Illinois’ Pension Time-Bomb Too Big Too Fix

So says the Commercial Club of Chicago.

In a memo to its members, the Civic Committee of the Commercial Club of Chicago said last week’s elections didn’t bring in an influx of lawmakers willing to deal with the pension crisis but instead leaves taxpayers with “more legislators who aren’t prepared, or willing, to make the tough decisions necessary to save our state.”

“We are writing today to let you know that the pension crisis has grown so severe that it is now, unfixable,” said the letter co-signed by Miles White, chairman of the Commercial Club; Jim Farrell, chairman of the Civic Committee, and Ty Fahner, president of the Civic Committee and Commercial Club.

via Sun-Times.

Miles White is the Chairman and CEO of Abbott Labs.  Jim Farrell is the retired Chairman and CEO of Illinois Tool Works.  Ty Fahner is a partner at Mayer Brown where he handles tax, bankruptcy, and securities matters.  These are not dumb guys.  They understand finance and are used to dealing with large numbers.

The headline is of course misleading; the problem is fixable.  It’s really just that every week that’s wasted means the solution will be more painful.  The Commercial Club outlines what it thinks needs to be done:

  • All cost-of-living increases need to be eliminated for retirees, who now get annual 3 percent pension boosts.
  • A cap on salaries must be imposed upon which pensions can be based.
  • The retirement age for full pension benefits needs to be raised to 67.
  • Downstate and suburban school systems must be forced to take on pension payments from the state for educators over a 12-year phase-in.

This is pretty painful for the pension members.  Naturally there will be some pain on the taxpayers as well.  It’s a bad situation that’s only getting worse by the day.

Mike Madigan: Speaker King

Democratic Speaker Michael Madigan has many advantages as he tries to extend his nearly uninterrupted three-decade control of the Illinois House.

His Democrats have more campaign money. His party has home-state President Barack Obama to drive the vote. Perhaps most important, Madigan drew the district boundaries for each of the 118 House contests that will play out in Tuesday’s election.

Given all that, Madigan is positioned to add to his 64-54 majority.

via Chicago Tribune.

Someday Michael Madigan’s daughter will not be the Illinois Attorney General.

Someday the people of Illinois will realize just what self serving piece of garbage Michael Madigan really is and demand that he be thrown in jail, burn his house down, and then burn the ashes.

All of Illinois’ problem can be laid at the feet of Michael Madigan.  The debt, the fraud, the corruption, the bad roads, the pension fiasco, … everything.  It’s been his piss poor planning for the last 30 years that has brought us to this point in time where the state is bankrupt and looking for a federal bailout.

We need to Kill the Machine.

 

 

 

Pension’s Rate of Return Plummets to 0.76%

This sounds like a problem:

The pension fund for most public school teachers in Illinois generated just 0.76 percent in fiscal 2012, a big drop from the 23.6 percent rate of return in the previous fiscal year, the Teachers’ Retirement System reported on Thursday.  …

It is the long-term results that matter and the system’s 20-year investment return at the end of June was 7.73 percent.”  …

Last month, the pension fund for teachers in all Illinois school districts with the exception of the Chicago Public Schools, lowered its long-term assumed investment rate of return to 8 percent from 8.5 percent.The move will depress TRS’ funded ratio to 42.5 percent and increase Illinois’ fiscal 2014 payment to the fund to $3.36 billion instead of $3.07 billion under the previous return rate.

via Crain’s Chicago Business.

Indeed a problem.  Consider …

A drop in the assumed rate of return from 8.5% to 8.0% meant that the state (that’s you and me, a/k/a the taxpayers) owed an extra $300,000,000.  Hummm….

TRS’s board members, appointed by The Machine, like to quote the 20-year ROR because it’s a respectable 7.73%.  That’s true.  But as I wrote about this before, the 10-year ROR is a pathetic 5.7%.

The fact remains that TRS is in some real trouble.  Everyone knows it.  And the longer we keep our head in the sand the more painful it’s going to be to fix.

IL Finances Heading to Social Unrest

“I think it’s going to reach a point where there’s either social disorder or bankruptcy before people will act,” he said.

via Crain’s Chicago Business.

Ya, that sounds about right.

But let’s back-up a little.  This is a quote from a story about how back the finances are in Illinois.

A Blue Ribbon Panel put together a report which was released this morning.  It’s damning in the extreme.  The whole report can be found here.

I’ll write more about this later… I have to catch a plane.

Chicago’s Pension Time-Bomb

While Emanuel can coast for two more years, the city in 2015 is required by law to set aside an additional $700 million a year for two of its four pension funds, all of which are woefully underfunded: That year’s budget will include a total of $1.2 billion for the retirement accounts of teachers, police, fire and municipal workers. Such a steep ramp-up threatens to gobble city resources for everything from parks to schools to transportation.

via Chicago Tribune.

The total budget for this year is $8.35 billion.  In two years the city has to find nearly another 10% more money… out of thin air.

This is naturally in addition to the $86 billion (laughable that anyone still believes this number; it’s easily twice that) hole is the state pension funds.

Get ready… something’s going to go BOOM pretty soon.

Illinois Need to Cut COLAs

The head of Illinois’ largest pension plan strongly suggested that cuts in cost-of-living benefits are inevitable for more than 360,000 teachers and retirees outside of Chicago.

In an interview with Crain’s editors and reporters, Richard Ingram, executive director of the underfunded Illinois Teachers’ Retirement System, said state politicians will have few other options if they want to make meaningful progress on closing the gap between promised pension benefits and the available funding.

via Crain’s Chicago Business.

Well Duh!

What’s missing from this article is any analysis as to how much longer the pensions can survive should the state cut or reduce the COLA.  Mark my words — cutting the COLA is NOT a FIX.  It is a band-aid at best.

Illinois – Worst Financial Shape Ever

Bloomberg L.P., the big New York financial data firm, is holding its fall municipal-financing conference on Wednesday, and guess what the title is for the special panel on the Land of Lincoln?  Try Land of Entropy.  Yes, sports fans, the panel titled “Illinois Treading Water” is set for 1:45 p.m. and, according to a synopsis, not too much good will be said about our fine state.

“California debt is beating Illinois bonds by the most in three months as investors choosing between the two lowest rated U.S. states reward efforts to bolster the finances of the nation’s biggest pension in California,” it says.  But though they passed a version of pension reform in California, nothing good has happened here.

“Illinois lawmakers failed to advance any measures in a special session Aug. 17,” the synopsis says.  “Standard & Poor’s cut the state’s credit.”  And, at last check, “Illinois carried a backlog of about $8 billion in unpaid bills, not including pension obligations.

“More: Illinois’ ratio of pension assets to liabilities is “the lowest among U.S. states.”  It concludes, “What is the outlook for significant defaults in the state? How can Illinois get its fiscal house in order?”

via Crain’s Chicago Business.

Rahm, Michael Madigan, Pat Quinn, John Cullerton, and the rest of The Machine will go down in history as fiddling while Illinois burned.

Aldermen Briefed on Pension Time-Bomb

[Chicago’s] Chief Financial Officer Lois Scott reminded council members that absent significant changes to pension plans, the city will be forced to drastically cut services, raise taxes or do both to close a funding gap that could reach $700 million in just a few years, aldermen said.  …

…  Lawmakers are looking to fix the state’s woefully underfunded pension system, but the city also needs changes from Springfield to repair its retirement funds.

… Absent a city pension overhaul, the fund for retired city firefighters would become insolvent in nine years, according to a city report issued two years ago.  The police pension would go broke four years later.  Funds for city laborers and municipal workers would be broke by 2030via Chicago Tribune.

These numbers are all wrong.  These pension claim they’re going to earn 8% on their money year after year.  That simply has not happened in a decade and they are tens-of-millions of dollars behind where they claimed they would be be even two years ago.

Kudos to my friend Anthony Curran who suggested we start a Pension Death Watch.  I think it’s a great idea.

Legislative Change Means $670 million More for Teachers’ Pensions

The state will have to come up with another $670 million for the teacher pension system in the next budget after a retirement fund panel crunched the numbers and adjusted its assumptions.

The Teachers’ Retirement System lowered what it expects from investments from 8.5 percent to 8 percent. The pension fund’s leadership also increased a variety of other assumptions, including how long it expects retired teachers to live. The fund covers teachers outside Chicago.  …

The state is paying $2.7 billion into the fund in its current budget. Without any adjustments, the state would have owed about $2.89 billion in the new budget year that begins next July 1.But the changes approved Friday increased that price tag to $3.37 billion. All told, the state will have to pay $670 million more than this year.

via Chicago Tribune.

Consider, we’re going to pay $3.3 billion into the teachers pensions and another $3 billion on debt service.  That’s $6 billion next year that could have gone to pay for services for the poor and the elderly but instead are going to the politically connected and union members (… I realize that’s redundant.)

But this may be the best line of all:

Senate President John Cullerton and House Speaker Michael Madigan, both Chicago Democrats, recently suggested that changes to the pension system would have to get done in January at the earliest. That’s a post-election period when more lame ducks are freer to take politically risky votes, and the bar to pass legislation with an immediate effective date drops from three-fifths to a simple majority.

Allow me to translate:  Fixing the pensions is going to be very unpopular and thankfully our experience is that voters have short memories.  We also don’t care how much more money this costs the state (after all, all the bond holders and the teachers unions are our buddies.) We’re also not sure that we can get all the Democrats to go along.  So we to avoid any embarrassment — and to make sure the unions make the campaign donations they promised before the election — we’re going to put this off until next year.

The Machine is like a casino… the house never loses.

Quick Pension Analysis

Ok, so I was getting asked about this the other day both in person and in the comments about why the pensions are really in such bad shape and what the latest GASB positions mean to the funds.  GASB first.

GASB Changes
I did some poking around and the recent GASB changes really mean nothing.

After six years of research and about 400 pages of text, GASB’s statements 67 and 68 do little to provide enough meaningful information about the potential retirement costs faced by the taxpayers. The statements will force the worst of the worse, such as Illinois, to recognize a much larger liability.

That’s like throwing the zombified Walking Dead under the bus to give the appearance of taking a serious step in providing transparency. Zombies are already dead. You can throw them under a bulldozer; it doesn’t make them more dead.  …

The new standards still allow most pension funds to choose their discount rates when determining their pension liabilities. In other words, the sworn and civilian plans of the City of Los Angeles can wantonly throw caution to the wind and assume a 7.75% earnings assumption going forward, avoiding any consideration of risk.

via City Watch LA.

You can read the policy papers.  It’s pages and pages of nonsense summarized nicely with the zombie analogy above.

But what the lastest GASB changes point out to us is the danger regarding the assumed internal rate of return.

Interest Rate Issue
For giggles I found the 2011 annual report of the Chicago Teachers’ Pension Fund.  It’s 116 pages detailing a underfunded, mismanagement, no financial understanding pension time-bomb with some lipstick.

From page 13:

As of June 30, 2011, investments at fair value plus cash totaled $10,456,912,118. This reflects a 16.8% increase from the $8,949,590,783 value of June 30, 2010. The Fund’s investment performance rate of return for the year ended June 30, 2011, was 24.8%, exceeding the projected return of 8% and reflecting a 82.3% increase from the 13.6% performance rate of return as of June 30, 2010. The ten-year rate of return posted by the Fund for the period ended June 30, 2011, was 5.7%, and fell short of the actuarial assumption of 8%.

That’s a lot of information.  I draw your attention to the incredible swings in the rate of return of the fund over the years.  24.8% one year, 13.6% another, however the 10-year average is a mere 5.7%.   On page 25 we learn that the 5-year average is only 4.7%.  Yikes!!  But the fund assumes that over the long term it will average 8%.

But what does that mean? So what?

Well, the fund currently has net assets of $10.344 billion.  When invested at the given rate of returns at the end of 5 years we have:

Year Value @ 4.7% Value @ 5.7% Value @ 8%
0 $10,344,100,000.00 $10,344,100,000.00 $10,344,100,000.00
1 $10,830,272,700.00 $10,933,713,700.00 $11,171,628,000.00
2 $11,339,295,516.90 $11,556,935,380.90 $12,065,358,240.00
3 $11,872,242,406.19 $12,215,680,697.61 $13,030,586,899.20
4 $12,430,237,799.29 $12,911,974,497.38 $14,073,033,851.14
5 $13,014,458,975.85 $13,647,957,043.73 $15,198,876,559.23

If the next 5 years are like the past 5 years the fund will earn 4.7% on its assets.  So in 5 years it will have $13.014 billion.

In the next 5 years are like the past 10 years the fund will earn 5.7% on its assets.  So in 5 years it will have $13.646 billion.

However the plan assumes that over the next 5 years it will follow the 8% column and have $15.1 billion.  History is against them.

If the fund earns 5.7% over the next 5 years it will be $1.55 billion short of projections.  That’s 10% less money available.

If the fund earns 4.7% over the next 5 years it will be $2.18 billion short of projections.  That’s 14% less money available.

If all the assumptions go on for 10 years:

Year Value @ 4.7% Value @ 5.7% Value @ 8%
10 $16,374,178,752.54 $18,007,050,537.73 $22,332,136,064.29

Earning 5.7% the fund is $4.33 billion short or 19.3%.

Earning 4.7% the fund is $5.95 billion short or 26.6%.

So if the next 10 years are anything like the past 10 years from an investment standpoint we can expect the all the state pension funds to have about 20% less money than they’re projecting.  That could easily be another $40-50 billion that someone’s going to come looking for.

– – –

Now in all fairness, a historic average suggest that a return rate of 8% could be reasonable.  i.e. These funds may be able to earn an 8% return in the next 5 years.  Why?

Interest Rates & Inflation.  In the last 5 – 10 years there has been very little inflation and interest rates have been low.  That’s generally accepted to be a good thing.  However it messes with the long-term analysis as to what something will be worth in the future.

Given the amount of debt carried by the Feds, and the quantitative easing (a/k/a money printing) that been happening, it’s safe to say that very soon interest rates are going to start going up… fast and dramatically.

When interest rates go up, the rate of return on these pension funds should go up as well.  If they get close to the 8%, then we’ll only have to worry about the current short fall of billions and billions and billions.

Any questions?