Look Below The Surface On Chicago’s New Financial Statements – Wirepoints

By: Mark Glennon*

Chicago this week released its audited financial statements for its 2020 fiscal year, which ended December 31, 2020. They are part of its Annual Comprehensive Financial Report, or ACFR. (ACFRs were formerly called CAFRs, which sounded like a racial slur in South Africa, so the industry changed it.)

At first glance, the results look quite good for a year made so challenging by the pandemic. The city’s Net Position for government activities actually improved a bit to negative $30.33 billion from the previous year. “Net Position” is government accounting’s term for net worth, and changes in it are comparable to net income or net loss.

But look further.

First, net liabilities for the city’s four pensions increased by roughly $1.1 billion dollars to $33 billion.

That deepening pension hole occurred despite an increase in the city’s yearly pension contributions by $1.1 billion, and despite what was an unusually good year for pension investments. The stock market was particularly strong in 2020, with the S&P 500 increasing over 16%. That drove up the value of pension assets by 10%.

But the additional $1.1 billion from taxpayers and the investment gains weren’t enough to stem the hole that deepened by over a billion dollars.

Second, the city’s reported OPEB liability more than doubled, rising $1.1 billion to $1.96 billion. That’s the estimated costs for future healthcare for city retirees – “Other Post-Employment Benefits.” The huge increase resulted largely from accounting changes to make the estimated liability more accurate.

OPEBs, like pension obligations, are constitutionally protected for government workers in Illinois and are usually ignored in discussions about state and local fiscal problems in Illinois. At the state and local level, OPEBs are a stunning $68 billion unfunded obligation, which we covered in a special report. Chicago’s OBEB liabilities, like the state’s, are entirely unfunded, pay-as-you-go systems; no investments are set aside to cover them.

How can it be, then, that the city’s Net Position improved despite these losses?

“A flood of federal relief helped cushion the pandemic’s impact on Chicago’s balance sheet last year,” as The Bond Buyer put it. “The City received more than $1.46 billion in federal aid last year to manage the pandemic’s costs” – that number is in the ACFR itself. Chicago, like the rest of the state, was showered with cash from the federal government. As we recently reported, total federal aid statewide is a stunning $138 billion and counting.

Spending reductions and delayed programs no doubt also helped save the city money during the pandemic, but the $1.46 billion is huge, comprising over 16% of the city’s total revenue. That’s just from the direct aid to the city. It also benefitted indirectly from the billions of federal money that went to individuals and businesses, helping sustain tax revenue and economic activity.

The city’s financial report also appears to have been distorted by the ridiculously obfuscated “deferral accounts” that have become common in government accounting in the past few years. I can’t claim to have figured them out and I am not alone, so I checked in with Sheila Weinberg and Bill Bergman at Truth in Accounting, which specializes in dissecting government financials. Here’s what they said:

On the surface, the city’s financial condition appeared to have stabilized. But our analysis, which we intend to issue in a report next Tuesday, suggests that confusing deferral accounts and changing assumptions make the city’s reported overall net position look better than it should, and point to further overall deterioration despite the massive infusion of federal money in the public and private sectors in Illinois and Chicago.

We will keep you posted on that.

Another important point about pensions should be noted. It’s often reported that the city is addressing its pension problem by moving to an actuarially required contribution schedule, or “ARC” payments. Two of the city’s pensions, for police and firefighters, received ARC contributions in 2020.

But the ARC payments are bogus. They are not really actuarially based. What the pension actuaries truly say is needed is called an Actuarially Determined Contribution or “ADC,” which is in the ACFR. The actual contributions made to the city’s four pensions were $1.1 billion less than the ADC.

In other words, despite the city’s contributions growing by $1.1 billion in 2020, they were still $1.1 billion short of what the actuaries want. That’s part of why the total unfunded pension liability grows and grows.

And even the ADC is still built on rosy assumptions that are often criticized and not used in the private sector, particularly high assumed rates of return on invested assets. Using more realistic assumptions, Moody’s Investors Service puts the unfunded liability for the four pensions at $42 billion, not $33 billion as now claimed by the city.

Finally, the ACFR contains the usual “Certificate of Achievement for Excellence in Financial Reporting.” I don’t recall ever seeing any ACFR or CAFR that didn’t have that certificate. When I poked fun at this once before the retort was that the certificate is not about the performance of the unit of government or the underlying accounting work, but about the format in which it is presented.

Sorry, but I still say that’s ridiculous. Go, for example, to page 185 of the ACFR and try to find the health expense for this year and last year. The formatting is horrible, and it is typical. Please spare us the awards for everybody.

*Mark Glennon is founder of Wirepoints.

5 Comments
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nixit
2 years ago

Why do they put the most current year’s numbers on the far right? Financial numbers should go latest to oldest. And they still haven’t figured out landscape format for the financial pages. Tell them Acrobat Reader lets you rotate the pages.

Aaron
2 years ago
Reply to  nixit

Because real accountants wouldn’t touch this.

susan
2 years ago

OPEBs are devastating financial burdens to local homeowners in Woodstock D200. For one example: public employees work for 20 years vesting period, then taxpayers owe top shelf health insurance coverage for 10 years or more (if recipient isn’t Medicare eligible).

This would be expensive enough if fair market value of this health coverage were competitively obtained but it is not. OPEB recipients have zero incentive to shop around. Teachers behave as though indifferent to overly-expensive and corrupt practices in awarding these lucrative healthcare third party gatekeeper monopoly contracts.

LessonLearned
2 years ago

Can we agree on one thing? Anyone living in Chicago with no plan to leave deserves no sympathy going forward.

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