By: Mark Glennon*
In picking which decepton to write about in the City of Chicago’s PR offensive last week about the its finances, I’m suffering from the “paradox of choice.” That’s what occurs when you’re overloaded with too many choices, making it difficult to decide.
I’ll go with this one for now — the numbers for Chicago’s police and firefighter pensions. Had it been honest, the city would have prefaced its pension numbers by saying, “Let’s assume we didn’t kick the can and that an old law is in effect.”
The pension numbers the city used are built on the assumption that it will make far faster, higher pension contributions than in fact it will make under a new law. Its numbers, in other words, ignore a huge can-kick the General Assembly recently passed. The numbers the city peddled therefore are worthless.
Recall what happened earlier this year. The faster, higher pension contribution set by state law six years ago was too much for the city to handle. So, Emanuel strongly supported SB777, a bill sponsored by Senate President John Cullerton and other Chicago legislators to extend and lower city contributions to the two pensions. Governor Rauner vetoed it when it passed, calling it a can-kick, which it unquestionably was. But the legislature overrode his veto and the bill became law in May (Public Act 99-0506).
The new law reduces the city’s required payments to the pensions by about $1 billion over the next five years and extends the timeline for reaching a 90 percent funding level from 2040 to 2055.
Emanuel had earlier blasted Rauner for vetoing the legislation, saying it would have forced a huge tax hike — much larger than we’ve already seen or that is now in the pipeline.
The problem is that the actuarial reports recently completed, on which the city bases its published numbers, assume the old law is still in place! They clearly state that. You can see for yourself in the report for the police report linked here. (You have to look at the “GASB 67 and 68 reports,” in which the all-important Net Pension Liability is calculated, which are the numbers the city used in its financial report widely reported last week. You may also recall that these are reports I had to get through a Freedom of Information Act request. The police pension finally posted theirs last week. The firefighter pension still has not.)
Below is a comparison done by the Civic Federation of the old contribution used by the actuary and the city compared to the new, easier one passed into law in May. The blue is the new, lower contribution schedule. The yellow and red is the old schedule, as calculated in earlier actuarial reports.
That’s just the start as far as taxpayer burden. Beginning in 2020, the required contribution goes up to an ARC-like amount (something resembling an actuarially required contribution, but still based on all the usual, phony assumptions). Tax increases to cover ever further contributions are automatic and mandatory under the new law — no City Council action required. And the actuary who calculates the amounts can be one chosen by the pension! We explained all that in an earlier article about why unions cheered the can-kick in the new law.
I’m not blaming the actuary on this particular point. Its latest report was for 2015 when the old law was in place. They did disclose what they were doing, though in language too garbled to understand if you are not following these things closely. It’s just that the city never disclosed the same assumption, as far as I have found. And the actuary said this in each report:
We strongly recommend that a formal liquidity and asset allocation study be performed as soon as practical and that [the actuary] prepare statutory funding and accounting impact statements of PA 99-0506 [the new law].
Fat chance we’ll ever see that from the city unless we pull teeth. More importantly, you can be sure the city has correct numbers now on unfunded liabilities and all the rest — based on the new law, which it simply isn’t using. It’s just a matter of plugging the new pension contribution schedule into the software the actuary is using.
Emanuel’s central message last week was mission accomplished. A solution is now in place for each Chicago pension.
No. It’s just another part of the cover-up. The pensions aren’t fixed and the new taxes will go into a bottomless pit.
Up next: How the police and fire actuarial reports show that the new accounting standards for pensions have failed.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.