POWIP Piece of Work In Progress – Former Abode of Dan Collins

Chicago Pensions – Why Daley is Leaving his Sinecure

Because the money is running out.

Some may point to possible corruption charges, but come on... any Daley could weather such a storm. What he can't weather is the gravy train stopping.

Let's take a look. First, let me send you to John Bury, a pension actuary who has been making some cashflow projections. In that link, you'll see a number of cities listed, but the one to note is that the assets backing Chicago's pensions could run out within a decade. Bury has spreadsheets if you want to see the numbers, and yes, Bury has to make certain assumptions for these projections. A listing of assumptions is hereand here. It's not just some lone actuary spinning these numbers -- Daley hired some people to look into this for him:

In April, a commission appointed by Mayor Richard Daley found that the city's funds could start running out of money as early as 2019, beginning with the firefighters fund. The commission's recommendations included lowering benefits for new hires and increasing funding from the city but stopped short of reducing benefits for current workers, which the majority of panel members felt was unconstitutional.

I want you to understand a difference here between insolvency and running out of cash. One can value liabilities on paper and compare against assets -- if the assets aren't enough to cover present value of liabilities, you're insolvent (and for insurance companies, the trigger is usually well before you hit this limit). In pensions, they can get a bit funny about "insolvent", especially public pensions. There's no official definition of insolvency for public pensions. Having assets at about 80% of liabilities is counted as doing well.

Chicago? The last report I can find on Chicago pensions mentions a funded ratio of 43%.

That's bad, if you couldn't figure it out.

In any case, that's comparing some numbers on paper to other numbers on paper, and given how many things it's dependent on it's not exactly real. All sorts of things could happen before the cashflows needed come to pass. The people valuing either assets or liabilities could be "wrong" in that sense - this is just a best estimate. But making up that 57% deficit is pretty daunting, of $15B in total, considering that the annual city budget is on the order of $3B according to this last estimate. But anyway, looking at that point-in-time number doesn't tell me if those cashflows needed to cover pension payments are more in the next year or 30 years from now. This can still seem fluffy even to well-meaning people.

Running out of cash, though? Yeah, that's tangible. I already noted that one Illinois pension fund looks to be in a death spiral. Think of it this way -- say you're a grad student with a low income, but lots of assets saved up, and you're paying for Manhattan rent. The income doesn't keep up with the rent, but you're cashing out the assets.... but at some point the assets are gone (yes, I did this.... why do you ask? I stopped before pissing all my assets away, though.)

The "running out of cash" thing is due to a lot of things, and in Chicago's case surprise SURPRISE, Daley is involved:

With help from allies in Springfield, the Daley administration pushed to have the pension code rewritten so property tax money that normally went to pensions would go to Chicago Public Schools coffers. Under the old law, the district's pension bill was slated to be $93 million in 1995. Instead, it paid just $10 million.

But wait, there's more! Assets hard to value? Pension bets not paying off? That wouldn't be at all linked to Daley's nephew being tapped to deal with some of the investments, would it?

But while it's fun to point fingers on the investment side, the next mayor of Chicago will need to need to figure out how to deal with the liability side of pensions.

I have a response to this guy from a previous link:

Chicago's pension crisis threatens to stain the legacy of Mayor Richard Daley, who has been at the helm of city government for the past two decades and appoints some of the trustees to the city's pension boards.The city's chief financial officer, Gene Saffold, said that the problems facing the city's public pension funds are not unique to Chicago and have been driven in large part by the worst economic climate in more than 70 years. He said the possibility of the funds running out of money "is purely hypothetical and speculative."

You know what? When I was sitting on some pretty hefty savings (yes, much in equities) and paying $1400/month in rent, with an income of about $24K/year (gross, not net), sure running out of money was "theoretical". But I could make a best-estimate projection of when I would run out. I want you to consider what it would take Chicago pension funds to =not= run out of money. Would you like to share that projection, Mr. CFO? I have a feeling it would be deliriously optimistic, requiring Skittles-shitting-unicorns teaming up with underwear gnomes to achieve mega-profits.

So yeah, Daley is getting out before the real hard stuff hits.

Life After Daley Will Be Sobering, writes The Chicago Tribune editorial board: "If for no reason more enchanting than municipal finance, Chicago after Daley will find — must find — not just a new mayor, but a new direction... Richard J. Daley ruled Chicago when gullywashers of cash flowed easily from Washington to urban areas. Richard M. Daley, mayor in a more constrained era, couldn't be the builder his father was. He has, though, grown city government's debt, adjusted for inflation, to more than double what it was when he became mayor. Chicago's property tax base has grown by a much smaller margin. And the city's pension system, like the state's, is severely underfunded, with only about 43 percent of the money it needs to meet its obligations: The firefighters' fund could go broke in 10 years, the police fund 12 years later. So the missing $14.6 billion to erase Chicago's pension shortfalls will come from — where?"

I'll tell you where.

It will get cut out, not only from bondholders and taxpayers, not only from new public employees, but also current and near retirees.

And it will get cut. Because there's not enough of the next generations to tax, for one, and if they try to squeeze the people too hard, the people know how to look up the number for U-Haul. Some may talk about federal bailouts... but such bailouts would have to be originated in the House of Representatives. Do you see that happening?

Hey - I've got a feel-good cut we could all stand behind.... cutting 100% the pensions of politicians -- past, present, and future. I bet you could even get Illinoisians to pass a state constitutional amendment lickety-split to make it so. That won't make up the gap, but it will make us all feel good.

For me, this is about managing expectations, and I want politicians and public unions to expect the financial reckoning. There are not enough taxpayers to soak. There are not enough bondholders to soak. You will have to take a hit, too. I figure people will be less hurt if they can plan for the government not being around for them. Guess what, union workers? You can't count on those pensions when they've been pissed away over the years. You may try to sue your pensions into existence, but you had best be running your own numbers now, saving up what you can, and figuring what cuts you can expect and what you can live with. You should not depend on the politicians or the pieces of paper you rattle to try to get the full measure of their promises.

If the promises were not prepared for, they will not be kept.

If I were Daley, I'd leave the country entirely.

Meep

Meep is a member of the Irish Catholic mafia, having a suspiciously high number of green-eyed, red-haired friends. While she doesn’t have red hair herself [except when she goes into the sun (rare for any vampire)], she does have green eyes. She’s a raving Papist and is a life actuary on the side [i.e., she counts dead people]. An amateur pain-in-the-ass [willing to go pro!], she likes covering retirement, mortality, math, and education issues.

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