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Chicago’s Pension Fund Problems Just Got 11.5 Billion Bigger

The problem with kicking the pension plan can down the road is the can keeps getting bigger. Eventually it gets to the point when the can is the size of a truck and too big to be kicked. Chicago is getting to that point. Although it is unknown when this crisis will explode, we know the result. The bailout will come from either taxpayers (federal or local) or retiree’s (current or future). It probably will affect both.

Although this post highlights Chicago and Illinois, they are not unique. Other cities and states are dealing with pension issues. The issues have been brewing for years and are not a surprise. There are many causes for the current disaster which will be the subject of a future post. Many are hoping for a painless solution but this balloon is going to pop and the result will be load and ugly. Please leave your opinions in the comment section below. 

Bloomberg – 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 its annual report. 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.

“The longer they wait to get this fixed, the more expensive it’s going to get for the city’s taxpayers,” Richard Ciccarone, the Chicago-based president of Merritt Research Services LLC, which analyzes municipal finances.


Illinois Policy – 1. Politicians grant workers overly generous pension benefits that taxpayers can no longer afford.

Government workers who earn generous pension benefits have done nothing wrong. They’ve benefited from labor negotiations that have led to lucrative compensation packages. However, the state’s taxpayers can no longer afford to offer such benefits going forward.

a. Retirement age: Private-sector workers cannot begin to collect full Social Security benefits until age 67. By contrast, 60 percent of state workers retire in their 50s, many of them with full benefits.


b. COLAs: Most retirees receive cost-of-living adjustments that are automatic, annual 3 percent compounded boosts to their pensions. That means their annual pension benefits will double in 25 years.

The state’s top pensioner, Leslie Heffez, earned a COLA of more than $16,000 in 2015, equal to the average annual Social Security payout for an average private-sector retiree. And since COLA benefits are not means-tested, Heffez will continue to receive COLA increases annually – which contributes mightily to his expected $18 million in lifetime pension benefits.


c. Contributions: Most retirees contribute only about 4 to 8 percent (8 to 16 percent when interest earned on investments is included) of what they receive in retirement benefits.For example, the average recently retired (from Jan. 1, 2013, through 2015) career (30 years of service) State Universities Retirement System member contributed only about $145,000 (6.5 percent) of the $2.2 million he or she will receive in lifetime retirement benefits.


d. Payouts: The average career (30 years of service) teacher who retired recently (within the last three years) receives a $71,000 pension and will collect over $2 million over the course of her retirement. To generate similar benefits, a worker in the private sector would need to have more than $1.5 million in her bank account when she retires.

In all, 53 percent of the over 213,000 state retirees in Illinois can expect to receive lifetime pension benefits of more than $1 million. Almost 40,000 (18 percent of all retirees) will receive $2 million or more in benefits. By contrast, private-sector workers with average Social Security benefits will only receive approximately $400,000 in lifetime benefits.

e. Benefits in Chicago: Employees for the city of Chicago also receive generous pension benefits. Nearly half of all city workers retire before age 60, and recently retired career workers (30 years of service or more) receive $65,000 average annual pensions.


2. Politicians use pensions as a political slush fund. In 1994, Gov. Jim Edgar created a culture of kicking the can down the road when he enacted legislation that pushed state pension contributions far into the future – through 2045. Since then, Illinois politicians haveborrowed, skipped payments and taxed to fund pensions rather than seek comprehensive reforms. As a result, the state’s 2015 pension shortfall has skyrocketed to $111 billion.


The current state of the Chicago teachers’ pension fund is the best example of how politicians manipulate pensions. Over the course of a decade, Chicago politicians redirected $3 billion in contributions away from the teachers’ pension fund, toward teachers’ salaries. Not only did this cause the teachers’ pension shortfall to skyrocket, but it also inflated teacher salaries, pushing teacher pension benefits to unaffordable levels.

The same thing also happened to Chicago’s police and firefighter pension funds. Police and firefighter salaries grew 50 to 70 percentage points faster than inflation over the past 30 years.

3. Pension plans are inherently flawed and unsustainable. Politicians’ failure to contribute to pensions is often blamed as the key reason Illinois pensions are so underfunded. However, that is not the case. A majority of the pension systems’ underfunding is due to the flaws inherent in DB plans. In DB plans, governments make promises to retirees based on certain assumptions – such as expected investment returns and mortality rates – which often fail. In all, 60 percent of the state’s current pension shortfall can be attributed to such failed assumptions.

The combination of these three factors has driven Illinois’ pension systems closer to insolvency. Chicago’s police and firefighters pension funds now have only a quarter of the money they need today to pay out future benefits. The Teachers’ Retirement System, the largest pension fund in the state, has less than half the money it needs. And at only 16 percent funded, the General Assembly’s own retirement system is the worst-off of all state funds, relying on a taxpayer bailout every year just to stay afloat.




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