Recent state-mandated contribution increases helped the city earn rating upgrades in the last year, including one from Moody’s Investors Service in November that allowed it to shed its one junk rating.
Johnson, who took office in May, has set up a pension working group that is charged with finding sustainable solutions to the long-term challenge.
Spokespeople for the city didn’t respond to a request for comment.
I bet they didn’t.
Their options are very constrained, due to past choices.
Let’s back up to when Chicago Mayor Johnson announced this pension working group for Chicago.
Official statement, 21 June 2023: Statement from Mayor Brandon Johnson on Pension Working Group
Today, my administration’s pension working group convened for the first time to address structural issues across the city’s four pension funds.
“I’m grateful to our pension working group for their willingness to work together to develop a sustainable path forward for the city’s pension funds.” said Mayor Brandon Johnson. “Today’s initial meeting included stakeholders representing my administration, the city council, the general assembly, organized labor and pension funds. Over the next several months, these individuals will work with a broader set of advisors from the financial and advocacy sectors to develop actionable solutions to meet the city’s obligations to retirees, workers, and taxpayers.”
The working group will form sub-groups to address specific pension issues and dedicated revenue as part of a comprehensive and balanced approach.
That’s the entirety of the statement, plus a listing of the group members:
One can note the list: heavy on the public employee union representation, as well as other politicians.
Not seeing much in the way of representation of the people they’re probably expecting to pay for the pensions.
Though this is paywalled, I think the headline is enough — Greg Hinz at Crain’s: Biz groups excluded from Johnson’s pension panel
All that said, there are probably at least a couple on that list (oh, budget director, maybe even that Director of Research & Employee Benefits for AFSCME) who may remember why Chicago was forced to ramp up contributions to its pension funds recently.
The very short explanation: if they continued with their old contribution rates, the funds would have run out of assets, and be on a pay-as-they-go basis.
In particular, MEABF (the municipal workers’ fund) was going to run out of assets by 2024.
STUMP has been around since 2014, so let’s check this out:
Nov 2014: Public Pension Watch: How Screwed is Chicago?
SPOILER ALERT: a lot.
Let me point out some language from a recent official report:
….
Having a negative impact on asset values was the need to liquidate investments to pay benefits on a monthly basis. In all, MEABF liquidated $496.3 million of investments to meet the Plan’s cash flow needs. [page 18]
…..
The Actuary projects that under the current funding policy, if all future assumptions are realized, the funding ratio is projected to deteriorate until assets are depleted within about 10 to 15 years. The current statutory funding mechanism impacts the ability to grow assets because in order to pay benefits, assets have and will continue to be liquidated.[page 20]….
Ah, the asset death spiral.
This is from the Comprehensive Annual Financial Report of the Municipal Employees’ Annuity and Benefit Fund of Chicago for the fiscal year ending December 31, 2013 (and 2012, but that’s an item I don’t want to touch right now.)
Let me explain the asset death spiral, which is when balance sheet weakness manifests itself in something really serious: a lack of cash flow to cover promised benefits.
Having to liquidate assets to cover cash flows is not necessarily a bad sign — if one has a decreasing liability (which means decreasing cash flow needs in the future).
This is not the case for Chicago. Nor Illinois.
One has to sell off assets when investment returns and pension contributions are too low to cover current cash flow needs. This reduces the asset amount for the pension funds…and if cash flow needs are increasing, you find that one has to liquidate more and more assets… until the fund is exhausted.
April 2017: Exactly How Screwed Are Chicago Pensions?
I’m glad you asked!
Very.
….
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.
May 2017: Testing to Death: Which Public Pensions are Cash Flow Vulnerable?
Note: that was before they ramped up the contributions.
But that gives you an idea why they had to ramp them up.
My baseline projection can be seen here in this April 2017 post: Watching the Money Run Out: A Simulation with a Chicago Pension
That’s not the trajectory it’s on now, because they greatly increased contributions, as mentioned in the article.
The blue bars are what they actually paid, as a percentage of payroll, but the red bars are what they should have paid.
They’re still falling short.
This is what the funded ratio is doing, even with that large increase in contributions.
I could add the 2022 data points with the new reports, but it’s not like it helps.
The last time I tried a cash flow projection on the Chicago funds, they did not run out of assets, but that was assuming the contributions could grow as they are now. I don’t think they really can sustain that contribution growth. It is a strain on the city’s budget.
I suppose that contributions might be able to be cut a bit and the funds not go into an asset death spiral, but that’s a fine line to walk.
Given how this pension working group is constituted, obviously, benefit changes downward or increased contributions from workers are unlikely.
Reducing contributions, given current contributions are still inadequate, is a bad idea. The funded ratio is in asset death spiral territory, and very sensitive to adverse experience, whether markets or even retirees living a little longer.
Looking for additional revenue is really the only way they can go.
Brandon Johnson had been hoping to use his ideas for spending revenue on all sorts of new goodies in Chicago, but really, given that Chicago has the worst city pension situation in the U.S., he’s got to be spending any “excess” revenue on old services — that is, unfunded pension liabilities.
Way back in 2014, I wrote Public Pension Watch: Chicago, Not Waving But Drowning, and it is still true. This comes from decades of overpromising and underpaying for pensions.
Other cities and states also have underfunded pensions, but because they didn’t under-contribute or overpromise quite as badly as Chicago did, they have more options in dealing with their situations.
Not so Chicago.
I don’t envy this working group, and whatever business groups are still in Chicago, they should probably be happy they’re not touching any of this. There was slim chance of adjusting the benefit side of the equation, what with Brandon Johnson as a mayor, and unless they really had some fantastic revenue ideas, they were not likely to make headway.
Perhaps these labor folks will be pie-in-the-sky, believing ridiculous revenue projections and undervaluing of pensions, maybe they will fall for the “pensions don’t have to be funded!” crap coming from various groups. Maybe they will think pay-as-they-go will work just fine for the pension funds and not be scared of asset death spirals in the pension funds.
They should know that Illinois will not be forthcoming with funds for the city pension funds… the best they might do is get a little something for the teachers’ fund from the state. Illinois itself is under a crunch and is seeing revenue leave.
I am unsure how much power Chicago itself has in trying to impose or ask for taxes, as it is. We’ve already seen prior revenue-seeking deals (the parking meter one) go poorly. I see that Chicago Public Schools can impose tax hikes, but as I said, the above pension analysis is separate from CPS.
It will be interesting to see what comes out of this committee. I am not necessarily assuming they will be detached from reality until I actually see their work product. They may be very realistic as to likelihoods. Of course, perhaps their only purpose is to try to work deals with the Illinois state legislature. We shall see.
]]>The North Carolina Legislature passed a bill to block state entities from considering environmental, social and governance factors when making investment and employment decisions, sending the Republican-led bill to Democratic Gov. Roy Cooper.
The state Senate passed the bill Tuesday in a 29-18 vote, with all Republicans voting for the bill and all Democrats voting against it, after clearing the House in May.
Under the legislation, the North Carolina state treasurer would be able to evaluate investments based only on “pecuniary factors,” which the bill text defines as factors with a material impact on an investment’s financial risk and return. The bill also bars state agencies from using ESG criteria to make decisions related to hiring, firing or evaluating employees, as well as awarding state contracts.
North Carolina Treasurer Dale R. Folwell, who is also running as a Republican gubernatorial candidate for 2024, said he supports the bill.
“As keeper of the public purse, my duty is to manage our investments to ensure that the best interests of those that teach, protect and serve, as well as of our retirees, is always our focus,” Mr. Fowell said in a June 6 news release.
“There is no red or blue money at the treasurer’s office, only green,” Mr. Fowell added.
“Pecuniary factors” is not a new term of art, by the way.
Before I start, all the disclaimers and claimers:
This is going to be super-simplified.
The core concept is that there are agents who are acting on behalf of principals.
To make it really simple, the agents are playing with Other People’s Money.
Okay, not exactly like that. (Man, I loved the 80s. Of course, I was a little kid.)
The principal-agent problem is a tough one, as the agents tend to have the expertise, and the principals don’t.
One of the many ways to deal with this is through third-party regulation — that is, if you have a private employer and employees, you can have the government step in as a regulator to define something like fiduciary duty to align agent interests with principals.
One of the fiduciary duties, for instance, of an investment advisor for a retirement fund, would be to only consider pecuniary factors in selecting assets. As opposed to, say, the assets chosen are run by the best buddies of the investment advisor.
In the private retirement savings space, ERISA was developed and adjusted over the years. Notice I said: private. It protects employees in the private sector, whether in defined benefit or defined contribution retirement plans.
It doesn’t do crap for state and local government employees.
That’s federalism, you see. State and local government employees need to get protected by state legislatures, by having them defining fiduciary duty there.
Washington Free Beacon: How Tobacco Companies Are Crushing ESG Ratings
S&P Global made headlines this month when it gave Tesla, the world’s largest manufacturer of electric cars, a lower environmental, social, and governance score than Philip Morris International, the maker of Marlboro cigarettes.
The electric car company, whose CEO, Elon Musk, has become a culture-war lightning rod, earned just 37 points on the 100-point scale compared with the cigarette giant’s 84.
ESG ratings are supposed to guide investors, and their money, toward ethical enterprises. But Big Tobacco has lapped Tesla in the ESG ratings race more than once: Sustainalytics, a widely used ESG ratings tool, gives Tesla a worse score than Altria, one of the largest tobacco producers in the world. And the London Stock Exchange gives British American Tobacco an ESG score of 94—the third highest of any company on the exchange’s top share index—while Tesla earns a middling 65.
How could cigarettes, which kill over eight million people each year, be deemed a more ethical investment than electric cars? It may have something to do with the tobacco industry’s embrace of corporate progressivism.
You can go to the link to see how absurd the specific scoring is (and you can decide for yourself whether Tesla should be scored higher or lower than Altria).
This is something that actually made me laugh just due to an order-of-magnitude mistake:
Update, 12:32 p.m.: An earlier version of this story incorrectly stated that Philip Morris sold six billion cigarettes last year. The correct number is 600 billion.
Somebody got a talking-to over that one.
By the way, to do a head-to-head comparison, about 1.35 million people die in vehicular accidents worldwide in a year.
That’s not exactly a fair comparison for Tesla, per se, but that gives you a starting point.
But more to the point: the investment managers are supposed to invest to support pension benefits. Is this ESG score relevant to either Tesla or Altria?
This is from Harvard Business Review, so I assume they’re not terribly happy about this: An Inconvenient Truth About ESG Investing
In a recent Journal of Finance paper, University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds.
That result might be expected, and it is possible that investors would be happy to sacrifice financial returns in exchange for better ESG performance. Unfortunately ESG funds don’t seem to deliver better ESG performance either.
Researchers at Columbia University and London School of Economics compared the ESG record of U.S. companies in 147 ESG fund portfolios and that of U.S. companies in 2,428 non-ESG portfolios. They found that the companies in the ESG portfolios had worse compliance record for both labor and environmental rules. They also found that companies added to ESG portfolios did not subsequently improve compliance with labor or environmental regulations.
….
The conclusion to be drawn from this evidence seems pretty clear: funds investing in companies that publicly embrace ESG sacrifice financial returns without gaining much, if anything, in terms of actually furthering ESG interests.
Here is something more to the point:
THAT’S NOT THE POINT OF PUBLIC PENSIONS.
Let’s pretend that the funds did achieve improved ESG results, even though the financial results did suffer (as expected, because reducing the universe of assets from which you choose will by necessity make the optimum in the smaller set possibly smaller than the global optimum).
Huzzah! Improved social goals! Yadda yadda!
But, what’s this?
An eroding funded ratio?
So… um, we can just look to the taxpayers to make up for disappointing investment returns!
Hmmm, let’s see.
Morgan-Lewis, a law firm, has been updating a map with which states have been passing legislation supporting or opposing ESG for their pension funds. I will not reproduce it, as I don’t mess with lawyers (often), but let’s just say, the states are what you think they are.
Well, California and Illinois (to name two states) — do you think the people leaving your states will make up for your pension plan losses?
Oh, and sorry my folks in Tennessee. I know the Yankees are swamping you. I can also see most of North Carolina has also been overrun. OH NO! THEY’RE INVADING AGAIN.
But look at that RED RED California and Illinois.
That means people are LEAVING.
Let us focus.
Public employees and retirees, more than anything else, want to make sure they get paid. If they’re not getting adequately paid during their working years, they always have options: striking or working elsewhere. They can withhold their labor, and the chances are that others will also not work for the public employers being so stupid as not to pay current employees enough.
However… retired employees can’t strike. They can’t threaten to work elsewhere.
They are really dependent on the public pension funds actually being there.
If the agents have decided to indulge themselves with ESG to give themselves the warm fuzzies, and, as a result, the investment results are deficient….where does that leave the principals?
I have held onto the example of the jerk at Calpers who said 10 years ago:
Joseph Dear, the chief investment officer of the California Public Employees’ Retirement System (CalPERS), called its green energy investments “a noble way to lose money.”
The admission came shortly after CalPERS officials voted to divest from high-performing investments in companies that manufacture firearms, fueling criticism that the organization’s investment decisions are based on political factors, rather than a determination to maximize returns.
According to Dear, CalPERS’ $900 million green energy investment fund has produced an annualized return of negative 9.7 percent.
“We’re all familiar with the J-curve in private equity,” Dear said at the Wall Street Journal’s ECO:nomics conference this week. “Well, for CalPERS, clean-tech investing has got an L-curve for ‘lose.’”
THAT WAS NOT HIS MONEY TO LOSE.
If Elon Musk took his own money and lost it on ESG bets that didn’t work out, well, that’s on him. If he wanted to frame it as a noble way to lose money, again, that would be on him.
However, Joseph Dear took the money intended to back the pensions of California employees. And piss $1 billion away, claiming it was a noble thing to do.
I will be charitable — I think what happened was that he thought that investment would pay off, but it didn’t.
Then he decided to lie.
He tried to turn his mistake into a noble choice.
There are other ways to characterize his decision, but you know — he could just say that investments are uncertain, he thought it would do well, etc. And he was wrong.
But no, he had to claim it was a noble way to lose almost $1 billion.
Of other people’s money.
April 2014: Public Pensions and Blacklists: Harmful to the Pensions
Dec 2016: Calpers: Moving Targets, in More Way than One
Aug 2017: Public Pension Assets: Divestments for Everybody!
Oct 2018: Calpers Quickie: President Pushed off the Board Due to ESG Over Pension Security
Oct 2015: Public Pension Follies: Divestment! Divest from All the Dirty Things!
June 2018: Around the Pension-o-Sphere: Divestment, Janus, and More
March 2018: Divestment and Activist Investing Follies: Don’t Let the Evil Ones Bank! Also more Pension Divestment Idiocy
]]>Well, it’s 6 years later, and the situation is no better.
]]>Brandon Johnson was sworn in as Chicago mayor on May 15, and I already sent my condolences when he “won” the election.
It’s not much in the way of winning when you have to deal with the disaster that are Chicago pensions.
A variety of people are claiming that Chicago pensions are the worst in the country (for the appropriate peer groups).
8 May 2023, WBBM: Brandon Johnson inheriting some of the nation’s worst-funded pensions, finance expert says
Chicago owes billions of dollars to its public pension funds for its teachers, fire, transit and other city workers. Mary Williams Walsh, the managing editor for the online newsletter News Items, said she considers it the worst for a major city in the U.S.
“There’s different ways of measuring things, so you can never be very precise, but I would say it’s one of the worst — if not, the worst,” she said.
Williams Walsh, a finance expert and a former New York Times reporter, said those for fire and police have the lowest funding. For each dollar they have to pay, she said they get about 23 cents.
She blamed so-called “ramps” — plans under prior administrations to postpone pension payments and then increase them in later years — for Chicago’s current situation.
“What somebody should say is, ‘If you can’t afford your contributions now, [then] you can’t afford your plan, and you should do it over,’” Williams Walsh said. “I mean, you should find some way of making it affordable.”
So that’s one take.
Here’s another.
1 May 2023, The 74: New Chicago Mayor Brandon Johnson Inherits America’s Worst Teacher Pension Mess
As the newly elected mayor of Chicago, Brandon Johnson just inherited what is arguably the worst teacher retirement plan in the country.
That’s a big claim, so let’s walk through some numbers.
First up is the cost side. Next year, Chicago will contribute more than $1 billion toward the city’s teacher pension plan. A large portion of that money will come from the state, and another $550 million will come from a dedicated property tax levy the state authorized in 2018.
And yet, all this money is not enough. The chart below comes from the Public Plans Database from the Boston College Center for Retirement Research. As the chart shows, Chicago’s pension contributions have risen substantially over time (the blue bars), but not once in the last 20 years has it contributed as much as what its actuaries recommended (the red bars). In 2021 alone, that gap amounted to about $350 million.
Okay Chad Aldeman, the author of this piece, uses the same graph I have:
So this gives me an idea for a comparison of city pension funds (and let’s carve out a variety of types, because teacher funds differ from safety officers and from generic office workers).
Let’s compare based on:
- Funded ratio (most recent measurement — this may differ in fiscal year)
- Percent of payroll for “required” payment
- and maybe I’ll look at average percentage of “required” payment that was actually made (mmhmm)… but that’s a policy choice.
The first two are also related to policy choices, as I mentioned in my “Choices have consequences” series in terms of benefit design and retirement ages, in that it leads to how expensive the pensions are, but how much you actually fund the pensions has consequences, too.
But let us do the first two.
I grabbed data from the Public Plans database, and got the funded ratios and “required” payments as percentages of covered payroll. I filtered for city-level pensions (more on that in a moment), and here is the result:
So that’s the scatterplot highlighting the Chicago plans only … and yeah, they’re about the worst. You can see a few plans worse-funded, and requiring much higher contributions… but let’s see what plans those are now:
First, you probably don’t have to be told that the Charleston, WV Firemen’s fund is pretty small compared to any of Chicago’s funds.
A few of the other pension plans are notorious for being bad, and have appeared on STUMP before:
Providence ERS, of Rhode Island, has appeared in these posts (not exhaustive):
October 2019: When the Money Runs Out: Some Thoughts on Public Finance and Pensions
The city has suffered from deep-rooted mismanagement of its pension system. Rosy expectations about investment returns and decades of inadequate contributions to the fund — the city came up $16 million short in 1999 alone — have left it just a quarter of the way toward covering the $1.3 billion it owes to current and future retirees.
Such numbers are mind-boggling in and of themselves, but the budget pressure they create reveals an acute crisis with a concrete human impact. A 2010 refinancing scheme demands 3.5 percent yearly increases in Providence’s annual contributions to its pension system, outpacing the 2 percent rate at which the budget grows overall. This means that pension liabilities could edge out priorities like other social spending and infrastructure. This would be catastrophic for a public school system defined by chronically absent teachers, for the 70 percent of Rhode Island streets in poor condition and for a city with the highest poverty rate in the Northeast.
Providence has been in quite the squeeze.
June 2022: Fewer than 4000 people just approved boosting Providence Rhode Island liabilities by $515 million
There was a special election on Tuesday, June 7, in which less than 4% of Providence, Rhode Island voters showed up.
Of that 4%, 70% agreed to the issuance of $515 million in pension obligation bonds. This would be a new liability, on top of the liabilities they already have.
….
I am not surprised that this sort of thing is coming from Rhode Island, and specifically Providence. They had some of the worst finances coming out of the Great Recession, and it took a lot of wrangling to try to get it in line, and it’s still not there.
Dallas Police and Fire has appeared in these posts (also not exhaustive):
August 2014: Public Pensions Watch: Dallas Pension Learns About Concentration Risk
Nov 2016: Dallas Police and Fire: The Pension that Ate Dallas
Dec 2018: Hindsight is Hilarious: Pension DROP Program Presentation
Jacksonville Fire and Police:
Dec 2016: Pension Nastiness in Jacksonville: Huge Jump in Required Payment and Public Pension Primer: Payroll Growth Assumption .
From that last post:
People have been behaving like pension funds are special sorts of creditors, so of course they can handle ways of “paying off” the unfunded liability that actually was guaranteed to cause it to increase in the “short run”.
Until the “short run” became 10 years.
And one finds one’s self in a much bigger hole than when one began.
Ugh.
Chicago finds itself in the same hole as Providence, Jacksonville, and Dallas has, for much the same reasons.
It made promises to its employees, and didn’t pay for the promises at the time the employees earned them. That is, when the employees were actively providing services.
After all, those promises were for retirement benefits, right? The cash flows didn’t have to come til later! And of course, the tax base would only be growing! We could make all those skipped pension payments in future years!
Forgetting that in those future years, those future taxpayers would want services for themselves.
And that retirees can’t really strike.
So Brandon Johnson is going to be finding himself in a very hard place, because the Chicago pensions have made some very large promises, which have accrued … and the underpayments to those funds have continued to snowball.
Johnson’s grand ideas of spending plans will get undermined by the need to pay for these pensions.
I have sympathy for him, because he’s actually going to have to deliver on operations, and he’s going to find the “rich” people he wanted to squeeze for revenue have become thinner on the ground. Maybe he can tax some of the highest-paid public employees. Let’s see how well that will go over.
Tell them it’s for their pensions.
]]>