Illinois

2 Numbers That Show How Screwed Chicago's Pension Plans Are

Collecting $99 million and paying out $999 million in a single year is not a formula for success.

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Kevin E. Schmidt/Quad-City Times/ZUMA Press/Newscom

You don't need to be an expert in the dense, convoluted math unpinning public pension systems to understand why this is bad news.

During 2015, the two pension plans for Chicago city employees paid out $999 million in retirement benefits to 29,286 retirees. During that same year, the two funds generated just $90 million in investment income.

To call that a massive shortfall would be a, well, massive understatement.

Here's why it matters. Investment returns are one of three ways that money gets into public pension plans—the other two being contributions from public employees themselves and contributions from taxpayers. Contributions from employees are set at fixed levels based on contracts, so a shortfall in investment returns means that either taxpayers are picking up the tab or the pension fund is running in the red. In Chicago, both of those things are happening.

Chicago City Wire, which reported this week on those terrifying numbers for the city's two municipal worker pension systems, also notes that the four other pension plans in Chicago—covering teachers, firefighters, police, and park workers—are not doing much better. "All six operate as government-sanctioned Ponzi schemes, paying retirees with contributions made into the fund by active city employees, as well as taxpayers contributing on those employees behalf," the Chicago City Wire concludes.

Chicago officials have tossed around a wide range of ideas for how to squeeze more money out of the population in order to feed the ever-growing appetite of the city's pension systems. Taxing soda and other sugary drinks is one idea. Taxing sewage is another. None of those ideas will solve the pension crisis, and are likely to drive more people out of the city, which has already seen a drop in population for two years running.

With city-level options unworkable or unlikely to succeed, Chicago is looking for help from the state—but Illinois is dealing with the nation's worst state-level pension deficit too. A recent report from the Illinois Policy Institute identified a $286 billion deficit in retirement-related costs at the state level, including pensions and retiree health care costs.

Chicago finds itself in the current mess because the city has failed to adequately fund the cost of its municipal pension plan. Going back to at least 2006, Chicago has never come close to fully funding its annual pension obligation—in most years, it hasn't even put in half of what would be required to keep the fund stable.

Gov. Bruce Rauner this week vetoed a bill that would have allowed Chicago to contribute less to the city pension plans for a few years with the promise that higher contributions would be coming in later years. Rauner correctly called the bill an attempt to further "kick the can," and has offered a $215 million state bailout of Chicago's school pensions in exchange for statewide pension reforms to curb long-term retirement costs.

"We should include all pensions in that. It would save billions of dollars, and it's the right long-term solution." Rauner said this week, according to Illinois News Network. "These politicians have gotta learn that kicking the can and having pension payments go up only after their out of office; no more. Because taxpayers are always there and they're getting hurt by that process of kicking the can."

The pension crisis is a weight around the neck of Illinois, says Moody's, a credit ratings service, which issued a sobering assessment of the state's economy earlier this year. "Soft job creation and the state's descent into fiscal quicksand" are the results of a shrinking labor force and population, Moody's said. Fewer people in the state means fewer people to pay the growing pension bills, which already exceed $56,000 per household, according to the Illinois Policy Institute report.

"Pensions don't work and they never will," Diana Rickert, vice president of communications for the Illinois Policy Institute, told Reason on Thursday. "It's wrong to ask government workers to pay more money into a broken system, and it's wrong to keep soaking taxpayers when we know full well the system is on the verge of collapse."

In Chicago, Rickert says, all new workers should be put into a new retirement plan modeled after the 401(k) systems common in the private sector, effectively shutting down the public pension system as current works retire and eventually die.

That doesn't solve the immediate problem facing Chicago's and Illinois' public pension issues because it would not reduce the payments owed to current workers and retirees, but it would at least save taxpayers from having to pay even more in the long run. In the short term, though, all you need to know is that collecting $99 million and paying out $999 million in a single year is not a formula for success.

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  1. How is it their fault that they hit the score cap? Is there at least some kind of cap-break mechanism built in?

  2. Why don’t they just move the decimal point over until the math works?

    1. Yeah, clearly they are not giving this task the 110% effort it deserves.

  3. Pensions are a ridiculous concept and need to die.

    If my company moved from their 401K match (~8% a year after profit sharing) to a pension system of “we will pay you later, trust us”, I’d tell them to get bent. Give me my money now and not a promise to pay me in the future.

    What the hell is wrong with people that they treat pensions as some sacred right. It’s bad for everyone.

    1. If you are like my father-in-law and worship at the feet of government while also having a pathological distrust of private companies, then you will absolutely think of them a sacred rights.

  4. it is a disaster here in the quad cities (Iowa/Illinois border). pretty much everyone in Illinois not on welfare, is picking up and moving across the bridge to Iowa.. Home prices are getting really high in Iowa and completely depressed in ill. don’t think there will be many citizens left to pay those pension bills..

  5. it is a disaster here in the quad cities (Iowa/Illinois border). pretty much everyone in Illinois not on welfare, is picking up and moving across the bridge to Iowa.. Home prices are getting really high in Iowa and completely depressed in ill. don’t think there will be many citizens left to pay those pension bills.

    1. Don’t worry. I’m sure they were planning on President Hillary to bail them out just like Obama did with the “stimulus”. These backwards states need to collapse under their own weight (and I live in California)

  6. Chicago is looking for help from the state

    I grew up in southern Illinois and well remember the contempt that the Chicago folk have for us “bumpkins”. I’m not surprised that they’ll just figure they’ll take the money from downstate.

    1. I don’t think there is enough cheese in Carbondale to bail them out at this point.

    2. Fellow down-stater here. Where did you grow up, EES?

      1. I did not realize that there were so many of us.

        For my part, I was born in Olney, grew up in Fairfield, and lived in Carbondale for a while.

        1. Grew up near Effingham. Now live in the Chicago Burbs.

  7. Looks like all these gubmit workers picked the wrong level of gubmit to work for.

    Federal gubmit workers all have pensions too. The difference is that the Federal gubmit can just print more money to pay them.

  8. “Chicago is looking for help from the state?but Illinois is dealing with the nation’s worst state-level pension deficit too.”

    Can’t they all go to a cheap lawyer together and get a bankruptcy group discount?

  9. …the results of a shrinking labor force and population

    We Illinoisans can look forward to more of this if things don’t change. Had some close friends move to Florida (they took a lateral position for the same company). They’ve got a bigger house with a pool and $25,000 more in disposable income now.

    I had hoped Rauner would change things, but it looks like Madigan is trying to run out the clock.

  10. The current Social Security system is another Ponzi scheme that cannot be sustained without higher taxes and or decreased benefits.

    1. SS isn’t in nearly as bad a shape as those pension funds. First and foremost, SS is not obligated to pay out any level of benefits. So, it would be much easier to just reduce benefits to the available cash flow. Secondly, the current trustees report indicates that SS at it’s lowest projected point, will still be able to pay roughly 75-80% of it’s benefits.

      http://www.pgpf.org/sites/defa…..umbers.png

      Medicare is in worse shape. I think the long term projections say at some point Medicare will only be able to pay roughly 50% of it’s expected benefits.

  11. The current Social Security system is another Ponzi scheme that cannot be sustained without greater taxes and or decreased benefits.

    1. You would not believe how emotionally-violently some people react when I tell them that fact. And these people vote! We are pretty much all doomed fiscally so long as wealth transfer payments are expected by any segment of the population. In other words, all political philosophies except libertarianism and anarchy are doomed to run out of other people’s money.

  12. Re: ” During 2015, the two pension plans for Chicago city employees paid out $999 million in retirement benefits to 29,286 retirees. During that same year, the two funds generated just $90 million in investment income.”

    Does anyone in addition to me see the lack of financial knowledge exhibited by Mr Boehm particularly with regard the long term investments and risk profiles regarding pensions?

    Whilst I have read reports, please don’t ask me to list them, of pensions plans, corporate and government, that are allegedly under funded due to unreasonably ambitious return exceptions; over generous payment promises, or insufficient employer contributions – using one years figures for benefits and ‘investment income’ is not the basis for a serious discussion of ‘retirement income reform’.

  13. Re: ” During 2015, the two pension plans for Chicago city employees paid out $999 million in retirement benefits to 29,286 retirees. During that same year, the two funds generated just $90 million in investment income.”

    We are currently in an environment where low risk investment returns are minimal to say the least – for example interest rate that make cash investments loss making.

    I am a company pensioner and witness the impact of the stagnant financial environment on pension fund growth. Sorry I would not take comfort if my sole source of income rested totally on the performance of ‘The Market’.

    My pension scheme needs to respond to current fiscal challenges by modifying the benefit profile of our plan – my annual payments may not increase as previously projected but this is much better than disappearing altogether. Additionally it does not reduce, so far, year over year so my budget is not negatively impacted any more than the inflationary pressures we all feel – employed or retired.

    I perceive the issue with government pension arrangements are that they are ultimately backstopped by folks who had little to no say in the commitment be made on their behalf – we tax payers. Also there is absolutely no willingness to adapt benefit to prevailing circumstances.

    That should be the point of the article.

  14. And yes, as a first time submitter, but not a first time reader, I agree the the commenting process is questionable.

    Are Amazon hosting this site – see all the sales suggestions? If so, could that be part of the problem?

  15. paying retirees with contributions made into the fund by active city employees, as well as taxpayers contributing on those employees behalf

    Would it be impolitely Rothbardian to point out that those are not actually two separate categories?

  16. No mention of the public sector unions that run Illinois and Chicago and that jacked up the union members’ pension benefits to impossible-to-meet levels? Even if IL or Chicago were bailed out, the people that caused the problem are still there: union mafiosos and crooked politicians. They’ll just continue the systematic robbing of taxpayers, as they know they’ll never suffer any adverse consequences for raiding public coffers.

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