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By: Mark Glennon*

 

How does this pension reform plan sound? “We’ll put billions of dollars into the pensions in distant years. Dunno where we we’ll get it.”

 

That’s not reform and not a plan — just unfunded debt — but that’s a pretty fair summary of the new bill many headlines are calling Chicago’s “pension reform plan.”

 

Yes, the bill awaiting Quinn’s signature includes meaningful reductions in pension benefits that will help. But here are the facts of overriding importance, and these are not in dispute:

 

– Even with those reductions and the new payment schedule for the city’s contributions, it will take until 2020 for the two pensions covered by the bill just to reach the point of starting on trajectory towards soundness. In actuary speak, they don’t “hit the arc” (Actuarially Required Contribution) until 2020. In other words, barring unexpectedly good performance in their investments, their unfunded liabilities will worsen between now and then. Pension deficits compound when proper funding is backloaded because the pension isn’t earning yearly returns on money it should have invested. More debt.

 

– And, more importantly, getting to that point where things start to improve needs requires contributions of $750 million spread over the next five years plus $250 million annually thereafter, and there’s no serious proposal on the table where that would come from. Heck, just the city’s first year contribution of $50 million is too hot a potato to touch. Despite backloading the bill so egregiously, Quinn, the legislature, City Council and Rahm are each playing transparent games to keep their names off a tax bill for even that $50 million.

 

Remember that this bill doesn’t touch pensions for about half of Chicago’s workforce — pensions for police, fire, municipal employers, laborers and teachers pensions, some of which are in worse shape. And never mind Cook County and other pensions for overlapping governments the same taxpayers are on the hook for. They, too, will need many hundreds of millions more per year to fund adequately. There’s simply no “plan” here of any kind to fund either the new bill or those other pensions.

 

One last smaller, but annoying thing. The bill’s goal of getting on an actuarially sound trajectory towards good health assumes that 90% funding is healthy. Our media and politicians forever say that 80% or 90% funding is sound. No, that’s a myth spread by pols and fund managers trying to hide, according to the American Academy of Actuaries. A pension is either funded or it’s not. “All plans should have the objective of accumulating assets equal to 100% of relevant pension obligation,” it says, unless reasons for a different target are clearly identified and understood.

 

This pension bill had support from some smart, bona fide financial conservatives. Their thinking is that something is better than nothing, and this was the best Chicago could get for now. They may be right. Just keep in mind, however, that it would make very minor progress.

 

*Mark Glennon is founder of WirePoints and a business consultant.

 

 

 

 

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