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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.

My questions:


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.




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Why would you buy real estate in Illinois?

mark glennon

Well, the bright side is that it keeps the city inexpensive for the startup community.


The 3rd world government of Illinois and Chicago is making the decision to move to Indiana easier and easier. The Government of Illinois shut’s down july 1st unless a budget gets passed. Taxes continue to go up and services are being gutted.
Thankfully Indiana’s government will continue to run with a 2 Billion Dollar Surplus, AAA credit rating well maintaining 50% lower taxes and cutting taxes even more.

Peter A Quilici
I have been following Illinois state and local government pensions since 1994-95, when the General Assembly back-loaded the liabilities. To say the situation is “nuts” is imprecise. There are about 7000 units of local government in Illinois, the largest number in the nation. For most of their workers, the retirement benefits are the thing of dreams. The only calculations you need to make to understand why these plans go without meaningful change is to determine the number of retirees plus workers vested into the present system plus family members who will benefit from the government largesse. Then determine the percentage of Illinois voters who bother to vote.… Read more »

Peter: Yes, SPOT-ON !! Eventually though, you would think the legislators would realize the Rolls-Royce pensions are unaffordable, that taxes cannot be raised enough to keep the pension systems afloat.

mark glennon

Peter, excellent. Thanks.

Thank you for the article, please write more. The Chicago Police and Fire pension bill in the 99th General Assembly is Senate Bill 777 (SB 777), House Amendment 4 (HA 4). > Bills & Resolutions > Senate – Bills 0701 – 0800 > SB0777 PEN CD-SURS-ADMINISTRATIVE > Full Text > House Amendment 004 Filed by Illinois State Representative Barbara Flynn Currie on May 29, 2015. Pensions in Illinois are not designed for long term fiscal sustainability, they are used as political tools to get politicians elected, as evidenced by reading 1,400 pages of Illinois Pension Code that’s constantly been changed and injected with benefit hikes,… Read more »
Well for an update on this thread, Senate Bill 777 (Chicago Police and Fire Pension funding – bind the taxpayer via mandamus, kick the 90% funding can, hike the minimum pension) did become law, as mentioned elsewhere on the blog. Here’s what happened. After passing the 99th Illinois General Assembly (ILGA), it was vetoed by Governor Governor Bruce Rauner. The ILGA overrode the Governor’s veto by achieving the minimum 3/5th override voting margin on May 31, 2016, and the bill became Public Act 99-0506. Here is the bill synopsis on the ILGA website. One might ask why this is important. Well how can one advocate for change… Read more »

Mike: You nailed it on every point ! Rahmbo should have realized this exactly and demanded that, in order to have ANY chance of keeping the pension system afloat, the pay should have been reduced 1%/year for a few years.

Jim Palermo

The decline in the popularity of private sector defined benefits plans can be attributed in part to the high funding standards that came with the 1974 ERISA law. If public sector plans were subject to ERISA, they’d either be far better funded, or defined contribution plans would be commonplace in the public sector.


Actually, Jim, ERISA funding standards were quite flexible. Unfunded Accrued Liability could be amortized over 30 years. That gradually changed until Pension Protection Act (PPA) of ’06 that moved it to 7 years. The Chicago Police & Fire Unfunded at PPA interest rates would be about $14B, so that’d be annual amortization pymts of over $2B for 7 years, plus NC of .3B, makes total requred cash contrib of about 2.5B. Payroll is 1.5B, so pension contrib would be167% of Payroll. Clearly, the 2 plans are irreversibly underfunded.


Asking untrained people to manage their own money is too much to ask? Really? Let’s start with teachers and university employees. Really? They can’t manage their retirement funds. Yeah, you’re right it is much easier to push all risk of loss on the taxpayer.

The current funding status of the Police and Fire pensions is atrocious. However, abandoning DB plans in favor of DC plans is not the answer. Asking untrained individuals to fund and manage their retirements will lead to unintended social and economic consequences. Importantly, liabilities do not grow at the 8% discount rate. A 30 year bull bond bull market has significantly inflated the present value of liabilities. A rising interest rate environment, should that occur, would begin to reduce the present value of those liabilities, and should make it easier for plans to beat liability growth leading to improved funding. The current DB plan design might not… Read more »
Russkamp: Most ‘untrained’ ppl in 401(k)/403(b) plans can invest in Target Date Retmt funds, combined with more bonds if they want to be more conservative. Not complicated. You don’t quite understand how DB pension LIabilities and funding occur. The Police & Fire pension plans have continued to estimate their long-term liabilities at 7.75% and 8.0% interest discount rate (assumed rate of return on assets). The low interest rates in the bond markets have NOT affected the P&F estimated LIabilities at all, for the actuarial report purposes of determining the Annual Recommended Contribution. And the ‘hybrid’ plans are NOT a superior alternative. They are a convoluted bastardization of… Read more »
mark glennon

Russkamp – How does an 80% loss of principal sound? That’s what the result has been for letting Chicago pols run it, at least as measured by comparing what poice & fire think they were getting to what’s in the funds. More importantly, the right result is a hybrid — some guarantied plan equivalent roughly to SS benefits, plus an equity based plan, that may or may not be individually managed. All workers should have some stake in the economy. That they don’t is part of the reason their perspective is so radically different from the rest of us.