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Summary and audio linked here.
Chicago’s political leadership is floating a pension buyout program as evidence it is seriously addressing the city’s thirty-six-billion-dollar unfunded pension liability, but Mark Glennon, founder of the Illinois policy research organization Wirepoints, said that the proposal moves debt from one column to another rather than reducing it, and that the broader fiscal picture facing the city continues to deteriorate across every measurable dimension. Audio here.
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
Full interview and summary linked here.
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Bankruptcy is the only option. The big mistake would be to delay. Chicago as well as the rest Illinois will start looking like detroit.
Lobby your federal reps for Illinois to be allowed to file bankruptcy today!
Mark and Steve: In the end it is not all that horrific as they simply will have to declare bankruptcy. I would think both of you would agree with me that is truly the only option for Chicago and many other cities and towns in IL down the line here. There is simply no way to pay for the pensions as is in any realistic way that people can afford. Agreed? Thoughts?
Adam: That’s correct. But Detroit’s bankruptcy was just kicking the pension can down the road……….gave it a few tweaks and kick it away a bit. It will still blow up.
Chicago will prob do the same, tweak the bfts downward but not nearly enough of bft cuts. It’ll be interesting.
Mark: You nailed it, although it’s even a bit worse (if that’s possible) You’re right that the unfunded accrued liability will grow to the extent that new annual cash contributions are less than 7.5% or 8% interest on the unfunded, PLUS the Normal Cost. But the other nightmarish possibility is if the assets don’t grow at 7.5% or 8% compounded over the next few years. Which they likely WON’T. This will be a horrific spectacle to watch. I’m glad I’m watching it from afar, from another state. The ILL newspapers and journalists should investigate more thoroughly, and then write about… Read more »
Steve-
Soon, I will be stealing pension clients from you actuaries who read this.
On further thought, actually, I would be the very last person they would ever hire.
Mark: You prob know the truth of the matter. Businesses all around the country KNOW how ridiculously risky Defined Benefit plans are……..and they’ve been frozen for actives and are just waiting to have enough money to terminate. Govts w/ DB plans actually have NO rules for cash contribution funding, have benefits that are way too generous and therefore after the last 15 years of substandard/horrible investment return……..they…….are………screwed
I know, thanks largely to a few people like you in the industry who have the courage to speak up, unlike most of the go-along, get-along crowd in Chicago.
How would a private sector defined benefit plan look in today’s world of employment mobility? For example, say I worked at 6 employers, 7 years per employer, my entire career, and none of the companies went belly-up. Would I have 7 paltry pensions? Or would each employer let me take my pension with me to my new job, basically letting carryover those years of service at a different employer (and thus a bigger pension)? Did employees even become pension eligible with such short tenures? Was there some “central states pension fund” (yeah, not the best example, but the only one… Read more »
Nixit: Lotta questions, I’ll answer tonight. Most of the answers are common-sense, knowing the rules and landscape of private sector retirement plans as I do (I should, I’ve worked on them, all types of them, for 36 yrs)
NIxit: It used to be typical in private sector to have a DB plan that paid roughly 1% of Final-5-Yr avg pay, x yrs of service…..payable in full at age 65 or reduced if earlier. Even those went from costing about 6 or 7% of payroll, to over 10% of payroll and thus were replaced by 401(k) plans costing about 3% of pay. Those DB days are gone, but the pension in your hypothetical, would have been a nice addition to SS at age 65. And “belly-up” by Er wouldn’t matter b/c the govt entity Pension Bft Guar Corp (PBGC)… Read more »