This is How You’ll Bail out Municipal Pension Funds

Check the bills in your mailbox. Happening now in Chicago.

It has gotten so bad that the phrase “Pension Crisis” made it into Wikipedia. It’s the perplexing reality that municipal, state, federal, and corporate pensions in the US and similar schemes around the world are so badly underfunded that it will be impossible to fulfill the promises by a wide margin. By many trillions of dollars.

With state and municipal pension funds in the US, the situation is particularly tricky because the beneficiaries are voters and employees of the government, and politicians of all stripes bought their votes with promises of low contributions and rising benefits. They got away with it for decades because no one cares about “underfunded pensions.” Even the term makes people’s eyes glaze over.

But someone is going to pay. And it’s not going to be the politicians.

This is how they will pay for it in Chicago – the city whose credit rating Moody’s cut by two notches to junk in April last year, and whose interest payments, despite historically low interest rates, have continued to skyrocket as it borrows more and skids deeper into the sinkhole of its own making.

On Wednesday, the City Council approved Mayor Rahm Emanuel’s scheme to bail out its largest and worst-off pension fund, the Municipal Employees’ Annuity and Benefit fund, which would otherwise be insolvent within ten years – and a lot quicker if markets have a hissy fit.

Despite seven years of rampant asset price inflation, and asset bubbles nearly everywhere, the fund’s obligations are only 20% funded. It forms part of Chicago’s $34 billion in retirement debt, accumulated over the decades by politicians making promises to buy votes and support from special interest groups. But neither the beneficiaries nor taxpayers via the city contributed enough to pay for those promises.

To save this one pension fund out of its four pension funds from insolvency, the city is jacking up water and sewer levies by 33%, phased in over a few years. Property owners in Chicago will pay, one way or the other, $3 billion into the fund by 2022, up from $1 billion under the prior scheme. Despite these billions of dollars involved, the fund covers only 77,000 workers and retirees.

Beyond 2022, additional revenues must be extracted from the hapless people to keep bailing out the fund for decades to come.

In theory, the scheme will be 90% funded in 40 years – “in theory,” because in practice, long-term projections like this never work out. There are recessions and market crashes that draw a red line through optimistic assumptions.

Even this won’t be a cure but it would “head off a financial disaster,’’ explained finance committee chairman Edward Burke before the vote.

The other three pension funds of the city will also be bailed out. For residents and property owners, it will be, to coin a new phrase, “Chicago water torture”: one drop at a time, whereby the drops are getting more frequent and bigger.

Property owners have already been whacked by a record property tax increase passed last October. It came on top of a reassessment of property values. So the property tax bills this year have jumped on average by 13%.

Phone users get to prop up the Laborers’ Retirement fund, expected to become insolvent “by 2029.” It covers about 5,000 current and retired laborers. So proceeds from the 911-surcharge increase from $2.50 a line to $3.90, imposed in 2014, or about $40 million a year, will be redirected to the fund. The city will also shuffle an extra $30 million a year from city funds covering the operation of O’Hare and Midway airports, water and sewer construction, and the like into the fund.

In turn, the Laborers’ Union has agreed that workers hired after January 1, 2017, will have to contribute more (11.5%) and work longer (until 65). The fund is 50% underfunded. The goal is to have it 90% funded by 2057!

2057! This is why citizens aren’t paying attention to the pension fiasco: it plays out over decades. It’s like watching paint dry. And cities like Detroit, known to be heading toward bankruptcy for years, take their time to make the trip. But attention spans are short. So it doesn’t register until the bills for water, sewer, property tax, phone, and the like are suddenly ballooning.

And this is now happening in Chicago.

It might still not keep Chicago out of bankruptcy. But Detroit has shown how municipalities can continue to borrow money and go on for years even as the worst doom-and-gloom projections have already been surpassed. This can go on as long as yield-desperate investors are willing for fork over new money to bail out the old money. It’s only when these investors walk away that the game is over. And then it can be over fairly suddenly. But that’s not happening with Chicago just yet.

Finally, some good data for middle-class Americans, it seemed: the Census Bureau reported that median household income rose 5.2%. But lost to the profuse media gushing, the report got, let’s say, complicated. Read… That 5.2% Jump in Household Income? Nope, People Aren’t Suddenly Getting Big-Fat Paychecks

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Wolf Richter

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China. WOLF STREET is the successor to his first platform… TP-Title-7-small-200px …whose ghastly name he finally abandoned in July 2014. Here’s the story on that. Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He earned his BA and MBA in Texas and his MA in Oklahoma, worked in both states for years, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland. And it almost swallowed him up.