By: Mark Glennon*
Make no mistake about where the additional one percent Cook County sales tax will go, along with much more — into its pension. Ninety percent of it will go initially into the pension, according to Cook County Board President Toni Preckwinkle, with that portion decreasing later. But will it?
The pension’s actuary just released its annual valuation report for the year ended in December. That document should be a key item informing voters and county board members about the vote on the tax increase: How much will it accomplish? What’s really going on with that pension?
I’ll provide here some of the basic headlines from the report, which are important, but first there’s a bigger, broader lesson that’s more important, and this is a good opportunity to learn it. Actuary reports are gobbledygook. Few people beyond pension actuaries can extract from them anything much that’s useful. Reporters cannot be expected to understand them, which is probably why you’ve seen nothing written about this new report. Browse through the report yourself: It’s opaque and obvious questions go unanswered. Go ahead. Look at it. I’m confident that even those among you with financial training will pull your hair out.
The report was prepared by Buck Consultants, which prepares many such annual actuary reports for other pensions in Illinois. We praised them for one report last year when they took an entirely different approach on the Teachers Retirement System, Illinois’ biggest pension. It conspicuously called out problems, ridiculed “Illinois Math” and used a format dramatically different than Buck and other pension actuaries typically use.
For the new Cook County report, they’ve reverted to the old, standard form that’s best suited only for hiding the ball. They are not alone. This one is typical.
First, let’s go through a few things it does tell us — according to the actuary’s calculations, that is. Even some of these would be hard for most readers to extract:
– The plan is 57.5% funded according to the standards the actuary applied. It’s unfunded liability is $6.5 billion. That’s 4.3 times the total annual payroll the county pays.
– The annual “actuarially required employer contribution” from the county for 2015 is $639.8 million, or 43% of payroll. That’s the total taxpayers should be paying on a actuarial basis, as Buck sees that, including an amount sufficient to pay off the unfunded liability over 30 years.
– The actual contribution by the county for 2014, however, was only $197 million. Under current law, that’s scheduled to remain a little under $200 million for 2015.
-The plan assumes its asset will return 7.5% annually.
– One thing the report does conspicuously say, in bold face, is that a new funding policy is needed. That should be obvious, since actual funding compared to supposed actuarial funding is short by a stunning $450 million.
Now, let’s put that in context and ask a few questions:
The unfunded liability comes to about $5,000 for a family of four in Cook County. That’s just the unfunded portion owed for benefits already earned, for just the one Cook County pension (Chicagoans are on the hook for 11 more).
The additional payment to the pension beyond what’s being made under current law, around $450 million, is roughly what Preckwinke says the sales tax increase would raise annually — $473 million. So, almost all proceeds of the tax increase would indeed have to go to the pension. Most of it — $513 million — would be part of a 30-year payment plan to pay off the unfunded liability. Preckwinkle says 90% of the tax increase would go towards the pension in the first year, but why would it go down after that, as she claims? It does not look that way, and the report doesn’t help us determine what out-year contributions would really need to be.
What about healthcare obligations to county retirees? [Update: those are included in the pension numbers, which is unusual for Illinois pensions and easy to overlook.]
What happens if you assume a lower rate of return on assets? Say, around 5.5%, like the private sector would use? Or maybe 2.3% — a risk-free rate which really should be used since pension benefits are promised risk-free? The report doesn’t say. Most don’t. Using those more realistic numbers could easily double the unfunded liability and required contributions. And, as one actuary who looked at the report wrote to me, “If there’s a stock market correction, they’re REALLY toast.”
What’s happening to “Tier 2” employees in all this? As you may know from our earlier piece, employees hired after 2010 get much lower benefits and their annual contribution actually exceeds their own pension cost — they are forced to pay additional amounts to keep down the unfunded liability owed to Tier 1.) How much of that is going on here? No mention of that, unlike that more comprehensive report for TRS mentioned above.
A huge challenge the pension faces is that it soon will be badly upside down. It will have more retirees and inactive members than working members paying in, and after ten years retirees and inactives will outnumber active members by 2:1. A chart showing that is in the report and reproduced on the right, though not discussed in the report. Active member employees are shown in blue on the bottom, and retired and inactive members are on top in red.
Lastly, think about what Cook County is contributing to employee retirement compared to your employer. If you’re lucky, maybe your employer is kicking 3% or so of your salary into a 401(k). Well, Cook County is paying over 40% of payroll into its pension.
A few conclusions. Yes, that sales tax increase will be sucked up by pension costs and, yes, those costs are astronomical. No, we can’t have any confidence how bad off the pension would remain even with the tax increase and, no, the actuary’s report doesn’t explain much. To repeat our usual mantra, public defined benefit plans are hopelessly opaque and fundamentally incompatible with open government and fiscal planning.
Updated 7/15/15 to reflect passage of the sales tax increase.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.