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By: Mark Glennon*


Consider this:


– Chicago is negotiating to undue a key part of its 2014 pension reform, even while it fights in court to uphold the law.

– The law it’s attempting to save in court is the very one that contributed to the credit downgrades and liquidity panic of the past few weeks.

– Now, Chicago has concluded that it’s not liable for pension obligations after all. It might be right, but the argument is being squandered.


That’s only part of the craziness into which the city’s pension crisis has deteriorated, and it’s likely a preview of what many Illinois municipalities will face shortly.


Just eleven months ago, high-fives abounded when Governor Quinn signed a pension reform law for Chicago, passed by the General Assembly with substantial bipartisan votes and approval of key elements in the business community. The law promised to put two of Chicago’s pensions on a path to full funding by 2055, through two very distinct means. First, it included elements of actual reform — lower benefits and higher contributions from employees. Second, and far more impactful, it scheduled a ramp-up of much larger annual contributions by the city to those pensions, including an enforcement mechanism with teeth that allows tax money to be intercepted and deposited into pensions.


You may recall the fretting at the time about an additional $50 million needed to fund the schedule for last year, which was addressed with a special surtax on phone services. How silly. Chump change. Much higher charges to the city were about to ensue, and, sure enough, fear over how the city can make those big contributions has been part of the credit downgrades and liquidity concerns that have captured headlines in the past few weeks. Yes, a possible $2.2 billion obligation on swap contracts has been the bigger concern, but rating agencies and municipal market participants, unquestionably, are also spooked by the pension payments coming up soon.

(in thousands)


On the right is a segment of the schedule of those annual payments required from taxpayers under last year’s law, taken from the disclosure documents for the city’s bond sale scheduled for this week. It shows aggregate contributions for the four pensions of the city itself. (The disclosure documents can be downloaded at The back-loading is readily apparent, especially for a city with no population growth. It was a kick of the can. (Those contributions are for the total of all four of the city’s pensions. The two not covered by the 2014 law are subject to a similar ramp-up under a 2010 law.)


Note the jump coming just for next year, which is part of what rattled the bond markets and rating agencies recently — over $1.1 billion for 2016. And it will get much worse with each future year, jumping to over $2 billion in twelve years.


Mayor Emanuel’s response, predictably, has been to ask Springfield to relax the schedule, and the bond offering documents say expressly that the city is negotiating with unions for that. “Please,” in other words, “let us kick the can a little longer.”


Well, kicking evidently doesn’t get the can to fly any longer. The muni bond market got tired of it, and the near term ramp-up is especially worrying. The kick was duffed, in other words — too short to ignore.


So, what’s the city doing in court? Fighting to uphold the very law from which the city wants relief. But if the law is invalidated, as was the state pension reform law, then the funding schedule will revert to lower contributions required under prior law. You figure out what the end result is supposed to be.


The good news is that the city has a new, intriguing argument, which is that it’s not liable for the direct obligations to pensioners. It’s only obligated, as the city sees it, for whatever annual payments the legislature sets. The argument appears to have merit, which we wrote about in detail last week, and it may apply to other municipal pensions as well.


The problem, however,  is that the city is misusing that argument in an attempt to uphold the reform law and its unaffordable new schedule of contributions. It’s claiming that its immunity from liability to pensioners distinguishes its case from the state, which recently had its pension reform law invalidated. But the actual reforms would reduce the city’s total unfunded pension liability by only about 10%, about $2 billion, according to an earlier estimate. That’s not enough, the market’s recent response has told us, which sent yields to junk status. The payment schedule, which already incorporates those savings, remains unaffordable.


Keep in mind that the real numbers are much worse than what’s above. The official numbers above supposedly set what are called “ARC” payments — actuarially required contributions. In fact, they are not actuarially sound. Also, Springfield’s methods result in far lower contributions than would be required under new governmental accounting standards or under those used by Moody’s, the rating agency. The bond disclosure documents warn expressly about just that.


There are also the pensions of overlapping layers of government. Just the five that are supported by property taxes on Chicagoans, according to the bond documents, have another $35 billion of unfunded liabilities, in addition to Chicago’s $20 billion. Like Chicago, they cannot be expected to get away with can kicking much longer.


With Chicago already facing a liquidity crisis from the start of the payment ramp-up, you’d think that real reform might be under consideration. Real reform perhaps could be based on the city’s argument that it’s not liable to pensioners. If that argument is valid — and we should have a lower court ruling on it within a few months — real reform could proceed as follows: Springfield could rescind all annual payment requirements to existing pensions. The city would, instead, begin funding an alternative plan with annual payments affordable for the city, to partially replace what pensioners lose from wind-down of the old ones.


No political will for anything remotely like that exists in Illinois. To the contrary, the majority of the General Assembly has, as its core notion of reform, forcing more money into pensions. “Chicago ain’t ready for reform,” an alderman once famously said, and it’s true today about pensions.


And it’s not just for Chicago. Pursuant to the 2010 statewide reform law, starting next year, all underfunded Illinois municipal pensions will begin intercepting tax money, depositing it into pensions in increasing amounts designed to “hit the ARC” in a way similar to Chicago. Most won’t be able to afford it. The onset of that intercept law is a hugely untold story. What’s happening to Chicago is a precursor.


When Illinois congratulated itself last year for passing Chicago’s reform bill, we wrote, The headlines should have been “Bill OKs More Taxpayer Debt to Chicago Pensions.”  Real pension reform was then, and remains today, of no interest to the majority in the Illinois’ General Assembly.


*Mark Glennon is founder of WirePoints. Opinions expressed are his own.

Updated 5/25/15 to clarify that the chart is for the aggregate of the four city pensions.


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Pension question: I came across these bulletins from SRS detailing the “EMPLOYER CONTRIBUTION RATE” for each fiscal year ( 2016: 46% 2015: 42% 2014: 40% 2013: 38% 2012: 35% Are we to infer from this that, in order to fund these pensions, the taxpayers are on the hook to pay 46% of a state employee’s salary this year towards their pension this year?! Isn’t this rate many multiples greater than the employer contribution? It looks like debt service is only 1-2% of this amount, which I would assume was a huge factor, but looks like it’s not. Am I reading this right? Does anyone else see this… Read more »
Jim Palermo

nixit71: The 46% contribution rate you are looking at aggregates two components. One is the ‘normal rate’, an actuarial term that means the contribution to fund the benefits accrued for the current year. The second component is an amount which amortizes the accrued deficit. Given the state’s habit of not making full contributions, the 46% may not be large enough to amortize the deficit over the expected time period.


Thanks for the clarification. Unfortunately, I’m still alarmed.

mark glennon

Nixit, you should be alarmed. The balance between employer and employer contributions is often obscure because even the employee’s contribution gets paid by the particular employer in many cases, particularly teachers in TRS, where local districts pick up the employee’s share. What’s really alarming is that the total contributions, set by statute in Springfield, are not close to being sufficient, which is why the unfunded liabilities spike every year, even when market returns are good. We had a great guest article from an actuary on this “negative amortization” point:

Jim Palermo
Paul, I look at it like this: Some public pension plans in Illinois are approaching funding levels from which they can not recover. At some point in the not too distant future pension benefits in some plans will reach ‘pay-as-you-go’ status, becoming a line item on a state or local budget. I recommend you look at the actuarial valuations of your favorite plans to learn the magnitude of the benefits already being paid. If you can tolerate the diminished services and higher taxes necessary to support the pension promises as they currently stand, I wish you well, but I suspect there will be many who decide to… Read more »

Jim you failed to comment at all on my simple example of a states attorney pension and the inequities of pension reform on him as an individual who has committed 28 years to public service for that pension.

Jim Palermo
Paul, as I believe I’ve articulated, in order to assure their sustainability, public pension plans need larger contributions to the plans and adjustment to their benefit schemes. To achieve this, decision makers representing taxpayers and labor must come to some agreement on increasing contribution rates and reducing benefits. Regarding benefits, retirement ages need to be increased; accrual rates must be reduced; average salary periods for pension calculations must be lengthened and maximum pension amounts must be reduced. It is entirely unreasonable and unrealistic to expect that only the taxpayers should shoulder the burden of returning sustainability to public pension plans. I propose your (presumably) hypothetical 28 year… Read more »
Jim, thx again for your reply. To begin I take NO solace that the high profile municipal bankruptcies decemate the bondholders. I simply point out that those who advocate for bankruptcy as a means towards pension cutting are simutaniously advocating for bond default. Bankruptcy has severe ramifications and is NOT a surgeons scalpel, but rather a hacksaw. As to finding public plans that are well funded, simply google “well funded pension plans” you will find what seems to escapes you. The National Institute on Retirement Security did a study on pensions and why the well funded ones were so and why others were not. Number one reason… Read more »
mark glennon

Guys, there is one overriding and undeniable reality: The bill is too big to be paid for many of these pensions. Try to collect it and Illinois will become a ghost state. Bankruptcy is a horrible alternative; the issue will be whether it is the only one.

Jim Palermo

Paul, it is clear to me that neither of us will persuade the other on this issue. Good luck to you.

Thx Jim and good luck to you in return. If I cant pursude you then maybe I can pursuade others, like my children, that when you give your word- it matters. When you make a promise-you keep it. When you make a contract-ya honor it. Obligations Comitments matter. If ya tell a laborer I will pay for your services and give ya a bonus at the end Ya dont renege on the bonus. When the State makes a contract the State needs to keep it. Illinois took pension hollidays but the bill needs to be paid. That is what is right and moral. Thanks for a spirited… Read more »
Jim Palermo
Paul, you’ve misinterpreted one of my comments. I did not say that bankruptcy is an unviable strategy; I said pension haircuts were not used in San Bernardino CA’s plan to exit bankruptcy. Left unsaid by me was that the San Bernardino City Council’s decision not to reduce pensions is puzzling since the bankruptcy judge in Stockton, CA’s bankruptcy explicitly said that pension reduction is permitted under bankruptcy law (Stockton also left pensions unchanged). Incidentally, $50 million of the San Bernardino debt is Pension Obligation Bonds, money borrowed to make up prior plan underfunding. Don’t expect future POB borrowings if the bondholders bear the full credit brunt of… Read more »
Thx for your reply Jim, If you did not say bankruptcy is an unviable strategy then the logical inverse is then that you say Bankruptcy is a viable strategy to deal with pension debts. To that, I simply point out that in our two major examples Stockton and Detroit the bondholders took the big hits and not the pensioners. So calling for bankrupty is also calling for bond default the two go hand in hand. Next you talk about pension payment equities for gov. Workers as compared to private. Lets take gov lawyers as an example. Say you are just out of law school and you have… Read more »
So it’s ok to change rules on taxpayers but not public sector workers? The benefits have been hiked in all 18 pension funds in the Illinois Pension Code. The pension benefits in place 28 years ago are less than pension benefits now. Which is the name of pension fund to which you refer in 1987 or so which is 28 years ago? Public sector unions and politicians changed the rules on taxpayers by hiking the pension benefits. Do onto others as you would like others to do onto you. So it’s perfectly fine to hike benefits but not to reduce them, how is that fair to the… Read more »
Mike your post is so scattershot and disjointed its hard to respond but I will give it a shot. All the same I look forwards to Jim,s reply to my States Attorney pension example. 1: So its ok to change rules for taxpayers….yes Mike is called a legislature they can make and change laws subject to the constitution and judicial review. Even public sector workers are effected as new hires have a MUCH lowered pension benifit called tier 2. Existing public workers pension are constitutionaly protecerd and not subject to impairment. 2. Benifits have been hiked…The legeslature can increase pension benifits but cannot impair them. This is… Read more »

What is the name of the pension fund.


Cook county fund as I told ya above

The below questions apply to Tier 1 as that is the program in which the the 28 year employee participates. What’s the accrual rate in the fund. Are their optional programs that can be or were purchased to hike the accrual rate, if so please explain. Is it a flat accrual rate for each year worked. What’s the minimum number of years at what minimum age to obtain full benefits, in this case the employee seems to be shooting for some target above 28 years. Can sick days be exchanged for years of service credit – what is the maximum number of unused sick days that can… Read more »

Your questions exemplify how limited your knowledge base regarding pensions is and how unresourcefull you are as to obtaining information. Look it up. Cook County Pension Fund.Google.


Are you a member of the Cook County Pension Fund Paul?

Paul – I appreciate your state’s attorney vs private sector lawyer example. I know someone who actually made that jump some years ago. You make some valid points on taxpayers essentially receiving discounted legal services. But I would encourage you to take into account a few other things: – How do you value risk? I ask because working in the AG’s office is a pretty risk averse choice in the legal field, whereas the private sector high-paying attorney positions are few and far between. My friend who worked for the AG years ago left for a couple of reasons. One was pay (obviously). The other was her… Read more »
I agree Nixit on your risk/reward point and some govt. Lawyer jobs are safe and steady. Some are not and States Attorney’s are not union. As a side note LRAP was not around for someone who started practicing in 1987, but came latter. We all make decisions about what course we take in life…and how much risk we choose to take on. The govt lawyer choose public service with the pension promise in mind and changing that promise years later pulls the rug out from under his feet AFTER he has taken on a lifetime of public service. The private lawyer made two or three times more… Read more »
You make some good points. But what I find concerning is the financial deal made in 1987, about 3 stock market crashes ago, is set in stone forever. Public sector employment is not a 35 year contract. This is not indentured servitude. Is this employee also going to receive medical coverage in retirement using only medical advances up to 1987? If we’re so locked in to 1987, why stop at the pension agreement? I agree changing the deal so far into a deal can be deemed unfair, but up until that point, they’re only entitled to what was earned. The only other option left for the employer,… Read more »

I used my numbers from the US Dept of labor 2010 stats. for public sector lawyers the Average salary is $45-65,000 per year and private lawyer $166,000 per year. In my States Attorney example with 28 years served he started in 1987 at $24,700 and makes now $97,000 per. Currently if he gets to 30 years and is not frozen his benifit will be the average of his last 3 or 4 years at 70 percent.


There are some Downstate Police and Downstate Fire pension funds that are fully funded as of Fiscal Year 2013 per the Commission on Government Forecasting and Accountability (COGFA) Fiscal Analysis of the Downstate Police &
Downstate Fire Pension Funds in Illinois report dated February 2015.

They are few and far between.


Most are greatly underfunded.

Jim Palermo

Mike, I’d be curious to know the number of fire fighters covered under these plans. The Fire Protection Districts (FPDs) tend to be newer plans and better funded than municipal fire departments. That these are just 2% of the 650 or so downstate police and fire plans speaks volumes.


They are mostly small.
The report is on the COGFA website.
There’s no breakthrough here, just some outliers.

Jim, to begin with, I am glad you agree bankruptcy would hurt the bond holders primarily and is not a viable strategy. On future accruals, you do realize the Illinois Supremes were very clear that pension benifits in place at the time of employee hire is constitutionaly protected from impairment. So it may be true that the funds need replenishment from the pension holidays, it is not true that the pension model is somehow outdated or that promises cannot be kept. Look at the pension funds that have been adequately funded, those promises made a generation ago are kept. Pension under funding has been a problem for… Read more »

The schedule above is that for the Chicago municipal workers and laborers pensions only,?????

mark glennon

It’s the aggregate for the 4 city pensions, but not the overlapping other governments. (From table 15 of the $201M PRC supplement.) I will update to make that more clear. Thanks for the close reading.

mark glennon

Paul- Actually, most readers here are pretty familiar with things like bankruptcy’s impact on bondholders and credit. Your are welcome to continue to comment here, but so you know, readers here seem to following these topics very closely.


What happens when another 100k people leave Illinois? Then another? I sure wouldn’t want my retirement funds to be tied to this sad (Illinois) state of affairs…

What would happen if Chicago/Illinois wriggled out of its contractual pension obligations? What would happen if Chicago/ Illinois wriggled out of its BOND obligations? Those that advocate default and bankruptcy and breaking pension contracts are delusional to think that BOND obligations would be left untouched. Asking a government to dishonor some contacts(pensions) yet to honor other contracts(Bonds) is dilusional. A contract breaker is a deadbeat. Cant have it both ways…..and yet pesion benifits have a CONSTITUTIONAL protected status…..Bonds do not have a clause like the pension clause…Bonds are only protected(as are pensions) by a contracts clause. So be carefull what ya ask for in default ya might… Read more »
Jim Palermo
Paul, no one knowledgeable believes bondholders would come out whole were bankruptcy allowed to restructure Illinois municipal debt. As a point of reference, in bankrupt San Bernardino, CA bondholders just took a 99% loss while pensions were untouched. Part of the city’s bankruptcy plan is to privatize the city’s fire service, so one way or another benefits savings must be realized. What needs to happen is that benefit accruals must be adjusted on a GO FORWARD basis. With many plans in Illinois having more beneficiaries than active workers and some plans so underfunded that they have too little money to meet the obligations of those already retired,… Read more »