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Home Publications Blogs Beat the Press Missing Background on Chicago's Pensions

Missing Background on Chicago's Pensions

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Thursday, 05 December 2013 06:15

The NYT had a piece discussing the situation with Chicago's underfunded pensions. It could have used some additional context.

First it would have been useful to point out how the pensions became badly underfunded. The problem goes back to the late 1990s when Chicago, like many other state and local governments, largely stopped contributing to their pensions because they thought the run-up in the stock market made it unnecessary. They made projections, with the blessing of bond-rating agencies like Moody's and Standard and Poor's, that essentially assumed that the stock bubble would grow ever larger for decades in the future.

After the bubble burst, Chicago continued to make contributions at the same levels. This was a conscious decision by the city's political leaders, most importantly its mayor Richard M. Daley. Any city that goes a decade without making required contributions to its pensions will have a seriously underfunded pension system. This is the legacy of Mayor Daley, who remarkably is still a respected figure in public life.

While the shortfall is substantial it would be helpful to put in the context of the size of the city and its projected revenue. Its pension shortfalls are in the neighborhood of $28 billion. This is equal to approximately 0.5 percent of its projected income over the next three decades and 15 percent of projected revenue. This is far from trivial, but also not a crushing burden for a city with an otherwise healthy economy. 

The article also highlights the decision of a federal judge to allow Detroit to declare bankruptcy. Given its much healthier finances it is unlikely that Chicago's current mayor, Rahm Emanuel, would opt to go the bankruptcy route.

Comments (5)Add Comment
Financial Illiteracy
written by Jay, December 05, 2013 7:09
$28 billion is a present value. You just took said present value and divided by nominal future cash flows. Didn't anyone ever teach you about inflation and that $1 today cannot be compared directly to $1 10 years from now without inflating the current dollar or deflating the future dollar.

I don't know the exact trends but I'm going to estimate revenue grows 4% a year and that the pension fund is assuming a discount rate of 5%. Under these conditions the present value of projected revenues is $87 billion. 28 / 87 = 32%. That is the correct way to do the math.

Durrrrrrrrrrrrr
...
written by watermelonpunch, December 05, 2013 7:33
the blessing of bond-rating agencies like Moody's and Standard and Poor's

Another time I can only think again, how are they still in business?
...
written by skeptonomist, December 05, 2013 9:26
The lessons from these city pension problems should be clear. When pensions are dependent on the stock market, or even the bond market, there will always be huge ups and down in revenue. It is too much to expect those in charge in every city or state to anticipate the problems and smooth out the revenue stream or even to avoid losing everything in crashes. Why should the retirement of city employees be dependent on the performance of a few individuals in charge of pensions, who are certainly not infallible, if not actually venal? Pensions should be related to overall national or at least state production, not the vagaries of markets. This is basically what Social Security does - it should be expanded.

Wall Street and conservatives argue that pensions should be based on individual savings. But if professionals in charge of city pensions can't handle them, how could it be done by individuals who know little or nothing of finance? Some city and state pensions are in trouble, but probably the rate of failure or inadequacy is greater among those who have to rely on individual plans.

The idea that a national plan like SS could ever be "bankrupt" is complete nonsense - this would happen only if the entire country went bankrupt. The basic idea is simple - a fraction of national production must go to the elderly and disabled. This is not something that has to be mediated by markets and financial operators who take a cut of all transactions.
Is this really going to save money?
written by Jonathan Swift Boat, December 05, 2013 6:50
In the near future public employees will start asking for their money up front instead of a promise that might not be honored.

And if Chicago is ripping up contracts since it's short of money, why not just refuse to allow the privatized parking collection that it auctioned off at bargain prices a few years ago to Wall Street and foreign investors? The public should just keep the money for itself and tell the investors to eat shit.
Some more context
written by Jennifer, December 05, 2013 7:39
"Chicago, like many other state and local governments, largely stopped contributing to their pensions "

It cannot be said enough, that when the word "Chicago" is used (or Illinois) in this instance it is a specific reference to the government's contribution. The workers have ALWAYS paid into these funds. The pensions are not some generous perks given by a benevolent power they were EARNED.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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