By: Mark Glennon*

 

Usually, Illinois’ 600-plus municipal pensions are ignored by local papers. Maybe that’s a blessing because, when they try, they often do readers a disservice.

 

This week the Forest Park Review ran a story headlined Police and Fire Pensions in the Healthy Zone. It provides a nice catalog of omissions, misunderstandings and outright errors that plague both the media’s and public’s understanding of the pension crisis. And it’s agreat place for point-by-point exposure of many reasons why the Illinois pension crisis is underestimated, even in towns reported to be healthy. Numbers I’ve used here about Forest Park are taken from the village’s most recent CAFR — their official financial statements.

 

Forest Park is a Chicago suburb with about 14,000 people. Like hundreds of other Illinois cities and towns, it’s responsible for pensions for its police and fire departments. Its police and fire pensions have unfunded liabilities of 58% and 66%, respectively. That’s “in the healthy zone,” the article says, because that’s better than many other Chicago suburbs, as reported in a very good recent report compiled by the Better Government Association.

 

That’s wrong. Even if you accept official numbers at face value, and even if Forest Park looks better than some of its neighbors, unfunded pension liabilities that big, along with other factors that are common in Illinois municipal pensions, should have the village alarm system ringing. Here’s why:

 

– In dollars those unfunded pension liabilities total about $20 million, meaning the village has about $20 million less in its two pensions than it needs to meet retirement promises for services already rendered. The village’s general fund revenue (aside from revenues for special, segregated funds) is about $17 million. So, it would take an entire year’s worth of general fund revenue just to catch up.

 

– It’s much worse than that because those officially reported numbers badly understate unfunded liabilities, which is accomplished by using unrealistic assumptions. Like many pensions, Forest Park’s assume they will earn an average rate of return of 7 – 7.5% per year, which no reputable financial economist says is reasonable, even for the biggest pensions that invest in stocks and high yield alternative investments. Don’t think that 7.5% sounds reasonable because you’ve been making that in the stock market. Unlike the big statewide pensions, municipal pensions are required by state law to invest much or most (depending on their size) of their money in conservative, low-yield investments, which Forest Park has done. Less than half of Forest Park’s firefighters’ fund, for example, is invested in stocks.

 

— Other assumptions that can be manipulated to make pensions look good are on how long workers and their spouses will live, early retirements, expected salary increases, inflation and more. Good luck determining whether those are reasonable, politically manipulated, or set by actuarial advisors who say what the politicians who hire them want to hear.

 

– That $20 million is $1,400 per capita in Forest Park — $5,700 for a family of four — lots of money in a village where per capita income is about $35,000 annually. That’s in addition to the tens of thousands of dollars of per capita liability on pensions for the state, Cook County and other jurisdictions the village is in. How would the village raise that? Property taxes, their largest revenue source, are the primary possibility for Forest Park and most cities with similar problems. But total annual property taxes are only about $6.5 million. They would have to divert three years of property taxes at current rates just to get their pensions back to even.

 

– Subsidized healthcare benefits for retirees are additional, and nobody really knows how expensive that will be or how long retirees will live. Do you know what kind of insurance premiums you’d have to pay if you were responsible for your own healthcare for the rest of your life? Nobody does. And subsidies for retiree healthcare, like Forest Park provides, cannot constitutionally be reduced according to the recent Kanerva decision by the Illinois Supreme Court.

 

– The article says one reason Forest Park is in comparatively good shape is because it “has been paying the payments all along.” According to it’s CAFR, that’s not true — it has not been making the payments required to meet pension promises even using the overly optimistic assumptions it does. That, too, is common in Illinois pensions.

 

– Payments out of the pensions to existing retirees already exceed total contributions coming in from both workers and the village, which is frequently true of Illinois police and fire pensions. Think about that. Use some common sense and suppose your were running a pension. If you were already paying out more than you were bringing in wouldn’t you be frightened? What about future obligations? And remember that Illinois is losing population at the rate of one person every ten minutes, so the base of taxpayers and plan contributors is shrinking in most places.

 

– The article quotes a village official who says, probably correctly, that Forest Park has been lucky to get pretty good returns recently on pension investments. Yet the dollar total of its pensions’ unfunded liability has increased in each of the past two years, despite good markets. That’s a typical situation, too, and is contrary to the hope some people have that recovering markets will mend the pensions.

 

– Forest Park’s unfunded liabilities do not, in fact, look any better than most other Illinois municipal police and fire pensions. Outside of Chicago, unfunded Illinois police and fire pensions average 55% and 56%, pretty close to Forest Park’s.

 

– The article says unfunded liabilities of up to 20% are still considered healthy. That’s a myth, according to the American Academy of Actuaries. Pensions either have what they need or they don’t, and 100% is needed in most circumstances. The myth is propagated by elected officials covering up their pension mess.

 

– Required contributions from the village to pensions jumped 14% this year to over $950,000. The village can handle that, the article says, so in 2016 when the state starts seizing money from villages that don’t adequately fund their pensions, Forest Park is not at risk. But the fact is that the recent law authorizing that seizure also includes an unfunded mandate that cities like Forest Park increase their pension contributions over five years to whatever-it-takes amounts to bring the pensions to 90% funding — that they “hit the ARC,” in pension speak, as we explained here. That number is not reported. It’s the glaring unknown which is pandemic in Illinois local pensions at this point. Nobody is really saying how much towns and cities will have to pay to hit their ARCs.

 

Forest Park’s overall fiscal health, I want to emphasize, may well be better than other towns and cities in Illinois for reasons distinct from its pensions. Indeed, its cash and current assets seem particularly robust for now, based on its CAFR.

 

And sorry to single out the author of this particular article because she’s not alone — bad pension reporting is common in Illinois.

 

A former Illinois state senator, David Barkhausen, said this about pensions in a comment on one of our recent articles, “The disconnect between what needs to be done and what the public supports may be wider than ever.” He’s right. The public bears primary responsibility for its own blindness, but much of the media isn’t helping.

 

*Mark Glennon is founder of WirePoints

 

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Anonymous

News media generally does a poor job of collecting and understanding facts, in this case the editor also is sub par understanding numbers. This is further exacerbated by wirepoint writing in a posture with no room to bring any of this to a norm. Suppose for example that your theories are correct, why have not any of these pensions funds gone bust? In addition to contributions by local government the funds themselves are predicted to earn investment income not to mention the employees contributions. You position is too static in an ever changing dynamic economy.

The numbers are accurate. If you can be specific about any you think are wrong I will respond. There are no theories of mine in here. Assumptions used in all pension work are not static — they are adjusted each year to reflect changes in the economy, markets and mortality. At least they are supposed to be — shoddy actuary work that lags reality is part of what we are covering here. Pensions don’t go bust. Instead, as unfunded liabilities increase they get closer to becoming pay-as-you-go plans, in which returns on investments shrink and have to be made up by employee and employer contributions. That’s really… Read more »
K Berg

Thanks for this. Municipalities have their heads in sand about long term obligations – don’t wanna scare citizen taxpayers into leaving!

Green

You sparked lots of good discussion in the comments on that original Forest Park Review article.

T.Kline

Really outstanding story. Great work here.

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