By: Mark Glennon*
Steven Bourg is an enrolled pension actuary from Maryland. He has been watching events in Illinois and emailing me recently. By sheer coincidence, we discovered that we grew up within a few blocks of each other in Park Forest, a Chicago suburb, at the same time, but we’ve never met. (Must be some virus in the water there that induces hostility to pension scams.) Anyway, he did a quick take on the rough numbers for the bill covering two Chicago pensions — police and fire — that passed the General Assembly this weekend. His view looks accurate to me, as do the numbers he used, but I will let actuaries who read this comment if they think otherwise. Here’s what Steve wrote:
The total Normal Cost (cost for upcoming year pensions for Actives) for Police & Fire is $.3B. Interest on the total unfunded of $10B at the 8% [the Fireman’s fund assumes an 8% return] interest discount to value the Liabilities (same as assuming the assets will earn 8% net, compounded) is of course $0.8B.
So, we KNOW the minimum that should be contributed is 1.1B — Normal Cost and interest on Unfunded. Per the article you linked to [a Reuters article linked here], the legislature will reduce the total contribution next FY from statutory .8B, down to .6B.
They are really whistling past the graveyard. They really should start shouting out (and the Governor might be the only responsible adult in the room and has already talked about it)… that the state constitution MUST be amended so that they can make some changes. They probably should reduce or even freeze future benefits for actives, and replace the Actives’ future pension accruals with an easy 401(k)-type plan, and probably even reduce accrued benefits for Retirees and Actives by x%, freeze everything and be able to pay interest and principal on the 10B of unfunded for the two plans. They probably should cut accrued benefits even for Retirees by 10% or 20%, because they’re past the point of no return.
How could they NOT? $0.8B interest on the unfunded is not affordable! So how can they avoid the answer that they need to freeze future accruals? Private sector taxpayers are choking on taxes, NONE of them have even a fraction of these Rolls-Royce benefits, they’re not affordable, they’ve never been affordable, and the starting actuarial assumptions were never conservative enough to begin with to determine long-term costs/affordability, and it’s coming to a head.
You said it right — kicking the can down the road — and the fiscal cliff’s in sight. And it’s not that contributions haven’t been large enough; it’s that these pension benefits are too big and payable much too early. How could it be affordable to have someone work 25 years to age 50, then pay them almost as much as their pay, and with COLA…. as a pension for another 30 years? It’s not affordable, and hopefully the Democrats will realize the Constitution has to change. Will be interesting to watch. True in California, too. I grew up in Chicago, lived 15 years in southern California, so I keep tabs on their situations. Not good.
Why on earth isn’t some kind of actuarial analysis like this done formally and made public along with the bill? Has any reporter ever asked for one? None that I have seen. Do the legislators who voted for the bill even know these numbers? Do they care?
I will certainly bet that the bill’s sponsor doesn’t really understand, House Majority Leader Barbara Flynn Currie (D-Chicago). Not long ago I was in a meeting where she said the proof that public defined benefit plans are perfectly fine in concept is their popularity in the corporate world. (The corporate world, of course, abandoned them some thirty years ago.) I’d bet the bill’s supporters only looked at two or three numbers — the first two or three years of the scheduled contributions the city has to make. Just kick the can out that far. That’s good enough.
The bill only surfaced two days ago. I guess we’re just supposed to accept the characterization by supporters and much of the media that it “saves” taxpayers money, puts the pensions on a course to soundness and all the rest.
This is nuts. Just plain nuts. Like Mr. Bourg said, we need dramatic changes to the pensions.
Mark Glennon is founder of WirePoints. Opinions expressed are his own.