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.