The Key Number in Chicago’s Pension Crisis Nobody Has – WP Original
By: Mark Glennon*
With tax increase proposals “popping up like weeds,” as one headline put it today, voters, particularly in Chicago, are justified in asking if those increases will solve much, or would just throw good money at an insoluble problem. This should be an all-important question for them: How much would taxes have to increase to properly fund the eleven overlapping pensions Chicago taxpayers are responsible for?
Incredibly, no source provides anything close to a useful answer. Without that answer, politicians and voters are driving blind. The sources that are available suffer from a variety of problems and produce very misleading results. Most are outdated and incomplete. Most ignore healthcare costs, which are now constitutionally protected along with pension benefits. Few are clear about the assumptions they use. Most rely on officially reported numbers that are far different from those required by new governmental accounting standards or by Moody’s, the ratings agency.
For example, Crain’s last week published an analysis under the very misleading headline, How much could Chicago pension payments jack up your property tax bill? Try 30 percent. All kinds of problems with that headline are admitted by that article once you dig into it. It covered only the four pensions for the city, not the other seven pensions for municipalities that overlap Chicago (aside from the five state level pensions). It did not include healthcare. It evidently was based on the city’s own reported numbers, which nobody should believe. It said the increase would actually be over 70% if the city funded the pensions out of property taxes at the same rate as it has been. It even assumed that Mayor Emanuel’s proposal to defer the contribution increases becomes law. In other words, it assumed a can-kick.
Most importantly, that article made a very common, huge mistake. It looked just at the 2016 pension payment that everybody is fretting about. The fact is that the 2016 increase is only a start towards funding pensions adequately. Contributions are scheduled under current law to increase at an average annual rate of 8% in 2017-21 and by an average annual rate of 3% in 2022-26. Even those numbers are probably far too low since they are based on the optimistic assumptions that plague contribution schedules set by government.
A few of the ratings agencies have published estimates with higher numbers but each of those, too, is deficient in some of the ways mentioned. Total per capita unfunded liabilities are sometimes published, but they mean little. It’s taxes that voters and politicians understand.
The Civic Federation has consistently produced the most useful numbers on all overlapping Chicago pensions, like the report linked here from last year on how the total unfunded liabilities have spiked in recent years. But nothing they’ve done has pulled it together in a manner taxpayers can understand.
We need somebody, anybody who is credible, at least to estimate the true, annual, total contribution that should be going to fund pension obligations as they currently stand. It should:
• Include healthcare;
• Use realistic assumptions — probably those required under the new GASB rules that went fully into effect this month;
• Assume a realistic ramp-up based on population, inflation or number of employees — something reasonable instead of the annual 8% increase currently assumed;
• Include all overlapping pensions, not just the city’s four;
• Use current numbers or make an estimate thereof, because all pensions are deteriorating rapidly;
• Have input from an honest, independent actuary who is not vying for government work; and
• Be translated into how much of an increase in property or other tax would be needed, so that both voters and politicians can really see the scope of the problem
In his budget address last year, Mayor Emanuel said Chicago property taxes would have to double to make pension contributions unless the pensions are reformed or massive service cuts are made instead. Is that the right number? Based on hundreds of pension stories we’ve published here over the last few years, I’m confident the real number is at least that, and I think that would turn Chicago into a ghost city. But I can’t do that analysis in a convincing manner and do not expect anybody to take my word for it. Reporters, also, cannot do that analysis.
C’mon, Civic Federation, Civic Committee, ratings agencies, actuaries — can’t somebody please give us what we clearly need?
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.