New accounting rules show Chicago has understated its pension liabilities by $11.5 billion.
At the end of 2015 the stated liability was $7.1 billion. Today it’s $18.6 billion. That’s a jump in net liabilities of 168%.
Mayor Rahm Emanuel has hopes pinned on union concessions and help from the state legislature. Neither is likely.
Out of Money in 10 Years
Bloomberg reports Chicago’s Pension-Fund Troubles Just Became $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 an annual report presented to the fund’s board on Thursday. The fund serves some 70,000 workers and retirees.
Decisions that are now adding hundreds of millions of dollars to its annual bills have left Chicago with a lower credit rating than any big U.S. city but once-bankrupt Detroit.
The latest estimate for the municipal fund, one of Chicago’s four pensions, will add to what had been an unfunded liability estimated at $20 billion.
A key driver was the court ruling striking down Mayor Rahm Emanuel’s plan that cut benefits and boosted city and employee contributions. Without it in place, the fund is now set to run out of money within 10 years.
That triggered another change. New accounting rules, adopted to keep governments from using overly optimistic investment-return forecasts to mask the scale of their liabilities, require them to use more modest assumptions once pension plans go broke. As a result, the reported liabilities jump.
Under the traditional way of estimating the municipal fund’s obligations, which is how annual contributions are set, the shortfall rose to $9.9 billion as of Dec. 31, based on market value of its assets, according to the actuaries report. That’s up from $7.1 billion a year earlier. The pension is only 32 percent funded — meaning it has 32 cents for every dollar it owes — compared to 42 percent last year, according to the actuaries.
“Very Good Discussions”
Emanuel claims to have “very good discussions” with the unions. That means one of two things.
- Emanuel’s mind has gone to mush.
- Emanuel is telling the unions he will hike taxes again, and again, and again.
In retrospect, those are the same thing.
Fluidity
Meanwhile, Jim Mohler, executive director of the fund, told board members on Thursday that it’s a “fluid situation.”
Mohler cited pending legislation in the Illinois legislature to bail out Chicago.
The only thing fluid is the exact timing of the bill followed by Governor Bruce Rauner’s immediate veto.
Super-Majority Theory and Practice
The Democrat controlled legislature has a super-majority that could in theory override Rauner’s veto. However, the legislature could have passed anything they wanted all year long. Yet, Illinois still does not have a budget.
In practice, there are a few “blue dog Democrats” that have a bit of fiscal sense.
And in this case, add in a bunch of downstate legislators who won’t relish hiking taxes to bail out bankrupt Chicago pensions.
Pension Shortages
Will downstate legislators and “blue dog” Democrats vote to bail out that mess?
It’s possible, but color me skeptical. Is Emanuel going to get union concession?
That idea sounds even sillier.
Stock Market Valuations and Assumptions
The Chicago pensions are 32% funded despite the biggest bull market in history. What happens if the market has negative returns for even a few years?
The answer is the pension plans will go bust before 10 years pass.
The sorry state of affairs is stock and bonds have such lofty valuations that negative returns are likely not for a few years, bit seven to ten years.
“One Big Worldwide Bubble”: Cusp of 30-Year Bear Market in Stocks and Bonds
I side with Milton Berg, founder and CEO of MB advisors says “One Big Worldwide Bubble”: Cusp of 30-Year Bear Market in Stocks and Bonds.
Please click on the above link for a fantastic interview with Berg.
Tax Hikes Not the Solution
The pension mess and the Chicago public school mess cannot be placed on the backs of Illinois taxpayer.
Mayor Emanuel already passed the biggest tax hike in history. Here are some links for discussion:
- Chicago Tax Collector Hath Arrived With Massive Tax Hike: Emanuel Says “No Stone Unturned … Not Done Yet”.
- Chicago’s Sheep Dogs Approve Mayor’s Tax on Sheep; Quote of the Day “It’s Not a Piece of Art”
- Chicago Public School System Threatens Massive Tax Hikes Via “Backdoor” Bond Guarantee
Solution is Bankruptcy
If Mayor Emanuel really wanted to do something for the city and city taxpayers, he would be begging House Speaker Michael Madigan for the one and only thing that can help the city: legislation that would allow Illinois municipal bankruptcies.
Let’s stop pretending there is another solution, because there isn’t.
Mike “Mish” Shedlock
Rahm must be preparing a crisis so he can take advantage of it.
Mish – are you still living in Illinois? If so, why?
Answered that earlier today.
My wife Liz has tremendous benefits – 35 vacation days or so
We travel a lot and I can blog from anywhere.
If and when she leaves, we have property in Montana
Mish
I’m moving my cash reserves to dental floss future.
Do you live in a house you own yourselves? Could things get bad enough that you’d consider selling it and renting instead?
When I was a kid, we just called them “FIBs”. Now I understand why.
FIBs huh, which side of the lake are you on, here on the West Michigan side we are all to aware when the FIBs come rolling in for the summer haha.
Well, solution seems pretty simple to me … go back to the old accounting rules …
I like it.
So would unions for about 4 years
Expect tax increase after tax increase. It seems inevitable. Also, as you point out, investment returns in the years ahead are unlikely to equal even the conservative estimates of 5% or whatever they are using these days, so the problem will only get worse.
Most pension plans assume 7.5-8.0% returns
Chicago is in that group
I’m not sure if payouts are that high anymore.
Having said that unless you’re AIG and a “you know who” you are required by Federal Law to use Treasuries as your capital which have had an outstanding run YTD and according to your own analysis will continue to.
In other words the insurance company should be okay though the payouts to the “beneficiaries” (shareholders?) may suffer.
I do agree GOVERNMENT sponsored annuities might take a hit here though…but that would be a failure of revenue generation (recognition even?) as the pressure for Mo Bailout starts to really ramp up going into the General Election.
So far the biggest winner has been United Healthcare in this mess…I think they’re in Minneapolis not Chicago though. I don’t really see how private health insurance companies like Aetna, etc survive all these mandates though. You can only raise premiums so high. In other words I think you’re barking up the wrong tree with this one. You could argue the US economy is in fact hyperinflating RIGHT NOW though…which would argue for a move into cash not gold or industrial metals.
The Fed looks like it’s being set up to me as there is nothing they can do if Debt Bombs start going off everywhere.
And yes..the Wall Street Banks will need another bailout if this scenario plays out.
Real rates for borrowing will move higher no matter what scenario is presented here.
That should put a premium on liquid assets…certainly oil prices have soared, drug stocks are doing well…Project Mayhem seems to have succeeded…
…and just let me ask, do the sellers of funds like these get bigger comissions if the assumed returns are higher?
As long as it stays contained within Chicago, that is self limiting. The problem is, with a nation of reliable but-heads (as in, “but this time is different”), once ten years (or less) is up and all there is to loot has been looted, you can almost rest assured “we” “have to” “do something.” And that “we” will mean someone else entirely than those who made, and believed in, the idiotic promises to begin with. If not for the but-heads, Chicago would just peacefully implode, as higher taxes causes more business and worker flight causes asset price drops causes jingle-mailed keys causes a lower tax base etc. In a virtuous circle.
Even aside from the disaster awaiting on the fiscal side, Chiacgo is dying because the exchange floors closed. The traders, brokers, runners,assistants and everyone else that was supported by a thriving floor trade no longer have any reason to be in chicago. It was a huge part of the cities character and it is just gone. I do not think the city will ever be the same. look for degentrification to accelerate. it is why i took my family out and went elsewhere. in 15-20 years it will be a worse hellhole than it was in the 70s
This is really hilarious to watch as we know it is but a sitcom.
We just saw them vote to bail out Puerto Rico, crushing bondholders and transferring pension liabilities… ultimately to our tab.
Does ANYONE think they will not bail out CHICAGO?
All theater to PROVE that there is no other solution,with a parade of potentially devastated public employees to tug at the heartstrings.
Obviously the answer for each of us is not to invest in stocks and bonds, but to incur as much debt as possible combined with liabilities to as many people as possible so when you finally are exposed, they have no choice but to bail you out.
Bankster funded propaganda against bankruptcy has only just begun, as witnessed with the situation in Puerto Rico. Who thinks the bond holders will accept haircuts? The austerity will continue until the economy improves.
More than bankruptcy is needed at this point. Chicago needs to be disincorporated and its functions assumed by Cook County. It’s obvious that many of the city’s institutions are failures and new forms of operations and management need to be put in their place.
I would think the first hit would be to Wisconsin as they actually have money to be looted.
In a Bailout Regime youre probably better off being broke since then you would be “in need”.
How do you take money from another state?
With an already 68% unfunded liability when the markets turn south (as expected) the Chicago municipal pension fund will implode. A 68% unfunded liability is past the danger zone. It’s in the ‘Katy bar the door’ zone. That city is a social and financial powder keg. My only advice would be to cut your losses and get the hell out of Dodge. Good luck to all who choose to ride it out. Your threshold for risk is much higher than mine.
The Central States Pension Fund which represents more than 400,000 International Brotherhood of Teamster union members, retirees and survivors is in trouble. Because of this the fund has proposed reducing monthly benefits currently being paid to pensioners by 22% on average. This is a disaster for those counting on the money they were promised.
It should be noted that underfunded pension funds is not a problem only here in America, but it exist all over the world. The PBGC, America’s safety net for failed pensions has total assets of about $88 billion and liabilities of $164 billion, this is an indication of how dire the situation is. The article below delves into why in the future many pension payouts will be cut.
http://brucewilds.blogspot.com/2016/05/pension-benefits-will-be-cut.html
ANYONE WHO OWNS A HOUSE OR WORKS IN CHICAGO.
THIS IS YOUR WARNING
For an individual to work for the city or county in Chicago, you must join the public union as a condition of employment.
Whether you agree with unions or the candidates they support, you will have your public union dues taken out of your paycheck before you even see it. You will have no say on how this money is spent.
You will be asked to perform violence and intimidation on “enemies” of the public unions. The police and the law will ignore it.
Public unions are the all time largest political campaign donors in the history of America.**
They support 99%-1% the most liberal democrats candidates. Any democrat at ANY level in Chicago government will not get elected without their support.
There is no opposition. No opposing party. There is no alternative.
The public unions will not give up one dime in benefits,, salary or pension no matter how bankrupt Chicago becomes.
They will force tax increase after tax increase. Business and people will continue to leave. No matter, their demands WILL be met. No matter what you will pay or lose your house.
No politician will stop or oppose them. They like their cushy jobs, benefits and pensions too.
It will end like Detroit.
Think about what would you have said to a private sector worker or home owner or small business owner in Detroit in 1995 knowing what you know now?
GET OUT. GET OUT NOW. SELL FOR A LOSS. IT WILL GET MUCH, MUCH WORSE.
THIS IS YOUR WARNING
** https://www.coursehero.com/file/p1ff4u/Top-All-Time-Donors-According-to-OpenSecretsorg-6-the-top-contributors-since/
Labor unions are the largest …single… contributors. But….
“The broadest classification of political donors separates them into business, labor, or ideological interests. Whatever slice you look at, business interests dominate, with an overall advantage over organized labor of about 15-to-1.”
http://www.opensecrets.org/overview%20/blio.php
I don’t see what the problem problem is that a little money-printing by the Fed to buy Chicago and Illinois bonds won’t solve. The Fed and the ECB will take that road one day in the future. It is the only politically feasible solution. Death by cancer rather than heart attack.
In the meanwhile, come on out to Montana where it somewhat sane, Mish.
No discussion of pension liabilities is complete without mentioning “The moving ahead for progress in the 21st century act” a rider in a 2012 transportation bill This law allows pension funds to calculate investment returns based on a 25 year average of interest rates instead of the previous 2 year average of rates. Needless to say this allows a much higher return calculation that is actually possible. Which means, pension fund sponsors are allowed to contribute much less to the pension fund.
In my case my employer (a large health care organization) was able to significantly reduce contributions to the plan. As an example for 2014 the company contribution “with adjusted interest rates” was $259, 203. Under the old calculation the contribution would have been
$35,927,754. That is not a typo! The plan went from 102.71% funded to 79.04% based on the reduced contribution.
It seems our lawmakers allowed the worst possible thing for pension plans (reduced contributions) at the worst possible time. I don’t know who was the author of the law or who pushed it through. If someone has the time and knowledge to find this information, it would be interesting to know who pushed through and passed a terrible law for the working man.
Mish – As a fellow IL resident, I wonder…Isn’t it only a matter of time before this issue rises to the level of *obvious* absurdity even to those not following it closely?
That is, at some point won’t the deficit become so big that the tax increase necessary to fill the gap will be large enough that it’s not palatable even to IL residents and they just say “Enough.” to the unions? The zeitgeist seems to becoming more skeptical in general about these issues.
But, I guess I can answer my own question and say that I’m leaving IL anyway as taxes elsewhere are already so significantly lower than the absurdity of what we pay here.
We have property and our eyes on Montana – Near Glacier National Park
Columbia Falls and Whitefish area
Have the land, just a matter of time before we build
Ever seen Montana’s pension obligations? You’d better consider somewhere else. Especially the area you are mentioning it is sky high wastefulness and high taxes.
Detroit may be a ‘big’ city, but I understand that She’s on a diet.
Government run pension funds that are 32% funded without being at the bottom of a recession is insane. They made absolutely fraudulent representations to their staff, and have conducted their finances in a way that should result in criminal charges. The USA is a banana republic … the government should be a watch dog to prevent private companies from committing fraud, let alone doing it themselves.
can you chant we love you obama com home barrack won’t you come home
I want to break this corrupt state up. I would like to see Cook and DuPage broken off along with perhaps Lake and Will. We could call the new entity the Commonwealth of Qurap. Maybe the State of Corruption. Cook and DuPage gets rid of the real scum of both the Democrat and RINO parties.
You could even make a little ditty about our current 102 counties. How would it be with one hundred I’ve often wondered? It’d be fine with ninety-nine. We’d be pretty great with just ninety-eight.
Mish, you know if they only paid out about 32 cents on the promised Dollar these crooks would get about what the people paying the taxes get for their own retirement payments. So I say screw ’em. When you figure in the double, triple, quadruple dippers this system is rife with they won’t starve, but they will not become retirement millionaires on the taxpayers arthritic back.
Reblogged this on The Arts Mechanical and commented:
And so it begins One by one, defined benefit pensions are going to go bust because they relied on growth and more people paying in, start with the private funds(http://www.zerohedge.com/news/2016-05-21/407000-workers-stunned-pension-fund-proposes-60-cuts-treasury-says-not-enough), then the public employee union funds and finally the big two, Social Security and Medicare. The problem is that you can’t spend money that doesn’t even exist and the stifling effects on growth for the last fifty years or so did not create the wealth that all those programs were planned on. They are ALL doomed
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It’s time to add a stipulation that if a pensioner maintains a residence in Illinois and pays taxes to the state, they can collect their entire pension. If they relocate out of state, they can only collect 50%.
They would just maintain legal residence in IL. Would not do much, if anything.
My plan is to simply tax all public benefits higher than x dollars at 90%.
That fixes the problem guaranteed, and I fail to see why it isn’t legal.
Mish
Publicly funded pensions need to be phased out. Why should private sector workers have to pay their own retirement via 401ks, IRAs, etc. and also pay for the retirement of government workers?
Such a convoluted situation.
First point: there is not such thing as a government “pension”. Pension is a construct of a for-profit enterprise.
Second: if government employees want to make a retirement system, it needs to be 100% funded by them. That means they deduct 1/3 of their salary-for the period of work, say 25 years; then for the next 25 years they receive a check, which supports them while they work a part-time job.
Third: People who work at a particular level of government, do NOT get to vote in that level during the election.
Fourth: the agreement Illinois Territory made to become part of the United States [3 December 1818] requires that it obeys the US Constitution. That means the citizenry are not obligated to pay the odious debt of the state/county/local governments. It also means that little addendum to the state Constitution from the 1970s, where they say public ‘benefits’ can NOT be changed/altered, is null & void.
So frankly, Chicago the municipal corporation should be sent through bankruptcy liquidation proceedings ASAP.