Investor’s Business Daily posted the graphical description of Chicago’s pension problems shown above:
Chicago is not Detroit, public finance professionals insist. It has a vibrant economy and a booming downtown, thanks in part to Emanuel’s efforts to attract businesses.
But its financial woes have mounted despite Emanuel’s efforts to rein them in. Years, perhaps even decades, of past financial sins all seem to be coming home to roost now.
Chicago’s pension funds have an average of about one-third of necessary funding, a total liability estimated at anywhere from $20 billion to $30 billion. Emanuel’s attempts to reform two of the four plans were challenged in court by retirees.Meanwhile, statutorily required increases in annual payments to the pension funds go into effect in 2016, totaling nearly an extra $550 million per year. It’s an attempt to make up for years of chronic underfunding: Contributions from the city averaged 35% of what actuaries deemed necessary in 2012 and 34% in 2013, according to a recent bond offering statement.
The deficit in Chicago’s operating budget plus the payment the state of Illinois is requiring it make into the public employees’ pension fund in 2016 add up to about $1 billion. That’s about half of Chicago’s total annual revenue.
Chicago’s newly re-elected Mayor Rahm Emanuel didn’t mention the pension payment in his State of the City message in January. In all of the hooplah surrounding his re-election, accounts of which invariably mentioned that Chuy Garcia didn’t have any credible proposals for solving Chicago’s fiscal problems, no one bothered to mention that Emanuel doesn’t, either.
The plan right now seems to be to try to get a reprieve from the state legislature, something it has shown no inclination to provide and which Emanuel’s weakened condition makes that much more unlikely. As the graphic above illustrates so starkly even if Chicago can get a slowed payment schedule from the state it’s just kicking the can down the road. It will actually make things that much worse later on.
Chicago needs a lot more than that.
You don’t need an exotic DCF model, or do what I do or be “Bond Girl” to understand that this is practically an impossible problem. Just in the broadest of strokes:
An operating budget in significant deficit, with no realistic economic scenario that would have it throwing off significant cash. A $20-$30mm liability that even amortized over decades could only be made good for current or soon to be retired retirees. And the element of time (compounded returns) not on your side, as the city is facing $500mm statutory payment requirements soon. And a statutory reprieve is just that; it doesn’t change the cash flows.
This has restructuring written all over it, and given that the tax turnip is about squeezed dry, means defaulting on the liability. And if not the pension liability, then the shell game of defaulting on some other liability. That probably means strikes etc.
There is a couple at my country club who were high school school teachers. Very nice people. He taught physical ed, she English. True to form in their later years their salaries were bumped to increase their retirement benefit. They travel the world. He was president of the club for awhile. His view of finance was just sign a requisition. Or in the club setting, just make an assessment. Money grows on trees. Travel the world. Teachers. How many of you are traveling the world? In Naples a couple weeks ago we got paired up for golf with a couple who had just purchased a place in an upscale golf community. He was talking to me about investment property as well. Doctor, lawyer? CEO? Engineer/manufacturing executive? Nope. Fireman. From Dave’s neck of the woods outside St Louis. How many of you have second homes and look at investment property in Naples, FL ?
The pols have given away the store. It takes a long time for these structural imbalances to become apparent. Unfortunately, in an uninformed society whose goals appear to singularly be entertained and who figure tax increase talk is for the other guy, when the imbalances finally do appear it resembles a train wreck more than anything else.
And now, SS and Medicare…….
Firefighters are a special case. I don’t believe I’ve ever met a firefighter who didn’t have a second job. I think that’s an abuse but it’s incredibly common.
The police officers’ method of gaming the system is a little different: overtime. Nearly every police officer works significant overtime. That’s why average incomes in Chicago for firefighters and police officers is in six figures regardless of what their notional salaries are.
The strategy that makes the most sense for Illinois school districts outside of Chicago is to keep wages as long as they can and pensions as high as they can. That’s because the district pays the wages while the state pays the pensions. In Chicago the city’s taxpayers pay either way so that avenue isn’t open.